Chart of the Day: Inflation-Adjusted Gold Prices
CARPE DIEM
Professor Mark J. Perry's Blog for Economics and Finance
Sunday, September 26, 2010
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- Name: Mark J. Perry
- Location: Washington, D.C., United States
Dr. Mark J. Perry is a professor of economics and finance in the School of Management at the Flint campus of the University of Michigan. Perry holds two graduate degrees in economics (M.A. and Ph.D.) from George Mason University near Washington, D.C. In addition, he holds an MBA degree in finance from the Curtis L. Carlson School of Management at the University of Minnesota. In addition to a faculty appointment at the University of Michigan-Flint, Perry is also a visiting scholar at The American Enterprise Institute in Washington, D.C.
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146 Comments:
gold is used to hedge 2 things: inflation and the US dollar.
it would be very interesting to factor in a dollar index (like the DXY) to this chart.
the dollar was very strong from the early 90's to 2000 while gold was weak and the DXY collapse (down 45%) of the next 8 years coincides with a huge gold rally and likely explains about half of the inflation adjusted move from $400 to $1200.
this does lead to an interesting question:
how do we explain the additional $400 in gold appreciation? we can explain some of it away by assuming gold overshot on the downside around 2000, but as it was a long slow bottom (saucer) i'd be hesitant to attribute too much to that.
this leads us to the possibility that gold is pricing in future inflation and dollar debasement, in which case a significant bubble is forming (which is not to say it cannot go on for a long time).
alternately, it may be an indication that our current CPI methodology underestimates inflation significantly and that gold is, in fact, pacing inflation and we are just using the wrong benchmark.
the constant commodity index bottomed at 195 in 2002 then rose to 615 in 2008 (215% appreciation) and even now is back to 535 (174% appreciation).
combined with high profits, this does not seem to imply that inflation is all that tame. (though granted, it's only a part of the picture and hardly conclusive).
i'll see if i can get an inflation adjusted gold series put together using the pre 1992 CPI calculation and see if it fits better. it would be quite interesting if it did.
The point seems to be that gold is not really at an all time high.
What I have noticed is that gold and oil used to track pretty well together but that gold has gotten way out on the high side.
My gut tells me that the gold price rise is all about fear.
There is still real fear of total collapse of the economy.
But if that is the fear, it would be smarter to accumulate trade goods, like canned food. Something useful.
I don't believe in gold. It just sits there and costs money to store.
Instead of comparing gold to inflation, compare it to the return on the S&P 500 over a long period of time. Gold has outperformed over the last decade, but stocks have done much better over the last 50 years.
What if a chart was available that showed the purchasing power of the U.S. dollar since its establishment by the Mint Act of 1792?
Voila -- Via Jesses Cafe Amercain blog: the The Purchasing Power of the Greenback from 1792 to 2004 and the 92% decline!
The chart was compiled by the American Institute for Economic Research. It shows what happened over time when the dollar was pegged to gold and when it was not.
Individuals owning gold and the percentages of net worth consisting of gold is debatable. Looking at the chart, the relative stability of the dollar when pegged to gold is less debatable.
Note: The history of the U.S. dollar peg to gold is complicated becuase it varied from hard to soft pegs and then none.
Gold is a relative investment. There was a bear market from 1965-82, when the stock market was flat and volatile. We're in another bear market. The stock market peaked in 2000, hit a low in 2002, peaked again in 2007, and hit a low again in 2009.
The housing market also peaked recently, after "too many" bigger and better houses were built, and over $300 billion a year was invested in home improvements. It'll be a while before we build 2 million houses again, and even longer before we surpass the homebuilding boom.
So, the stock and housing markets won't be booming for a while, and gold is an alternative investment that represents stability. A bar of gold doesn't change. Also, not much of it is "expensed," e.g. copper, oil, sugar, etc. (and when it is, e.g. for dental crowns, it's often recovered). However, if it cost $300 to extract an ounce of gold, more gold is being extracted, since the price is $1,300. Eventually, the gold market will collapse like a house of cards.
The current gold price may be at historically high levels in any relevant sense once one remembers that the extremely high price at the end of 1979 and into early 1980 was at least partly driven by the Hunt brothers' attempt to corner the silver market. In late 1979, the price of silver rose 5 times and then collapsed to its original level in March 1980. The pattern of gold prices over that period reflects silver's pattern. Silver and gold have an element of substitutability, so their prices have a tendency to move together. I am unaware of any evidence that today's gold prices are related to anyone's attempt to corner the market in any metal, so the prices today presumably reflect other factors.
If you go to the World Gold Council site, you will discover that the bulk of gold is used in jewelery, and the bulk of that is being purchased in India and China.
Indeed, recently gold sales are up many time over in Inaida.
You have 2 billion Chindians with new disposable buying power, with traditional or historic attachments to gold.
Whither gold prices? Who knows, but I suspect demand will be there from the Asian jewelry industry.
The wisest words I ever heard, from my grandfather: All gold is fool's gold. Good for trinkets and baubles and to capture the fancy of inferior minds.
Gold has little, if anything, to do anymore with Fed policy. That point of view is 20 years out of date.
Among economists, including Milton Friedman, the consensus is that static CPI measurements always overstate inflation.
An interesting point of view....
July 09, 2010
How close to deflation are we? Perhaps just a little closer than you thought
Since last October, the consumer price index (CPI) has gone up an annualized 0.7 percent. On an ex-food and energy basis, the number is a little lower, at 0.5 percent. And the Cleveland Fed's trimmed-mean and median CPIs, at 0.7 percent and 0.2 percent, respectively, also put the recent trend in consumer prices in pretty low territory.
And this is before we take into account any potential mismeasurement, or "bias," in the construction of the CPI.
How big is the CPI's bias? Well, in 1996, the Social Security Administration commissioned a study on the accuracy of the CPI as a measure of the cost of living.
This so-called "Boskin Commission Report" said the CPI was overstated by about 1.1 percentage points per year. The commission identified several sources of potential bias, but about half of the 1.1 percentage points resulted from new products and quality changes that were slow or otherwise imperfectly introduced into the price statistic.
Now, in an article (available to all in its working paper version) appearing in the latest issue of the American Economic Review, Christian Broda and David Weinstein say the earlier estimates of the new goods/quality bias may be a bit understated. The authors examine prices from the AC Nielsen Homescan database and conclude that between 1996 and 2003, new and improved goods biased the CPI, on average, by about 0.8 percentage points per year. If this estimate is accurate, consumer price increases since last October would actually be around zero, or even slightly negative, once we account for the mismeasurement of the CPI caused by new and improved goods.
morganovich said...
"alternately, it may be an indication that our current CPI methodology underestimates inflation significantly and that gold is, in fact, pacing inflation and we are just using the wrong benchmark."
I would actually be surprised if this wasn't true.
"i'll see if i can get an inflation adjusted gold series put together using the pre 1992 CPI calculation and see if it fits better. it would be quite interesting if it did."
I'm looking forward to it. It should be interesting.
Let us get real Mark. The $850 price was a one time spike that did not reflect the true price paid by most investors at the top. The average price for the month was around 20% lower at $675. That means that other than a few unlucky idiots, few people paid anywhere near the top.
If you want to be seen as credible it makes sense to do the comparison based on the average monthly price or better yet, the average annual price because that is more reflective of the experience of those that were on either side of the gold market.
For the record, the average price in September was around the same as that in January, when the peak was noted.
My gut tells me that the gold price rise is all about fear.
Fear is natural and makes a great deal of sense under certain circumstances. But I do not believe that the price is indicative of fear because gold is rising in price even in currencies of countries that have not had a major contraction like the US. What you are likely seeing is recognition that gold is money and a desire to hold gold, which can't be created out of thin air, over US dollars, which are fiat and are created out of thin air.
There is still real fear of total collapse of the economy.
As there should be. People that understand history know that Afghanistan is the place where empires go to die and it is doubtful that the US will be an exception. The simple fact is that the US is bankrupt and depends on the kindness of trading partners that may have something other than altruism as a goal.
But if that is the fear, it would be smarter to accumulate trade goods, like canned food. Something useful.
You are missing the point. Gold is a medium of exchange like the fiat currency but unlike the fiat currency is a store of value. You can't exactly trade a goat for a can of beans and get change. So to trade effectively you need something like gold or silver as a trusted medium of exchange. It is likely that if you want to buy a chicken you will be able to exchange a silver dollar for it. But you may not be able to exchange any amount of paper dollars because nobody may want that paper as anything more than something to wipe one's arse with.
I don't believe in gold. It just sits there and costs money to store.
That is because you are ignorant of monetary history and do not understand why society needs a medium of exchange.
Instead of comparing gold to inflation, compare it to the return on the S&P 500 over a long period of time. Gold has outperformed over the last decade, but stocks have done much better over the last 50 years.
You are comparing a medium of exchange with the returns provided by investments in capital goods. One would expect a greater return.
But that may not be true if we have a crisis in the future that drives many of the companies that make up the S&P 500 into bankruptcy. If you go close to zero and are in need of purchasing power you may have to sell what you have left and would be looking at nearly a total loss. That would not happen if you held gold, which would see its purchasing price increase. When the crisis comes you should be able to buy ten or twenty units of the S&P 500 with an ounce of gold.
An education might be useful. Try reading a bit more about money.
How close to deflation are we? Perhaps just a little closer than you thought
Really? On what planet do you see prices for goods and services that are essential for our daily lives going down?
Since last October, the consumer price index (CPI) has gone up an annualized 0.7 percent.
That is because the CPI does not measure inflation as it used to, a point that some of us have pointed out to you before.
On an ex-food and energy basis, the number is a little lower, at 0.5 percent.
Other than the dead, who does not use energy and eat food?
And the Cleveland Fed's trimmed-mean and median CPIs, at 0.7 percent and 0.2 percent, respectively, also put the recent trend in consumer prices in pretty low territory.
As I pointed out on other threads, the Fed and BLS are not exactly known to tell the truth about what is really going on. The truth gets in the way of managing expectations and prevents the Fed from manipulating markets.
If you go to the World Gold Council site, you will discover that the bulk of gold is used in jewelery, and the bulk of that is being purchased in India and China.
Really? I thought that most gold is held in bullion and coin form. You really should do some research and learn how to read more carefully.
Gold is a relative investment. There was a bear market from 1965-82, when the stock market was flat and volatile. We're in another bear market. The stock market peaked in 2000, hit a low in 2002, peaked again in 2007, and hit a low again in 2009.
Careful. Gold is money, not an investment. Some times that money gains purchasing power and at others it looses it.
The housing market also peaked recently, after "too many" bigger and better houses were built, and over $300 billion a year was invested in home improvements. It'll be a while before we build 2 million houses again, and even longer before we surpass the homebuilding boom.
Careful again. If we get hyperinflation, $2 million will not buy you a window or a door and houses will run to the quintillions.
So, the stock and housing markets won't be booming for a while, and gold is an alternative investment that represents stability. A bar of gold doesn't change. Also, not much of it is "expensed," e.g. copper, oil, sugar, etc. (and when it is, e.g. for dental crowns, it's often recovered). However, if it cost $300 to extract an ounce of gold, more gold is being extracted, since the price is $1,300. Eventually, the gold market will collapse like a house of cards.
Careful again. What you are likely to see is a major run-up in prices that coincides with the death of paper currencies. At that point gold can't fall against those currencies, only against the goods and services it bought during the crisis.
buddy-
you are leaving out an important point.
gold does not earn interest.
assume 5% interest for that period and every dollar you had would be worth $31,000 now.
so sure, if you stuck your money in a mattress, you'd have lost a lot of buying power, but at prevailing interest rates on US debt, a dollar has maintained it's purchasing power far better than gold has.
vangel-
while you are absolutely correct that current CPI does not measure inflation, i fear that no amount of logic will ever get that through to benny. he's far too fixated on wanting a massive QE subsidy for his debt.
commodities (CI) are up 28% in the last 12 months.
healthcare (1/6th of GDP) is soaring. how many 20-30% hikes in premiums have we seen? and why is 1/6 of the economy only counted as 1/16 of the consumption basket?
food is up over the last 2 years.
rent is up from last year too.
i have no idea where all this mythical "deflation" is.
as i'm sure you've seen, using 1980's measures of CPI show current inflation at 8.5%.
that's a number much more in tune with reality. it also implies that we are still in recession.
how did commodity prices increase at 19% a year from 2002-2008 while inflation averaged 3%, healthcare costs soared, and real estate went wild?
we had money supply growth in the teens and there was no inflation?
there is just no way.
we have literally swapped a Fahrenheit thermometer for a celcius one and are getting warned to bundle up and look out for ice because it reads 30.
current inflation is similar to 1973-4. that's where it comes out if you use the same methodology. you can argue over which one is right, but the absolute fact is that the same thing is happening to prices now that was then. either the 70's were nothing to worry about, or this is becoming real inflation.
well, i see i too have taken up the Sisyphean task of explaining this to benny, to perhaps my admonitions against doing so should be taken with a grain of salt.
oh well...
ron-
i don't have a whole series, but here are a few insights from SGS (who calculate CPI the old way):
"The earlier all-time high of $850.00 (London afternoon fix, per Kitco.com) of January 21, 1980 would be $2,385 per troy ounce, based on August 2010 CPI-U-adjusted dollars, and would be $7,758 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars"
of further interest, old methodology CPI from 2002-2010 compounds to a 120% increase in price levels.
(data from SGS)
factor in a 45% decline in the dollar and you get about a 218% projected increase in the price of gold which implies that the price should have risen from $400 to $1272.
that is a remarkably tight correlation.
it would seem that gold is tracking "old" CPI, not the new one.
morganovich,
I am advocating some tie of USD to gold (silver, plat. etc.) to limit $ printing.
I am not advocating large percentage positions of gold for individual investors but investment Gold ETFs are the current drivers of gold demand.
Compounding is magical but inflation is not unless one has investable $ left to invest in treasury yields beating inflation over maturity period.
Considering how basically useless gold is in the hands of an individual (unless one likes or makes jewelry) I would think that commodities that always seem appreciate in value are steel and lead...:-)
"factor in a 45% decline in the dollar and you get about a 218% projected increase in the price of gold which implies that the price should have risen from $400 to $1272."
Thanks for the, numbers morganovich, that's kind of how it "feels".
I didn't understand your response to Buddy R Pacifico. I read his comment as pointing out how badly the purchasing power of the USD has eroded since going off a hard gold standard. I didn't see anything about holding gold as an investment. Did I misunderstand either you or him?
buddy-
are you arguing that real interest rates have been negative?
real rate of return has still averaged around 3% over that period, putting you way ahead of gold.
using a gold peg has serious issues in terms of growth and trade.
if the economy grows more rapidly than the gold supply (as currently) the dollars appreciate in value. this freezes lending and hikes rates until growth winds up much lower.
i'm all for a responsible fiat currency (which we clearly do not have) but a gold peg is not the answer.
it seems to me that basing it on something useful and expansionary might work better (KWH is an example) but i have not really thought that all the way through.
ron-
i was responding to the first portion of his argument in which he stated that a dollar has lost 92% of it's purchasing power.
my point is that while this is true, it only matters if you were keeping them in your mattress as opposed to bonds.
if you got even risk free yields, you're still WAY ahead.
It's easy to pick a few items from the CPI and declare there's a huge inflation problem.
However, the reality is a higher level of productivity reduces inflation. Also, commodity prices or raw materials is a very small part of U.S. production costs (the two biggest components are labor and capital, which are cheap).
Too much supply, including from imports, causes prices to fall, or at least not rise much. Also, low interest rates, including zero percent financing, effectively lower prices.
There hasn't been an inflation problem, reflected in the general price level, for decades. Even the Fed overestimated inflation and caused this recession.
peak-
between raw materials as they flow through, health care, food, and housing, i'll bet you have 60% of the US consumer basket. all but fod are up big from 2000-8.
food is up big for the last 2 years, and rents are up in 2010 from 2009.
so where is all this deflation? these are not a few items, they are the big expenses.
and the fed caused the recession by underestimating inflation?
how on earth can you back up such a ludicrous claim?
interest rates have been historically low for a decade. (for a full business cycle)
that ran up the massive debt that is now suppressing growth.
this recession is the popping of a debt bubble because rates were too low from underestimating inflation and denying the real estate bubble.
morganovich, I am arguing that real interest rates have been declining over the last eighty years. You (morganovich) challenge the real rate of inflation as being more then the government says they are. The gov't gets lower interest rates on its debt by reporting lower CPI.
Thus, the investor's dollar can't keep up with costs when invested in maturity date, risk free investments. When the savings bond payout doesn't keep up with true inflation the $ purchasing power recedes downward over time.
Your kwh/$ link is intriguing but I think the peg has to be tangible like a basket of metals to connect with the populace. Maybe the basket could incorporate the entire Periodic Table up to the unsafe for bodily contact elements.
Most dollars these days are backed by "tangible" investments, Buddy, and dollars aren't created out of thin air, Vange. The Fed prints about $1 trillion in dollar bills, half of which is used abroad, leaving $500 billion here in the US, backed by the Fed's holdings of US Treasuries. The remaining $1.2-8 trillion in the money supply, depending on which measure of money you use, is privately issued and backed by bank assets, everything from real estate loans to equity investments to corporate debt. This fractional-reserve system works well most of the time, with periodic problems in liquidity crunches at banks, and it makes a lot more sense than stupidly putting a bunch of gold or silver or copper in vaults and hiring guards to secure it. As the internet takes off, I think we won't need "currency" at all and will simply digitally barter all production and goods, so all these currency issues are frankly a thing of the past, and silly gold schemes are even more antiquated.
Morganovich, do you believe rent would increase or decrease if there were "too many" houses?
Much of the increase in health care costs is paid by employers, as part of the increase in real compensation.
Dr Perry has shown the price of food as a percentage of income has been falling.
Of course, the Fed caused the recession. The tightening cycle raised the Fed Funds Rate from 1% to 5 1/4% and the Fed left the rate too high for too long.
There was too little money chasing a huge oversupply of goods. The money Wall Street "recycled" prevented a worse downturn.
Low interest rates were caused by:
1. The record 20 consecutive quarters of U.S. double-digit profit growth, which reflected a huge increase in productivity, i.e. the U.S. produced more output with fewer inputs.
2. The virtuous cycle of consumption-investment. Export-led economies sold their goods too cheaply and lent their dollars too cheaply.
Also, I may add, at full employment, when domestic output was high, the U.S. consumed up to $800 billion a year more than it produced.
Moreover, there was diminishing marginal utility, which meant prices had to fall to induce, or maintain, demand, and export-led economies had to accept smaller gains-in-trade (which implied the U.S. received larger gains-in-trade) to maintain exports.
There really wasn't a U.S. inflation problem for the Fed to preempt. Ideally, the Fed should've stopped hiking the Fed Funds Rate at 5% and began an easing cycle in early 2007 to achieve a soft-landing.
_______________________
Credit is Like Nostalgia:
It is prone to lead to procrastination and prevent us to go forward!
Our economy is slowly dying, your job, lifestyle are dominated by anxiety.
No one is proposing a solution because no one has the slightest idea of why it is happening and many have vested interest in the present system.
However an objective observation of the phenomenon can help us understand it and provide us with an innovative solution.
Of course we can't solve the problem with the tools that brought us there in the first place and we need a new ideology.
_______________________
- Do you feel that your ideology pushed you to make decisions that you wish you had not made?
- Well, remember that what an ideology is, is a conceptual framework with the way people deal with reality. Everyone has one. You have to -- to exist, you need an ideology. The question is whether it is accurate or not. And what I'm saying to you is, yes, I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact.
- You found a flaw in the reality...(!!!???)
- Flaw in the model that I perceived is the critical functioning structure that defines how the world works, so to speak.
- In other words, you found that your view of the world, your ideology, was not right, it was not working?
_______________________
In order to alleviate those economic woes wee need to create, as fast as possible, a new credit free currency that will solve the credit crunch and bring incremental jobs, consumption and investments to the present system.
An Innovative Credit Free, Free Market, Post Crash Economy
Tract on Monetary Reform
It is urgent if we want to limit social, political and military chaos.
_______________________
Is the fulfilment of these ideas a visionary hope? Have they insufficient roots in the motives which govern the evolution of political society? Are the interests which they will thwart stronger and more obvious than those which they will serve?
I do not attempt an answer in this place. It would need a volume of a different character from this one to indicate even in outline the practical measures in which they might be gradually clothed. But if the ideas are correct — an hypothesis on which the author himself must necessarily base what he writes — it would be a mistake, I predict, to dispute their potency over a period of time. At the present moment people are unusually expectant of a more fundamental diagnosis; more particularly ready to receive it; eager to try it out, if it should be even plausible.
But apart from this contemporary mood, the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.
Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.
Not, indeed, immediately, but after a certain interval; for in the field of economic and political philosophy there are not many who are influenced by new theories after they are twenty-five or thirty years of age, so that the ideas which civil servants and politicians and even agitators apply to current events are not likely to be the newest. But, soon or late, it is ideas, not vested interests, which are dangerous for good or evil.
_______________________
Credit Free Economy
More Jobs, No Debt, No Fear.
Prosperous, Fair and Stable.
_______________________
you are leaving out an important point.
gold does not earn interest.
Why would money earn interest? If you hold $50 in your pocket for your entire life you will never earn a dime of interest. The same is true of gold. If you want to earn interest you have to take the risk of lending your gold to someone who can pay you back with interest.
You are also ignoring something very important. The greater the interest earned the more risky the institution that is offering that interest. There was a reason why ten year Icelandic bonds were offering 8% when the bonds from other countries were half that level.
assume 5% interest for that period and every dollar you had would be worth $31,000 now.
so sure, if you stuck your money in a mattress, you'd have lost a lot of buying power, but at prevailing interest rates on US debt, a dollar has maintained it's purchasing power far better than gold has.
You need to check the facts. The link between the USD and gold was cut in 1971 when Nixon closed the gold window at the NY Fed. Since then the USD has lost more than 95% of its purchasing power.
while you are absolutely correct that current CPI does not measure inflation, i fear that no amount of logic will ever get that through to benny. he's far too fixated on wanting a massive QE subsidy for his debt.
Sadly, many people have invested heavily in the deflation story. After arguing for a collapse in the price of everything for years we cannot really expect them to admit their error. We live in a world where flawed human beings use emotion rather that reason to speculate about how the greater world works. It is too much to expect that most of them will step beyond their psychological limitations and have the courage to move into the light.
i have no idea where all this mythical "deflation" is.
When people talk about deflation these days they mean the fall in price of the overvalued assets that they held, not the formal definition, which is the fall in the supply of money and credit. Again, they get confused by their wrong assumptions. They are so worried about the fact that their overvalued house fell by 50% that they do not notice that the things that they pay for every day in their lives (food, energy, water, property taxes, insurance, health care, tuition, etc.) have all moved up in price because of the Fed's monetary inflation schemes. In fact, they welcome more inflation because they are too worried about their houses to see the real implications of what the Fed is doing.
we have literally swapped a Fahrenheit thermometer for a celcius one and are getting warned to bundle up and look out for ice because it reads 30.
Bingo. Both the data and methodology have been corrupted and do not offer an apples to apples comparison.
well, i see i too have taken up the Sisyphean task of explaining this to benny, to perhaps my admonitions against doing so should be taken with a grain of salt.
It is not just altruism that makes you explain things to benny. By going through the process you actually improve your own understanding and position yourself to prosper in the current environment. I know that trying to shed some light on the nature of money, credit, and inflation has certainly helped me.
"The earlier all-time high of $850.00 (London afternoon fix, per Kitco.com) of January 21, 1980 would be $2,385 per troy ounce, based on August 2010 CPI-U-adjusted dollars, and would be $7,758 per troy ounce in terms of SGS-Alternate-CPI-adjusted dollars"
Now what $850 would that be? The price was reached by only a handful of contracts. The average price paid for the month of the high was $675 and if it adjusted for volume would probably be another 10% or so lower. (I have the closing price data but have lost the volume adjusted numbers. If anyone has a link I would like to access them again because they are useful.)
My point is that the reported maximum and minimum prices are not reflective of what went on for the average market participant and should be avoided. The best approach is to use a monthly or even an annual price average. If we do that we see a rise from around $40 in 1971 to a peak around $615 in 1980. From the peak we saw the price decline to an average price of $278 in 1999 and have seen an increase since. All prices are in nominal dollars and can be adjusted to see the real increase and decline.
it would seem that gold is tracking "old" CPI, not the new one.
Part of the reason comes from the fact that gold does not care about the way that the methods of calculating CPI have changed and is fulfilling its traditional role as money.
But we have to be careful here because we have to look at the possibility of hyperinflation. The people who think about it believe that they can get out and protect themselves from hyperinflation by recognizing when inflation is getting out of hand. What they do not recognize is that hyperinflation is not caused by runaway inflation but by a loss of confidence. Such a loss has a distinct transition point that will not leave time for those that are not prepared for the eventuality. They could wind up chasing the market and being victims of circumstance in the same way as those that never thought about the danger in the first place.
I am advocating some tie of USD to gold (silver, plat. etc.) to limit $ printing.
Sorry but I do not think this goes far enough. Money is too important to be left to government. What we need is a private coinage system and a free market in money as in all things.
I don't believe that the ETFs have been the big driver for physical gold at all. Many of them do not have the gold and are playing the game from the paper side. If you want real physical you better be prepared to buy the real thing or funds that actually hold real gold that they hold in allocated form and is audited on a semi-annual or quarterly basis.
Compounding is magical but inflation is not unless one has investable $ left to invest in treasury yields beating inflation over maturity period.
The $ will ultimately be useless unless it is linked to something physical that cannot be created out of thin air. Sadly, people have forgotten that there needs to be a distinction between money and credit.
Considering how basically useless gold is in the hands of an individual (unless one likes or makes jewelry) I would think that commodities that always seem appreciate in value are steel
and lead
...:-)
Perhaps lead and steel will go up in value against gold. But how exactly will you invest and hold lead and steel? Gold is very easy. You call up Sprott Metals and bring in a few thousand dollars. In exchange you get the appropriate amount of gold and silver coins that you can put away until you wish to sell. Where exactly will you put your steel and lead and how will you buy and sell it?
You also need to educate yourself about the use of a medium of exchange. Without a medium of exchange you could not have a functioning economy, which means that gold is much more useful than you are willing to admit.
using a gold peg has serious issues in terms of growth and trade.
It never did in the past. The world did not go off the gold standard because of trade or growth issues. It went off the gold standard because it restrained governments and central banks and by doing so would not permit something like WW I to be financed.
I have no idea where you are getting your ideas from but you better check them again because are quite wrong.
if the economy grows more rapidly than the gold supply (as currently) the dollars appreciate in value.
The dollar has lost more than 95% of its value since its link to gold was severed. That has destroyed savers, who are unable to retire comfortably as they could before when purchasing power was stable.
this freezes lending and hikes rates until growth winds up much lower.
The lending freeze did not come because the dollar went up in value or because gold did anything. Lending froze because creating money out of thin air does not work for very long. The USD is no longer tied to a certain amount of gold as it used to be. It is a fiat currency that depends on the confidence of holders in the integrity of the issuer. That is why it is heading towards the money graveyard that has take other fiat currencies before it.
i'm all for a responsible FIAT currency (which we clearly do not have) but a gold peg is not the answer.
History has taught us that there is no such thing as a responsible FIAT currency because governments with printing presses cannot be trusted. Gold has no such problem.
it seems to me that basing it on something useful and expansionary might work better (KWH is an example) but i have not really thought that all the way through.
I believe that you are confused. As many have pointed out before, gold has a very distinct use. It is an honest medium of exchange.
vangel-
but gold is unproductive and does not expand with the economy. using a non expansionary medium for currency inevitably increases interest rates and slows growth.
we'd be much better off with a fiat currency administered formulaicly based on changes in output. (constant velocity)
and you still don't get this purchasing power thing:
dollars held in a savings account or in bonds earn interest. you have to pay someone to hold your gold. that is VERY big difference.
this notion that you can hold gold and protect value better than bonds do is provably false.
if real interest rates are positive, you are still coming out ahead. the have almost invariably been so in US history (with the exception of recently)
a dollar in bonds has not lost the value you purport it has.
peak-
those are incredibly disingenuous arguments.
even now, US home prices are 30% higher than in 2000.
cost paid by employers aren't inflation? you have to be joking. the procedure's costs go up. that is inflation. workers get paid less, contribute more, and overall costs rise.
as a % of income is not the same as nominal terms. food has been up dramatically in cost the last 2 years.
and then you claim that a debt bubble was created and caused by HIGH interest rates?
how, pray tell, does that happen?
how do we wind up with consumer debt levels (in % of gdp terms) not seen since 1929 because rates were too high?
However, the reality is a higher level of productivity reduces inflation.
Absolutely. We should have deflation and see an increase in the purchasing power of our money just as the Americans and English did during the 19th century.
Also, commodity prices or raw materials is a very small part of U.S. production costs (the two biggest components are labor and capital, which are cheap).
Labour in the US is not cheap. If it were it would not be loosing so many labour intensive jobs.
Too much supply, including from imports, causes prices to fall, or at least not rise much. Also, low interest rates, including zero percent financing, effectively lower prices.
Yet even with all of this supply and low rates we have seen prices go up. I think that you need to check your premises.
There hasn't been an inflation problem, reflected in the general price level, for decades. Even the Fed overestimated inflation and caused this recession.
This is such a stupid statement that I do not know where to begin. Yes, we have seen a massive drop in prices for things like consumer electronics, computers, and other high tech goods. But as that was happening the price for energy, insurance, tuition, health care, Coke, Pepsi, chocolate bars, sugar, bread, meat, eggs, property taxes, etc., have gone up, particularly when you include the subsidy costs that tend to be hidden from the consumer and are paid by taxpayers.
In response your average family has made many adjustments. People have chosen to lower their food bills by eating a great deal more processed food, which is much cheaper per calorie consumed than the type of foods that we used to consume. Young men and women have taken on a lot more student debt to get into their preferred universities. People have extracted cash out of their mortgages to pay for many of the things that their parents paid in cash. Cars are no longer owned but leased. Seniors have found themselves retired but still having to pay off mortgages that their parents would never have had.
Most of the problems that you see in your economy were caused by the very inflation that you say never happened. The Fed kept creating money and credit and injected them into the financial system. The financial system lent cheaply and encouraged malinvestments that will have to be dealt with eventually. Now the financial system is insolvent and the real economy is in big trouble. The only way to fix it is to allow the malinvestments to be liquidated by the market and for public employees to be fired in droves. But that is not going to happen and the inflation card will be played yet again until the USD is toilet paper.
vangel-
you are ignoring all of the massive dollar shortages and balance of payments issues under BW. you are ignoring its role in the great depression and the inflation that it would cause by balancing trade here or worse, the depression it would cause if we didn't as all out money left.
you are likely just confusing coincidence and causality.
being on the gold standard hampered our post war growth significantly, it's just that the underlying fundamentals were so strong that we still grew well.
you seem to share in the romantic notions of the gold standard, but it was a deeply flawed system that functioned very poorly in a modern economy.
Most dollars these days are backed by "tangible" investments, Buddy, and dollars aren't created out of thin air, Vange.
Yes they are. The Fed prints them any time it decides to.
The Fed prints about $1 trillion in dollar bills, half of which is used abroad, leaving $500 billion here in the US, backed by the Fed's holdings of US Treasuries.
??? Treasuries are a promise to pay you back in Federal Reserve Notes that can be printed any time by the Fed. As I wrote before, the distinction between money and credit seems to have disappeared without you guys noticing.
The remaining $1.2-8 trillion in the money supply, depending on which measure of money you use, is privately issued and backed by bank assets, everything from real estate loans to equity investments to corporate debt.
The problem is the leverage. All you need is a small percentage of your loans to be bad and the bank is insolvent. The damage caused by the volatility to the real economy is huge.
This fractional-reserve system works well most of the time, with periodic problems in liquidity crunches at banks, and it makes a lot more sense than stupidly putting a bunch of gold or silver or copper in vaults and hiring guards to secure it.
But history teaches us that it does not work well. Inflation and fractional reserve banking are actually very destructive and pushes nations into bankruptcy over and over again.
As the internet takes off, I think we won't need "currency" at all and will simply digitally barter all production and goods, so all these currency issues are frankly a thing of the past, and silly gold schemes are even more antiquated.
You have no idea how a medium of exchange works and why it is necessary to reduce frictional costs. I suggest that you do some reading.
While you are learning you might try to think about the nature of fiat money and why it has NEVER worked in human history.
i get it
lead and steel
a little picture of a gun
lol
"lol"...
Grim humor (in a low brow fashion) for what seems like grim times bix...:-)
Morganovich, do you believe rent would increase or decrease if there were "too many" houses?
If empty houses are not being put up for rent rents could increase even as they sit idle. If houses for rent are built far from where people live they could remain empty even as rents increase in other locations.
Much of the increase in health care costs is paid by employers, as part of the increase in real compensation.
You are missing the point. It does not matter who pays because the price went up substantially and is not reflected in CPI, which underestimates the health care component of the economy.
Dr Perry has shown the price of food as a percentage of income has been falling.
But the cost has not fallen in the way that Dr. Perry suggests. If you pay farmers billions to produce that is a cost to the taxpayer and should be accounted for in an honest system. Also, Americans have used substitution to lower their bills. They buy far more processed food, which provides many more calories per unit of expenditures. The cost of getting the proper nutrition has not fallen as much (if at all) as Dr. Perry suggests.
Of course, the Fed caused the recession. The tightening cycle raised the Fed Funds Rate from 1% to 5 1/4% and the Fed left the rate too high for too long.
The housing bubble was not caused by the increase in rates but by the decrease in rates that was supposed to prevent the correction after the IT bubble collapsed. That bubble was created when the Fed reacted to prevent a reaction to LTCM. Before that it reacted to prevent a reaction to the Mexican crisis.
As I said, your education sucks. Try to learn something not being pushed by the Keynesians.
Sprewell said: "Most dollars these days are backed by "tangible" investments Buddy..."
The Fed has bought one trillion in mortgages and it is estimated that up to four hundred billion dollars of loans will go bad. The Fed took the loans out of the banks and onto its books.
I don't pretend to understand the fractional banking system very well but I do know that some sort of fiat currency system is needed to control $ printing to prevent massive bubbles in the fractional system.
regarding rent:
NYC was a very hard hit rental market.
but there, as in SF, rents are now back on the rise.
http://www.nytimes.com/2010/09/26/realestate/26cov.html?_r=1&partner=rss&emc=rss
when mortgages are difficult to get, rents rise.
VangeIV, the Fed has to buy treasuries or other securities for every dollar that it prints, it does not simply print them. You are right that the backing is a bit circular, but so is any other security or commodity that doesn't use a floating rate. The fact that you keep harping on money vs credit suggests to me that you don't really understand the issue too well, as the trillion+ dollars in checking accounts aren't merely "credit." I don't think the problem with bank-issued money is leverage, it's what Diamond-Dybvig elucidated decades ago, that the privately-issued money used in fractional-reserve banking is essentially a badly structured contract that isn't robust to widespread downturns. When banks promise to convert their $2-8 trillion in privately issued money into the $500 billion in Fed-issued money upon demand, they are prone to liquidity crunches in bad times since such a promise can never be fulfilled if a large enough minority tried to exercise it, that's the problem.
If history teaches us that fractional-reserve banking doesn't work well, then it means your gold standard doesn't work very well also, as fractional-reserve banking has been going on for centuries. I saw a paper that said reserve ratios in banks averaged 10% in 1900, before the creation of the Fed. That's what's so laughable about goldbugs such as yourself, you are wholly ignorant of how privately-issued money under fractional-reserve banking has long coexisted and dominated other forms of money. It is funny how you repeatedly assert that everybody else doesn't understand basic issues like a medium of exchange and yet simply spout boilerplate goldbugese about how gold works better. My basic point is that a medium of exchange is not necessary in the internet age. I suggest you do more than read but actually try to understand the concepts you are spouting, as I have. Fiat money is prone to excesses, that is true, but the Fed has done a decent job under Greenspan and we'll soon take even that responsibility away from them. :)
Buddy, you are right that the Fed has almost $1 trillion in mortgage-backed securities but your link is talking about the potential losses at Fannie, Freddie, and other govt programs, not the Fed. I think the Fed will take some losses on those MBS but I'd be surprised if it were more than 10-20%. A fiat currency does nothing to prevent dollar printing, suffice to say the US doesn't have the same govt money-printing issues as Zimbabwe because frankly, our central bankers aren't that stupid.
but gold is unproductive and does not expand with the economy.
Gold is a medium of exchange and does its job well.
using a non expansionary medium for currency inevitably increases interest rates and slows growth.
No it does not. First, inflation is not a good thing for the economy. Second, the most rapid growth in the US economy took place under a gold standard.
we'd be much better off with a fiat currency administered formulaicly based on changes in output. (constant velocity)
No. Stealing purchasing power from savers is not a good idea, particularly when the process is administered by people who have nobody to control their activities.
and you still don't get this purchasing power thing:
dollars held in a savings account or in bonds earn interest. you have to pay someone to hold your gold. that is VERY big difference.
You can lend gold if you want interest but that is not the point. The point is that under the gold standard savers saw their purchasing power increase even as the economy boomed and the standard of living increased at record rates.
this notion that you can hold gold and protect value better than bonds do is provably false.
Not at all. The dollar's link to gold was severed in 1971. Since then gold has done much better than bonds.
if real interest rates are positive, you are still coming out ahead. the have almost invariably been so in US history (with the exception of recently)
I disagree. During most of your history the USD was linked to gold so we have to look at the data after 1971. And as I said above, the numbers do not work unless you cherry pick the temporary peak for gold in 1980.
a dollar in bonds has not lost the value you purport it has.
But it has unless your timing is good. The income is taxable and partially lost to the government even though the USD is losing value and buys a small fraction of what it used to. In the best of times bonds are little more than a break even holding while at the worst of times they are a great way to lose much of your purchasing power. The bottom line is that USTs are not a store of value and inferior to gold.
For the record, I expect gold and silver to pull back a bit before they explode to levels that are much greater than those today.
sprewell-
i was with you until you said that greenspan had done a good job.
how do you figure?
defining inflation out of existence by changing CPI is not the same as making it go away.
greenspan's preposterously loose money drove a set of concatenated bubbles and set up the current crisis that we will be digging out of for a decade.
he singlehandedly destroyed what volcker did and worse, claimed a "great moderation" where there was none.
we have had severe asset bubbles and inflation for 15 years, run up consumer debt levels not seen since 1929 and called it growth and seen the dollar disintegrate since the response to the internet bubble.
then, when he realized the gig was up, he left.
so how again is that doing a good job?
he was a disaster.
vangel-
i think it is you who are cherry picking.
from 1971 to 2000, bonds outperformed gold by a wide margin.
you compounded to about 8x your money in 30 years vs 6x for gold, and that leaves out the costs of holding gold unless you have your own vault.
it is only in the last decade you've seen outperformance, and that's down to dire fed policy.
you are still mistaking coincidence with causality as well.
you can make the same claim that higher taxes in the gold standard period drove higher growth. the correlation is there, but it's obviously not true.
you are assuming ceteris paribus where is does not exist.
the gold standard was a constant problem. it deepened the depression and fomented numerous trade crises and drove consequent protectionism.
you ignore the fact that appreciating currency drive interest rates much higher. i presume you agree that higher rates slow growth?
so how can you champion a currency backing that will clearly slow growth as increasing it? you have this utterly backwards.
appreciating currency = high rates = slower growth.
that's a pretty indisputable fact.
while high inflation is clearly harmful, mild inflation is clearly a helluva lot more benign and easy to plan for than persistent deflation.
you are ignoring all of the massive dollar shortages and balance of payments issues under BW. you are ignoring its role in the great depression and the inflation that it would cause by balancing trade here or worse, the depression it would cause if we didn't as all out money left.
The Great Depression was caused by massive inflation in the mid to late 1920s and meddling in the economy after the crash, not a shortage of money.
you are likely just confusing coincidence and causality.
You have no idea about monetary history or theory. It would help you if you tried to do some more reading.
being on the gold standard hampered our post war growth significantly, it's just that the underlying fundamentals were so strong that we still grew well.
The world went off the gold standard to fight WWI so let us not go there. The US, which did not go off the gold standard did very well after WWI. While there was a sharp contraction, President Harding cut taxes and the size of the government and kick-started growth after the needed market contraction in 1921.
The problem in the 1920s was created by the Genoa Conference of 1922, which established the the gold-exchange standard as the new international monetary order to replace the gold standard. This allowed Britain and Europe to inflate because the market discipline of the gold standard was not in place. The game was over in 1931 when France tried to redeem its sterling holdings in gold and by doing so force Britain to go off the gold standard. The rest of Europe soon followed. Finally, FDR took the US off the classical gold standard in 1933. Chaos followed as governments played the devaluation game in the 1930s. We finally got Bretton Woods but that ended in 1971 when Nixon defaulted.
you seem to share in the romantic notions of the gold standard, but it was a deeply flawed system that functioned very poorly in a modern economy.
My knowledge of monetary history is simply better than yours.
I don't pretend to understand the fractional banking system very well but I do know that some sort of fiat currency system is needed to control $ printing to prevent massive bubbles in the fractional system.
It is because of the fiat currency system that we have bubbles. Under a gold standard or some other system in which printing is constrained by a link to commodity you have much smaller bubbles because the central banks are constrained.
from 1971 to 2000, bonds outperformed gold by a wide margin.
The purchasing power of the USD fell by more than 80% while gold went from $40 to $300. Had you actually been in bonds in 1971 you would have been wiped out very quickly as interest rates went up along with inflation as many people were and we saw many on fixed income go from a very comfortable retirement go to eating dog food.
It is also interesting that you stopped your holding period at the 2000 low, which came after the two decades of central bank selling that was designed to keep fiat currencies seem stronger than they were and a decade of manipulating the CPI.
you compounded to about 8x your money in 30 years vs 6x for gold, and that leaves out the costs of holding gold unless you have your own vault.
I think that you are assuming that the interest was tax free. It wasn't. The average person who would own bonds would have had a tax rate of more than 35% and friction fees that would have reduced the total return. Of course, there is the problem of reality. While bond ownership by individuals was quite common at the time when the USD was linked to gold far too many people got wiped out by the USD devaluation after the link was cut. These people were forced out of the bond markets and looked elsewhere early in the game. The good gains for bonds came only for those who purchased them when interest rates were high and began to go down after Volker imposed a bit of discipline in the market. It was only the major change in sentiment that provided the very nice gains for bond holders.
The thing to remember is that a similar change in sentiment for gold produces much greater gains and a reversal produces much lower losses. There was no equivalent of the bond carnage of the 1970s for owners of gold. The average price paid in the highest month for gold (going by closing prices only) was $675 and nobody saw half their net worth get destroyed in a two or three year period as was the case for bond holders in the early 1970s.
it is only in the last decade you've seen outperformance, and that's down to dire fed policy.
Actually, it was because the central banks targeted gold in the 1980s and 1990s that it fell as much as it did. While it should have corrected to around $500 because the run-up in 1979-1980 was far too fast it was targeted central bank selling that got gold to fall to under $300. And since 2000 we have seen many of the reported gains in USTs get wiped away by unreported inflation.
But you are still comparing a monetary media to an investment class and that is not exactly an apples to apples comparison. Gold is not an investment but money. While I love gold and silver I do not have all my investments in bullion sitting at home or in a safety deposit box because there are other vehicles that provide better leverage.
A gold bug looking for a return would look to royalty plays like Franco Nevada, Royal Gold, Silver Wheaton, debentures that pay in silver or gold, or producing companies that pay out a dividend.
you can make the same claim that higher taxes in the gold standard period drove higher growth. the correlation is there, but it's obviously not true.
Actually, I did not make the claim. There were no income taxes when the classical gold standard was in effect. Taxes were paid by purchasers and users of goods.
you are assuming ceteris paribus where is does not exist.
I am not assuming that all things are equal. I am merely stating the obvious; that when savers and investors can't be robbed by the creation of purchasing power out of thin air the rewards will flow to those that deserve them, not to those with the printing presses and in such a system there is more incentive to produce than in one where one gets more money and power by being close to those that control the printing presses.
the gold standard was a constant problem. it deepened the depression and fomented numerous trade crises and drove consequent protectionism.
It was only a problem if you needed to print money to wage war, which is why it was abandoned by the Europeans. That did not work out too well for them. Otherwise gold is simply a medium of exchange that provides transactional liquidity in a healthy economy. Your confusion comes from the fact that you believe that malinvestments that require monetary expansion are a good thing.
you ignore the fact that appreciating currency drive interest rates much higher. i presume you agree that higher rates slow growth?
Check your premises. Interest rates exploded in the 1970s when the purchasing power of the currency was collapsing.
so how can you champion a currency backing that will clearly slow growth as increasing it? you have this utterly backwards.
Honest money does not 'slow growth.' It simply requires that malinvestments are liquidated so that limited resources can flow to those that are best able to allocate them properly. The current problem was created by too many malinvestments and too much liquidity, not too little growth.
appreciating currency = high rates = slower growth.
that's a pretty indisputable fact.
Check the facts. The US had its greatest period of growth when its currency gained purchasing power.
while high inflation is clearly harmful, mild inflation is clearly a helluva lot more benign and easy to plan for than persistent deflation.
Wrong again. Robbing savings, productive workers and investors of their purchasing power is not a good thing. And the US had its greatest period of growth when the currency was gaining purchasing power.
VangeIV, the Fed has to buy treasuries or other securities for every dollar that it prints, it does not simply print them.
But it does print the Federal Reserve Notes that it uses to buy the paper that is printed by Treasury. That is my point; both the USD and USTs are printed and depend on each other for backing.
You are right that the backing is a bit circular, but so is any other security or commodity that doesn't use a floating rate.
When you were able to use gold backed money you could go to the bank and exchange your bills for a certain weight of gold. That is real backing by a fixed weight of a real commodity, not paper backing that is dependent on the number of zeros printed on a piece of paper.
The fact that you keep harping on money vs credit suggests to me that you don't really understand the issue too well, as the trillion+ dollars in checking accounts aren't merely "credit."
You misunderstand. I merely point out that your money is backed by credit instruments and not something tangible. That happens when the Fed prints that money and uses it to buy treasuries. Of course, the Fed has recently bought mortgage backed securities and other troubled paper instruments with its newly printed money so we can also claim that your money is also backed by those plus whatever gold the US holds in reserves.
I don't think the problem with bank-issued money is leverage, it's what Diamond-Dybvig elucidated decades ago, that the privately-issued money used in fractional-reserve banking is essentially a badly structured contract that isn't robust to widespread downturns.
But it is leverage. When you have $1 of deposits but make $20 in loans you have a serious problem because you are vulnerable to external shocks. We see this over and over again.
When banks promise to convert their $2-8 trillion in privately issued money into the $500 billion in Fed-issued money upon demand, they are prone to liquidity crunches in bad times since such a promise can never be fulfilled if a large enough minority tried to exercise it, that's the problem.
Correct. What we have in fractional reserve banking is a scam that is dressed up in language to hide the fact that it is a scam.
If history teaches us that fractional-reserve banking doesn't work well, then it means your gold standard doesn't work very well also, as fractional-reserve banking has been going on for centuries.
I have never claimed that fractional reserve banking is a good thing because I believe it to be fraud. But gold is not a fraud. It is a monetary commodity that has been chosen by the market to be a medium of exchange for thousands of years. It took the rise of the modern state to suppress the market forces temporarily but that has not worked out too well.
I saw a paper that said reserve ratios in banks averaged 10% in 1900, before the creation of the Fed. That's what's so laughable about goldbugs such as yourself, you are wholly ignorant of how privately-issued money under fractional-reserve banking has long coexisted and dominated other forms of money. It is funny how you repeatedly assert that everybody else doesn't understand basic issues like a medium of exchange and yet simply spout boilerplate goldbugese about how gold works better.
This is a straw man argument. I have never been a defender of fractional reserve banking. I have just made it clear that a fractional reserve system that is based on a fiat money system is worse than one that is used in a hard money system because the latter does not permit as much of a dislocation before a correction has to take place. With fiat money the central banks can prevent the corrections that are necessary and prolong crises or simply kick them down the road and make them larger.
My basic point is that a medium of exchange is not necessary in the internet age.
But it is. You have to have something that has intrinsic value independent of the issuer.
I suggest you do more than read but actually try to understand the concepts you are spouting, as I have. Fiat money is prone to excesses, that is true, but the Fed has done a decent job under Greenspan
Would that be Al? So much for your credibility.
and we'll soon take even that responsibility away from them. :)
Only when the USD becomes worthless and gold is much higher than it is today.
Buddy, you are right that the Fed has almost $1 trillion in mortgage-backed securities but your link is talking about the potential losses at Fannie, Freddie, and other govt programs, not the Fed. I think the Fed will take some losses on those MBS but I'd be surprised if it were more than 10-20%. A fiat currency does nothing to prevent dollar printing, suffice to say the US doesn't have the same govt money-printing issues as Zimbabwe because frankly, our central bankers aren't that stupid.
Without the Fed's ability to create purchasing power any time it wished the crisis never could have developed to the extent that it did. Without the discipline imposed by gold or some other commodity backing on the currency there is no constraint on the damage that can be done by the central banks and politicians.
vangel-
your monetary history is flawed and romantic.
we have seen this time and time again.
if you have a point, make it, but the "my history is better that your" dodge is just you being unable to refute arguments and trying to claim victory anyway. it won't work.
and you continue to confuse coincidence with causality. your economic understanding is severely limited in this respect. we grew in spite of the gold standard, not because of it.
you are refuting basic economic fact.
which of these facts can you dispute.
if the amount of dollars grows less than output, dollars increase in buying power.
a currency increasing in buying power is more expensive to borrow because lenders wish to be compensated for the lost appreciation.
higher rates lead to less borrowing and less investment and therefore growth.
unless you can dispute one of those claims, you must admit that the gold standard slows growth.
all the rest of what you are claiming could be equally applied to the claim that high taxes increase growth.
look at income tax rates in that period.
the correlation is quite high, but clearly it's spurious in terms of causality, just as your claim is.
you are assuming all else is equal when it's not.
your claim about the 70's is equally disingenuous. i'm not arguing that monetary expansion cannot cause inflation (as it did). that's a whole separate issue. you are advocating deflation like it spurs growth.
stop and think for a minute and you'll realize how insane that is.
further, do you have any idea how the gold standard would demolish us in our current situation?
appreciating federal debt alone would destabilize us.
and what would happen to trade? all out gold would flow out and our money supply would shrink horribly or we'd have to stop buying from abroad and prices would rise and living standards drop.
have you thought this through at all?
vangel-
gold pays taxes when it is sold as well and costs money to store.
long term bonds would have been fine. so would munis.
hell, i had some bonds from the late 70's that only just expired last year.
the outperformance of gold is strictly a last 10 years thing.
that is down to terrible monetary policy, but the answer is redefining cpi and a better fed, not a return to the gold straitjacket.
gold tracks inflation. unless real rates are negative, bonds outperform.
do you really not understand this?
if you have a point, make it, but the "my history is better that your" dodge is just you being unable to refute arguments and trying to claim victory anyway. it won't work.
My point is simple. Giving someone the power to create purchasing power out of thin air is theft and leads to trouble. That is exactly what history shows; fiat currencies die while gold as a monetary commodity endures. I can exchange an ounce of gold coined by the Romans to buy me goods and services today and have pretty much the same purchasing power even if I melted it down and made a gold eagle out of it. You can't do the same with fiat currencies because their purchasing power usually dies fairly rapidly.
and you continue to confuse coincidence with causality. your economic understanding is severely limited in this respect. we grew in spite of the gold standard, not because of it.
Again, it is you who have the problem. The Austrian School predicted the events we see now and has the theory to explain them perfectly. That is not true of the monetarists and Keynesians who ignore the fact that the four decades of a pure fiat money system that uses dollar-denominated debt as the primary reserve asset has created monetary chaos just as the Austrians predicted. After all these misadventures they somehow expect that politicians and central banks will adopt monetary and fiscal discipline that they have never had before. On what planet would that be a good assumption?
if the amount of dollars grows less than output, dollars increase in buying power.
Yes they would.
a currency increasing in buying power is more expensive to borrow because lenders wish to be compensated for the lost appreciation.
You are confused a bit. Lenders will benefit from lending their gold because it will buy more in the future than today. Because the risk of money creation out of thin air does not exist interest rates would be low.
Go take a look at Homer and Sylla's, A History of Interest Rates. You will find Treasury rates falling from around 6% at the beginning of the 19th century to around 2.5% at the end of the century. Even railway bonds at the end of the 19th century were yielding 2.5% less than treasuries in the early part of the century.
higher rates lead to less borrowing and less investment and therefore growth.
As I said, market rates were lower under a gold standard than under a fiat system. Investment was booming and capital accumulation grew at a much greater rate as did the general standard of living. A large portion of the population moved out of the rural farming areas into industrialized cities that had the jobs that were necessary to lift workers out of poverty.
unless you can dispute one of those claims, you must admit that the gold standard slows growth.
The first claim does not need to be disputed because it does not slow growth. The others were clearly wrong.
all the rest of what you are claiming could be equally applied to the claim that high taxes increase growth.
look at income tax rates in that period.
Is this an example of the New Math that they have been teaching? Since when is zero a high income tax rate?
the correlation is quite high, but clearly it's spurious in terms of causality, just as your claim is.
There is no correlation. There was little income tax paid in the US prior to the passage of the 16th amendment in 1913. By that time the world was fighting WWI and the classical gold standard was over.
you are assuming all else is equal when it's not.
As I wrote above, I am not assuming anything. The theory that I use is sound and has predicted and explained what we have been observing. The monetarists and Keynesians could not predict or explain stagflation or what has happened recently.
your claim about the 70's is equally disingenuous. i'm not arguing that monetary expansion cannot cause inflation (as it did). that's a whole separate issue. you are advocating deflation like it spurs growth.
I am not advocating anything other than a free market in money. Let the market determine what is a viable medium of exchange and stop stealing from savers, workers and investors by giving an organization like the Fed a monopoly to create money out of thin air.
further, do you have any idea how the gold standard would demolish us in our current situation?
It would do less damage than the hyperinflation that the Fed will create. A hard money system demands that business ventures are viable and sustainable. There is nothing wrong with that.
appreciating federal debt alone would destabilize us.
You have unfunded liabilities that are an order of magnitude greater than GDP. That is not stable and will require a massive bout of inflation or a default.
and what would happen to trade? all out gold would flow out and our money supply would shrink horribly or we'd have to stop buying from abroad and prices would rise and living standards drop.
Trade was booming under a classical gold standard. There were no losses due to exchange volatility and there was never an issue about what one was receiving for one's goods or services.
have you thought this through at all?
Actually I have. Unlike you, I have family that has lived through hyperinflation and have seen what the death of a currency does to a population that was stupid enough to trust politicians. I have also seen how gold saved many of the people who used it as insurance. Your problem is that you are so US centered and so unfamiliar even with your own history that you have no clue about what you are advocating.
v-
i should have been more clear-
i was talking about real rates, not nominal ones.
if you borrow in an appreciating currency and use it do buy fixed assets, they depreciate even more quickly.
this leads to less valuable collateral, hence higher real rates as the loans are less secured.
eg. if houses drop in value in dollar terms because dollars are appreciating, then you will need more money down and a higher real interest rate to offset the risk.
and you are being totally disingenuous about a return to the gold standard. you have to play the ball where it lies. we are a debtor nation now. the GS would be disastrous for us. it only benefits you if you are a creditor. it benefited us (and wasbad for most of the world) only for that reason.
now it would work in reverse.
you are pretending the world is like it was and wishing we could collect global rent as we once did.
that's not how it would work.
we'd wind up paying china and japan. we are now the tenant, not the landlord.
gold pays taxes when it is sold as well and costs money to store.
I just bought gold and silver coins and did not pay any taxes on them. I am not sure that the seller will declare any capital gains and frankly do not care. One of my friends paid his dentist for a job using a gold coin. The bill noted the nominal value of the coin, not its market value so he will not be declaring the increase in purchasing power as a gain.
long term bonds would have been fine. so would munis.
No. If you held long term bonds prior to August 15, 1971 you would not have done well. You would have seen a massive loss of your capital within the first few years after the gold window was closed.
hell, i had some bonds from the late 70's that only just expired last year.
How convenient. Take a look how 30 year bonds did after the gold window was closed.
the outperformance of gold is strictly a last 10 years thing.
No. In the 1970s bond holders got killed while gold went from $50 to $650.
that is down to terrible monetary policy, but the answer is redefining cpi and a better fed, not a return to the gold straitjacket.
Fiat currencies die. Read your history.
gold tracks inflation. unless real rates are negative, bonds outperform.
Nonsense. Gold did well during deflationary times like the 1930s. That is because it is money.
do you really not understand this?
I do because I have a personal history with fiat money dying and gold being the savior of the prudent. I think that you are about to learn a very tough lesson.
morganovich, I'm not the one making the case for Greenspan, it's Hummel and Henderson in the short paper I linked you to, that I found very convincing. I'm of the school of thought that unless the Fed is wildly irresponsible, ie to Zimbabwe levels, monetary policy frankly doesn't matter. Much more important is the trainwreck of fiscal policy that we have had over most of the last century. I think it's laughable to blame Greenspan or the Fed with their small 3-4% changes in the money suppy or interest rates for the bubbles we've seen. The housing bubble was caused by the savings glut and dumb bankers who didn't know where to invest it, along with regulations and govt instutitions like Fannie/Freddie that dumbly incented investing in housing. The Fed had almost no role to play. I also disagree that deflation is necessarily bad. It's all about expectations and what interest rates have been baked into contracts based on those expectations. If we all expected persistent deflation of 3% yearly, we'd write contracts to that effect, ie I'll pay you 0% interest for lending me money for my mortgage because I expect deflation to be 3% and I'll pay you 3% for your risk (-3% + 3% = 0%). The problem is when inflation comes in and upends those expectations and contractual terms. It's the same with deflation today in an environment where everyone expects inflation: it's not deflation that's the problem, it's that nobody expected it and so one side of the contract disproportionately benefits from it. However, with the rise of floating-rate contracts, like option ARMs, even that's not an issue anymore.
VangeIV, if my bank is using real estate securities to back their privately-issued money, as most banks do, that is just as tangible as any commodity. Further, even backing with a fixed weight of gold is circular, let me demonstrate. Suppose there's $1 trillion in gold-backed money in circulation and a bunch of banks want to issue more money, so they go buy $300 billion in gold at $1k per ounce and issue paper money backed with it to their customers. Now, according to what you said, if you have one of their $1k notes, you are entitled to an ounce of gold, but because they increased the money supply by 30%, the price of gold denominated in dollars is going to go up. So if a customer redeems, he would get more gold for $1k than the market rate would imply and the banks would soon be in trouble. One way around this is to use a floating rate, where the banks contract with their customers to redeem the notes at whatever the market rate for gold is later on, but that would be the same as backing Fed Notes with floating-rate securities. So any backing for money, in fact money itself, is inherently circular, the best you can do is structure it better by using floating rates and backing it with better instruments, like not using gold. ;) Further, such privately issued money backed by other financial instruments has long dominated the money supply, since reserve ratios during even the heyday of the gold standard that you trumpet were in the 10-30% range. The Fed merely took over a small 10% of the money supply with their Fed notes, most money has always been privately issued. :)
I don't think the problem with fractional-reserve banking is leverage, it's the fact that they claim convertibility to paper dollars at a moment's notice. The contractual way around this is to suspend convertibility in the case of a panic, or at the very least limit it to whatever the average amount the customer used to take out pre-panic. I too used to think fractional-reserve banking was likely some sort of scam, but I've come to realize it's just a matter of language. The truth is that "dollars" are issued by two parties: the Fed issues printed dollar bills and the banks issue checking and savings accounts and other forms of dollars, with the latter being far more numerous than the former. The only problem is that most checking accounts advertise immediate convertibility to the paper form, which is physically impossible during panics, when a large minority wants their money out. I am not saying you like fractional-reserve banking, I'm saying the private money issued through fractional-reserve banking has long been the dominant factor in the money supply, so gold-backed money then and Fed-issued money now don't matter that much: the power of the Fed is way overstated. It would take too much space to explain why a medium of exchange is not necessary in the coming internet era and what will likely replace it, so I'll point you at this good overview of recent online payment ventures and ask you to think about what happens when they stop aiming low at the credit card companies and eventually go after money itself. :)
Not sure if my comment will post so reposting in two pieces:
VangeIV, if my bank is using real estate securities to back their privately-issued money, as most banks do, that is just as tangible as any commodity. Further, even backing with a fixed weight of gold is circular, let me demonstrate. Suppose there's $1 trillion in gold-backed money in circulation and a bunch of banks want to issue more money, so they go buy $300 billion in gold at $1k per ounce and issue paper money backed with it to their customers. Now, according to what you said, if you have one of their $1k notes, you are entitled to an ounce of gold, but because they increased the money supply by 30%, the price of gold denominated in dollars is going to go up. So if a customer redeems, he would get more gold for $1k than the market rate would imply and the banks would soon be in trouble. One way around this is to use a floating rate, where the banks contract with their customers to redeem the notes at whatever the market rate for gold is later on, but that would be the same as backing Fed Notes with floating-rate securities. So any backing for money, in fact money itself, is inherently circular, the best you can do is structure it better by using floating rates and backing it with better instruments, like not using gold. ;) Further, such privately issued money backed by other financial instruments has long dominated the money supply, since reserve ratios during even the heyday of the gold standard that you trumpet were in the 10-30% range. The Fed merely took over a small 10% of the money supply with their Fed notes, most money has always been privately issued. :)
second piece:
I don't think the problem with fractional-reserve banking is leverage, it's the fact that they claim convertibility to paper dollars at a moment's notice. The contractual way around this is to suspend convertibility in the case of a panic, or at the very least limit it to whatever the average amount the customer used to take out pre-panic. I too used to think fractional-reserve banking was likely some sort of scam, but I've come to realize it's just a matter of language. The truth is that "dollars" are issued by two parties: the Fed issues printed dollar bills and the banks issue checking and savings accounts and other forms of dollars, with the latter being far more numerous than the former. The only problem is that most checking accounts advertise immediate convertibility to the paper form, which is physically impossible during panics, when a large minority wants their money out. I am not saying you like fractional-reserve banking, I'm saying the private money issued through fractional-reserve banking has long been the dominant factor in the money supply, so gold-backed money then and Fed-issued money now don't matter that much: the power of the Fed is way overstated. It would take too much space to explain why a medium of exchange is not necessary in the coming internet era and what will likely replace it, so I'll point you at this good overview of recent online payment ventures and ask you to think about what happens when they stop aiming low at the credit card companies and eventually go after money itself. :)
VangeIV, if my bank is using real estate securities to back their privately-issued money, as most banks do, that is just as tangible as any commodity.
No it isn't. Paper securities are not tangible. They are a promise that someone will pay you money in the future. If they do not pay as much as specified the value of those securities falls and you could wind up insolvent. That is not the case when your notes are backed by a weight of a specified commodity because that commodity has no counterparty.
Suppose there's $1 trillion in gold-backed money in circulation and a bunch of banks want to issue more money, so they go buy $300 billion in gold at $1k per ounce and issue paper money backed with it to their customers. Now, according to what you said, if you have one of their $1k notes, you are entitled to an ounce of gold, but because they increased the money supply by 30%, the price of gold denominated in dollars is going to go up.
This shows how confused you are, something that I suspect is common among many of the gold bashers on this thread.
Let me be clear about this. Under a gold standard when we say the word dollar we mean the legal value of a US gold dollar, which was set as 23.22 grains of pure gold. When banks would issue notes they had to have a specific weight of gold and did not care about what that gold could buy. As such, to talk about price is totally meaningless.
So if a customer redeems, he would get more gold for $1k than the market rate would imply and the banks would soon be in trouble.
No. Redemption is in weight of the commodity. End of story. How is it that you guys can debate this topic without knowing how the standard worked?
And let me be clear again. When we talked about Pound Sterling, Franc, we also mean a weight of gold or silver. In the 19th century we saw the Latin Monetary Union, which was made up of Switzerland, France, Belgium, and Italy, agreed that their national currencies would all be backed by 0.2903 grams of gold or 4.5 grams of silver. This helped trade, commerce and travel because there was no need to worry about exchange rate hedging.
One way around this is to use a floating rate, where the banks contract with their customers to redeem the notes at whatever the market rate for gold is later on, but that would be the same as backing Fed Notes with floating-rate securities.
No. The most stable systems are those where the rules are clear and known to all. When the unit of measure change all the time it is difficult to make effective plans and to protect oneself from volatility.
So any backing for money, in fact money itself, is inherently circular, the best you can do is structure it better by using floating rates and backing it with better instruments, like not using gold. ;) Further, such privately issued money backed by other financial instruments has long dominated the money supply, since reserve ratios during even the heyday of the gold standard that you trumpet were in the 10-30% range. The Fed merely took over a small 10% of the money supply with their Fed notes, most money has always been privately issued. :)
Thank you for proving that you have no clue what you are talking about. I suggest that you read up about what being under a gold, silver, or copper standard really means.
I don't think the problem with fractional-reserve banking is leverage, it's the fact that they claim convertibility to paper dollars at a moment's notice.
We just saw that the problem was leverage. European banks were using 50:1 leverage and went bust when the mortgage backed securities they were buying from the US banks turned out to be worthless. The same was true of the American banks and like their European counterparts, they were bailed out by the central banks and the taxpayers. The reckless bank managers were saved while the prudent banks wound up having to pay more for deposit insurance. As usual, the taxpayer was screwed.
The contractual way around this is to suspend convertibility in the case of a panic, or at the very least limit it to whatever the average amount the customer used to take out pre-panic.
That is theft. And if the depositors were denied their money when they needed or wanted it they would do what other depositors have done after similar circumstances. They would avoid the currency and the banking system and move to alternate systems.
I too used to think fractional-reserve banking was likely some sort of scam, but I've come to realize it's just a matter of language.
If you sold or lent out something that was not yours you would rightfully go to jail. That is as it should be because you engaged in fraud. Fractional reserve banking is legal but it is still a fraud because it requires creating money out of thin air by lending what one does not have.
Sorry but you might want to read up a bit on the subject. In addition to monetary theory it may you some good to read up on ethics.
i was talking about real rates, not nominal ones.
My point is still correct. Real rates were quite low during most of the 19th century under a gold standard. Lenders were content with a low nominal rate because there was no inflation to speak of unless there was some type of war or governments got out of hand subsidizing their pals for short periods of time. Real investment boomed and savers saw their purchasing power protected.
if you borrow in an appreciating currency and use it do buy fixed assets, they depreciate even more quickly.
If you invest in wealth producing capital you do not have to worry about depreciation at all. And when the currency is stable it is a lot easier to plan for the future, particularly when you do not have to worry about exchange rates. You are also forgetting the obvious; that a strong currency will keep your input prices very low. That was exactly why Clinton kept talking up the strong currency theme even as Greenspan was busy printing as much money as he could get away with.
eg. if houses drop in value in dollar terms because dollars are appreciating, then you will need more money down and a higher real interest rate to offset the risk.
Since when are falling prices a bad thing? Would you have been happier if the cost of computers, airline travel, telephone calls, etc., stayed high? Do you wait until after the sales are done to go shopping? Do you ignore the cheaper printer ink in Costco, Wal Mart, or Target and choose the more expensive places to buy them?
and you are being totally disingenuous about a return to the gold standard.
It is the belief in fiat money that is disingenuous. You have a banking cartel being given the power to create money out of thin air and by doing so rob savers and you cheer?
you have to play the ball where it lies. we are a debtor nation now.
You certainly are a debtor nation. You owe around $14 trillion in federal debt and have unfunded liabilities of at least another $60 trillion in SS and Medicare. That means a default.
the GS would be disastrous for us. it only benefits you if you are a creditor. it benefited us (and wasbad for most of the world) only for that reason.
I would not pay off the creditors. I I would default on all debts and let the market choose the medium of exchange. I would offer a gold backed currency as one option but encourage banks to get their own gold reserves and issue their own notes. There would be no Fed.
you are pretending the world is like it was and wishing we could collect global rent as we once did.
I have no idea what you mean. It is likely that you are not clear about it either.
we'd wind up paying china and japan. we are now the tenant, not the landlord.
They already own much of your treasuries and have a claim on most of your Federal Reserve Notes in circulation when the bonds that they hold matured. Unless you default they could step in and purchase many of your tangible assets at fire-sale prices. Why would you want to let your creditors buy the best American companies or use those USDs to buy up good companies around the world? Isn't it better to default and make sure that nobody will be stupid enough to lend to the federal government again?
I'm of the school of thought that unless the Fed is wildly irresponsible, ie to Zimbabwe levels, monetary policy frankly doesn't matter.
Where have you been the past 40 years? Since the gold window was closed in 1971 we have witnessed monetary chaos just as was predicted by the Austrians. Given the political incentives and pressure to inflate do you really expect the Fed and Treasury to become fiscally and monetarily sane? If so why?
Much more important is the trainwreck of fiscal policy that we have had over most of the last century.
That would not have been possible under the discipline imposed by a commodity standard. Did you forget that the world dropped the gold standard so that it could finance a huge war that killed millions and destroyed much of the established order?
The housing bubble was caused by the savings glut and dumb bankers who didn't know where to invest it, along with regulations and govt instutitions like Fannie/Freddie that dumbly incented investing in housing. The Fed had almost no role to play.
I hate to break this to you but you are one of the globe's worst debtors. There was no savings glut. And without the Fed adding liquidity the GSEs and Congress could not have acted as stupidly as they did.
I also disagree that deflation is necessarily bad.
It isn't bad at all. Apple did fine even though the price of computers kept falling and competitors forced it to cut prices. The collapse in the price of semiconductors did not destroy Intel. And while Jobs and Gates got rich, the greater benefits were provided to the consumers who got useful ways to increase their productivity and improve their entertainment options.
VangeIV, and the unit of measure doesn't change with gold? Everytime someone digs up a whole new cache of gold, that devalues gold. Everytime someone melts down all their jewelry into gold bars to be sold as money, that devalues gold. If you don't know this, you have an extremely limited understanding of money. Haha, hilarious how you simply assert that I'm wrong about fractional-reserve banking dominating for centuries and yet cannot make a single argument against it, vaguely pointing at some "reading" that will make your argument for you. :) Leverage is NOT the issue because fractional-reserve banking allows you to hold a bunch of mortgage-backed securities under a gold standard, when 10-20% of the money supply, paper Fed Notes, are backed by gold instead of with Treasuries like they're now. The central issue is convertibility of the privately-issued checking money to the paper notes. It is not theft to deny depositors as long as that's in the contract. It is possible they would not sign such a contract in the first place, if circuit-breakers for panics were put in, but I think if it were properly explained to most depositors that it is for their protection in the case of a panic, I think it would do much better than our current joke of a deposit insurance system. I think you don't really understand how private checking money works if you think it's fraud. It is badly structured for panics, no doubt, but it has worked much better over the last 30 years than your proposed gold standard. Funny how you keep telling everyone to read, yet you simply make flat assertions that we're wrong and cannot back it up with any actual arguments. :D
While the 70s were no doubt an example of bad Fed policy, the last 30 years, mostly under Greenspan, have been great. No highly inflationary or deflationary episode in 30 years, where do you see the chaos? As I said, the Fed has behaved well for 30 years and I don't see the need for them to become even more sane, as we soon won't use dollars at all, since we won't need a medium of exchange. :) I don't see how a gold standard stops the govt from taxing 40% of our income as it does now, feel free to put forth an argument for how it does. Yes, the US is a big debtor, do you imagine that means there isn't a ton of money here to invest? Besides, a good chunk of the savings glut came from abroad, are you really ignorant of that? It is laughable to suggest that the $470 billion that the Fed added to the money supply in the last decade inflated a housing bubble of $5-10 trillion. While you no doubt understand some of these topics, your response when you don't know something is to make vague assertions that some book will fill them in. I suggest you actually engage with what I'm saying, rather than constantly repeating your goldbug mantra, as it's a dead ideology that isn't coming back.
VangeIV, and the unit of measure doesn't change with gold? Everytime someone digs up a whole new cache of gold, that devalues gold. Everytime someone melts down all their jewelry into gold bars to be sold as money, that devalues gold. If you don't know this, you have an extremely limited understanding of money. Haha, hilarious how you simply assert that I'm wrong about fractional-reserve banking dominating for centuries and yet cannot make a single argument against it, vaguely pointing at some "reading" that will make your argument for you. :) Leverage is NOT the issue because fractional-reserve banking allows you to hold a bunch of mortgage-backed securities under a gold standard, when 10-20% of the money supply, paper Fed Notes, are backed by gold instead of with Treasuries like they're now. The central issue is convertibility of the privately-issued checking money to the paper notes. It is not theft to deny depositors as long as that's in the contract. It is possible they would not sign such a contract in the first place, if circuit-breakers for panics were put in, but I think if it were properly explained to most depositors that it is for their protection in the case of a panic, I think it would do much better than our current joke of a deposit insurance system. I think you don't really understand how private checking money works if you think it's fraud. It is badly structured for panics, no doubt, but it has worked much better over the last 30 years than your proposed gold standard. Funny how you keep telling everyone to read, yet you simply make flat assertions that we're wrong and cannot back it up with any actual arguments. :D
While the 70s were no doubt an example of bad Fed policy, the last 30 years, mostly under Greenspan, have been great. No highly inflationary or deflationary episode in 30 years, where do you see the chaos? As I said, the Fed has behaved well for 30 years and I don't see the need for them to become even more sane, as we soon won't use dollars at all, since we won't need a medium of exchange. :) I don't see how a gold standard stops the govt from taxing 40% of our income as it does now, feel free to put forth an argument for how it does. Yes, the US is a big debtor, do you imagine that means there isn't a ton of money here to invest? Besides, a good chunk of the savings glut came from abroad, are you really ignorant of that? It is laughable to suggest that the $470 billion that the Fed added to the money supply in the last decade inflated a housing bubble of $5-10 trillion. While you no doubt understand some of these topics, your response when you don't know something is to make vague assertions that some book will fill them in. I suggest you actually engage with what I'm saying, rather than constantly repeating your goldbug mantra, as it's a dead ideology that isn't coming back.
VangeIV, and the unit of measure doesn't change with gold? Everytime someone digs up a whole new cache of gold, that devalues gold.
The unit of measure does not change under a gold standard because a dollar is still defined as the same number of grains of pure gold as before. When you dig up new gold or sell exports to another country you can print up more dollars.
But the reason why the market chose gold as money is because of stability of supply. It takes a lot of hard work to go out and dig up gold out of the ground and annual production is a small percentage of the total stock.
Everytime someone melts down all their jewelry into gold bars to be sold as money, that devalues gold.
That is as it should be. But you are missing the point. When gold gains too much purchasing power too quickly new supply flows into a country to correct the move. That is why jewelry would be melted down to create gold reserves that would justify printing more money. Things do not get out of hand as they do in fiat systems.
If you don't know this, you have an extremely limited understanding of money. Haha, hilarious how you simply assert that I'm wrong about fractional-reserve banking dominating for centuries and yet cannot make a single argument against it, vaguely pointing at some "reading" that will make your argument for you. :)
I think that I have been clear. I am with Rothbard on the fractional reserve issue and believe that it is a scam.
Leverage is NOT the issue because fractional-reserve banking allows you to hold a bunch of mortgage-backed securities under a gold standard, when 10-20% of the money supply, paper Fed Notes, are backed by gold instead of with Treasuries like they're now.
History shows that when banks create too much paper and use too much leverage (even under a gold standard) they can fail. But gold reserves do not change. They are what they are and work as expected. That is not true of mortgage backed securities, which could turn out to be worthless and drive the bank into insolvency. This is not theoretical. We just saw it happen during the 2008 crisis.
Gold is better because there is no counterparty risk as there is in mortgage backed securities. As I said, you need to do some reading.
The central issue is convertibility of the privately-issued checking money to the paper notes. It is not theft to deny depositors as long as that's in the contract. It is possible they would not sign such a contract in the first place, if circuit-breakers for panics were put in, but I think if it were properly explained to most depositors that it is for their protection in the case of a panic, I think it would do much better than our current joke of a deposit insurance system. I think you don't really understand how private checking money works if you think it's fraud. It is badly structured for panics, no doubt, but it has worked much better over the last 30 years than your proposed gold standard. Funny how you keep telling everyone to read, yet you simply make flat assertions that we're wrong and cannot back it up with any actual arguments. :D
It is not theft to deny depositors as long as that's in the contract.
You may not have heard of the instruments that will deny you the investment for a fixed period. They are called bonds. But demand deposits are not bonds and cannot be treated as such.
It is possible they would not sign such a contract in the first place, if circuit-breakers for panics were put in, but I think if it were properly explained to most depositors that it is for their protection in the case of a panic, I think it would do much better than our current joke of a deposit insurance system. I think you don't really understand how private checking money works if you think it's fraud.
You don't seem to understand what a demand deposit is. When you deny people what is theirs it is called theft.
It is badly structured for panics, no doubt, but it has worked much better over the last 30 years than your proposed gold standard.
Since the world went off the gold standard there have been nothing but one crisis after another. Entire countries went bankrupt. The US went from one crisis after another.
Funny how you keep telling everyone to read, yet you simply make flat assertions that we're wrong and cannot back it up with any actual arguments.
But I have. You claim that MBSs are good holdings that present no problem but we have recent events showing you that the claim is false. My explanations are sound theoretically and supported by history. Yours have been discredited many times.
No highly inflationary or deflationary episode in 30 years, where do you see the chaos?
Market crash in 1987 that gets kicked down the road by direct intervention. S&L crisis that takes the formation of the Resolution Trust and billions in taxpayer dollars. The dotcom bubble. IT bubble. LTCM. Y2K liquidity injections. The housing bobble. It has been one disaster after another all thanks to the Fed's interventions.
I found this interesting site about gold rate and gold price - http://www.indiangoldrates.com/
Let me get back to the anti-gold but pro-Greenspan line of argument for a bit.
morganovich, I'm not the one making the case for Greenspan, it's Hummel and Henderson in the short paper I linked you to, that I found very convincing.
If you find Greenspan as convincing as Hummel and Henderson you my consider paying attention to his view on this topic. It seems that even the great inflationist Greenspan does not believe the crap that you are posting about gold and fiat money. In fact, when asked why gold was going up he answered, "Fiat money has no place to go but gold."
Of course, Greenspan's views would not be a surprise to anyone familiar with his essay, Gold And Economic Freedom, in which he cuts through the noise right from the beginning by opening with the paragraph, "An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense-perhaps more clearly and subtly than many consistent defenders of laissez-faire -- that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other."
VangeIV, if you simply set a dollar to equal a set amount of gold, that is prone to distortions when gold supply goes up, particularly since you don't always know how much jewelry people are melting down to gold or digging up. Perhaps the gold supply was once stable, but it certainly wasn't over the last century, as "92% of all the gold mined up until 2007 was mined since 1900". Things usually do not get out of hand in a fiat system for the same reasons as with gold, currency markets are there to punish bad central bankers, as they have repeatedly over the last century. And above all else, these paper currencies don't require storing a bunch of gold in vaults, which is an antiquated tradition that makes no sense in the modern era. Fractional-reserve banking is misinterpreted as a scam by Rothbard and some others because they don't understand that the privately-issued checking money issued by banks is really a private money on its own, that we happen to also call "dollars." Yes, mortgage-backed securities were not a great backing because they lost value, but since gold lost most of its value for 25 years from 1980-2005, by that rationale, gold would have been a bad backing also. ;) There's no magic backing that will never lose value, that's why you diversify as many good banks do. Haha, counterparty risk of MBS makes up for all the costs of storing a bunch of useless gold bricks? That's a good one. :) You need to do more than some reading, you need to learn how to think, rather than accepting uncritically all the drivel some gold bugs have fed you.
Lol, I had to explain to you that Fed Notes are backed by treasuries and now you try to explain what a bond is? :) I guess in your limited imagination only a bond can have redemption requirements and a demand deposit cannot ever put any limitations on redemption. I can see why you go ape for such simplistic concepts like a gold standard, that's obviously all you can understand. I asked you to point to a single monetary crisis in the last 30 years, you are unable to name a single one and as usual make crazy, vague claims about how the "US went from one crisis after another." I never claimed MBS are good holdings, I said that the diversified securities that banks now use are much better than going back to holding an antiquated commodity like gold in their vaults. You have no explanations, you just say others are wrong without explanation, :) displaying your ignorance above anything else. You list various market crashes over the last 25 years, yet cannot make a single connection between any of those crashes and the Fed's actions. It's hilarious how dummies like you think the Fed is some magical entity that mysteriously controls the markets and is to blame for every misstep. :D
Haha, you think Greenspan actually believes that crap? Like Reagan, Greenspan knows that there are a bunch of dumb gold bugs like yourself that love it if anyone in political power even mentions your dumb crusade. To see what they actually think, all you have to look at is what they did: did Reagan or Greenspan actually do anything about moving back to gold? No, they did jack, they just talked about it to get political points with the gold bugs, but they probably both knew it was a dumb idea. As for what's the true laissez-faire policy, you probably know that there are many in the laissez-faire camp that think the gold standard is a dumb idea. The truth is that laissez-faire people like me, who want to move to free banking with no gold standard, actually know and understand how money works, while people like you don't really understand the subject and simply want to go back to some antiquated system that you fantasize worked great. It's clearly a fantasy because fractional-reserve banking long allowed bankers to increase the money supply as much as they wanted, even during the heyday of the gold standard, a fact that is lost on the simple-minded gold bugs such as yourself.
VangeIV, if you simply set a dollar to equal a set amount of gold, that is prone to distortions when gold supply goes up, particularly since you don't always know how much jewelry people are melting down to gold or digging up.
I thought I answered this before. In case I didn't, let me write something up quickly and point out that you don't seem to have done any research on the subject. Let us look to history and see how this 'distortion' argument worked in the past.
The largest gold 'supply shock' that we know of was observed in the 19th century when large quantities of gold were found in California in the late 1840s. The California gold discovery led to a significant increase in gold output, which reduced the global purchasing power of the metal. Let me repeat the point; there is no argument that the increased supply created inflation of the price level.
But just how large was price inflation and how does that compare to fiat standard inflation? When we look at the data compiled by Jevons we see that there wasn't much inflation at all. The general price index rose by 12.4% over an eight year period giving us a compound annual price inflation rate of around 1.5 percent. Twenty two years later the purchasing power of gold was exactly the same as it had been before gold was found in California. (Note that a lot of gold was also found in Australia around the same time and increased supply even further.)
The bottom line is that history shows that your claims are false because it would take massive new production to create anything in the way of inflation under a gold standard. That is not true under a fiat money standard in which we can easily see the same amount of inflation in one year than we did during the entire California gold rush period.
Perhaps the gold supply was once stable, but it certainly wasn't over the last century, as "92% of all the gold mined up until 2007 was mined since 1900"
That is what we would expect. Go to a spreadsheet, set annual production at 2% of the outstanding stock and see what you get. (I choose 2% because that is what Friedman advised as a good increase in money supply under his preferred system.) Well, in year 2007 you would expect the annual production to be around 16% of the entire stock in 1900. That is not a big problem but a natural outcome of compounding.
You also seem to forget that since then the population has grown by more than 300% and the real economy by even more.
Things usually do not get out of hand in a fiat system for the same reasons as with gold, currency markets are there to punish bad central bankers, as they have repeatedly over the last century.
On what planet do you live? We had more price inflation in one year of the 1970s than the entire 19th century even though growth rates were much higher in the 19th century.
As I wrote before, your ignorance of the facts is astounding. Try looking at them before you post please. It will be less embarrassing.
VangeIV, and the unit of measure doesn't change with gold? Everytime someone digs up a whole new cache of gold, that devalues gold.
The unit of measure does not change under a gold standard because a dollar is still defined as the same number of grains of pure gold as before. When you dig up new gold or sell exports to another country you can print up more dollars.
But the reason why the market chose gold as money is because of stability of supply. It takes a lot of hard work to go out and dig up gold out of the ground and annual production is a small percentage of the total stock.
Everytime someone melts down all their jewelry into gold bars to be sold as money, that devalues gold.
That is as it should be. But you are missing the point. When gold gains too much purchasing power too quickly new supply flows into a country to correct the move. That is why jewelry would be melted down to create gold reserves that would justify printing more money. Things do not get out of hand as they do in fiat systems.
If you don't know this, you have an extremely limited understanding of money. Haha, hilarious how you simply assert that I'm wrong about fractional-reserve banking dominating for centuries and yet cannot make a single argument against it, vaguely pointing at some "reading" that will make your argument for you. :)
I think that I have been clear. I am with Rothbard on the fractional reserve issue and believe that it is a scam even though I give some leeway to some of Lawrence H. White's arguments.
Leverage is NOT the issue because fractional-reserve banking allows you to hold a bunch of mortgage-backed securities under a gold standard, when 10-20% of the money supply, paper Fed Notes, are backed by gold instead of with Treasuries like they're now.
History shows that when banks create too much paper and use too much leverage (even under a gold standard) they can fail. But gold reserves do not change. They are what they are and work as expected. That is not true of mortgage backed securities, which could turn out to be worthless and drive the bank into insolvency. This is not theoretical. We just saw it happen during the 2008 crisis.
Gold is better because there is no counterparty risk as there is in mortgage backed securities. As I said, you need to do some reading.
VangeIV, as you yourself admit, gold discoveries set off massive inflationary periods during the gold standard period. However, you seem to think that what matters is long-term price stability when it is short and medium-term price stability that matters much more. I've commented before on this blog about how a consistent level of inflation, as we had for the last 30 years, is much preferable to the wild swings we saw in the 19th century. Further, it is only gold bug dummies who think the long-term purchasing power of the currency matters. Since most people hold currency for the very short-term and invest in equities or bonds, as others tried to point out to you, that pay a nice inflation-adjusted rate over longer terms, stable inflation of the currency just doesn't matter. The only reason you fantasize that it does is because you obviously don't understand these issues too well. As for the issue of gold supply, I see, so you admit that the gold supply increases at a rate of 2-3% per year? But, but that's inflation, whatever shall we do?!! Actually, there were years in the 19th century that had higher price inflation than any year in the 1970s, check the charts, I linked to one from the linked comment above. Hilarious how everytime you accuse someone of ignorance, you are the one who is found to be ignorant and yet you don't seem to be embarrassed at all. :D The funniest part is that each time I link to data that proves you wrong, whereas you never seem to have any arguments or facts to back you up. XD
As for the issue of gold supply, I see, so you admit that the gold supply increases at a rate of 2-3% per year? But, but that's inflation, whatever shall we do?!!
Nothing needs to be done because the economy is also growing. As I pointed out above, the greatest supply shock in history could not create any inflation over two decades and only 1.5% per year price inflation compounded over a short period of time.
Actually, there were years in the 19th century that had higher price inflation than any year in the 1970s, check the charts, I linked to one from the linked comment above.
You check them and figure out why you were so ignorant of the facts that you did not know that those periods were ones in which the gold standard was suspended so that fiat money could be used to finance the wars.
Hilarious how everytime you accuse someone of ignorance, you are the one who is found to be ignorant and yet you don't seem to be embarrassed at all.
See my comment above. Greenbacks were not backed by gold.
The funniest part is that each time I link to data that proves you wrong, whereas you never seem to have any arguments or facts to back you up. XD
You can't even understand what it is that you are liking and have no idea about the facts. As I said, the greatest supply shock produced a 1.5% price inflation compounded over eight years. If you pick any one year of the 1970s you will see more inflation than the entire 19th century. Ignorance is not bliss. And neither is stupidity. Check your facts please.
VangeIV, something still needed to be done under the gold standard because there were wild swings in inflation and deflation during that time. As I noted in my linked comments, inflation over a long period, like 30-50 years, just doesn't matter. People made short and medium-term contracts and if interest rates are jumping all over the place, they were less likely to contract in the 19th century. This is one of the main issues that gold bugs don't understand, probably because they have no exposure to business. I see, so your precious gold standard was so great, but it wasn't able to stop fiat money expansion in the 19th century? What's the use of a "standard" that can be suspended so easily? You are the one showing your ignorance as there was also huge deflation during the 19th century that didn't correspond to any war.
It is continually hilarious how a dumb, uninformed gold bug like yourself can keep calling other people that. :) Particularly funny is when I point out that your '70s inflation example is wrong and why, you simply repeat it. XD I realize you've put a little effort into learning a little bit, so you obviously want to run around trumpeting your little knowledge and calling everyone else ignorant, which is laughable considering how much you obviously don't know. :D But let me counter with the real aphorism that applies for your continued avoidance of the real issues only to spout more dumb arguments, "A little knowledge is a dangerous thing."
VangeIV, something still needed to be done under the gold standard because there were wild swings in inflation and deflation during that time.
The booms and busts were not created by the gold standard. They were created by fractional reserve lending and by war financing. The biggest inflation during the 19th century did not come from the massive supply shock when gold was discovered in California but by Lincoln going off the gold standard so that he could finance his war against the South.
As I pointed out above, under the gold standard the USD saw a mild increase in purchasing power at a time when the real economy was growing rapidly and society was being transformed by a mass migration from the country to the cities. It seems to me that the gold standard offered stability that has yet to be replicated.
As I noted in my linked comments, inflation over a long period, like 30-50 years, just doesn't matter.
Try telling that to people living on a fixed income. They go from being comfortable to being on public assistance and eating dog food. Yes, it matters.
People made short and medium-term contracts and if interest rates are jumping all over the place, they were less likely to contract in the 19th century.
The problem is the counterfeiting and the math. If banks can create purchasing power out of nothing and the Fed can print as much money as it wants to buy treasuries that allow the government to spend as much as it wishes you do not have a stable system that is capable of surviving a significant or prolonged contraction. That is why paper money systems die as often as they do.
This is one of the main issues that gold bugs don't understand, probably because they have no exposure to business.
Let's stick to the facts please. A business that depends on easy money and credit for its survival is not exactly credible when arguing for more easy money and credit.
I see, so your precious gold standard was so great, but it wasn't able to stop fiat money expansion in the 19th century?
Correct. The government had the power to take the country off the gold standard and to print money. That is what allowed the massive slaughter and created the huge inflation. The gold standard would not have allowed either.
What's the use of a "standard" that can be suspended so easily? You are the one showing your ignorance as there was also huge deflation during the 19th century that didn't correspond to any war.
No, I am not. As I said, under fractional reserve lending you can have busts, particularly when you have an economy that is dependent on agriculture, which is itself dependent on weather conditions. It is easy to have a bust when you lend to people whose crop fails because of drought, too much rain, an early or late frost, pests, or countless of other factors that farmers worry about.
As I wrote on other occasions many of you guys need to learn about monetary theory and history.
It is continually hilarious how a dumb, uninformed gold bug like yourself can keep calling other people that. :)
I stick with the facts, which you ignore because they falsify your arguments. As I said, the argument that when gold supply increases we will have high and persistant inflation has been shown to be false by history and cannot be supported by theory. A gold standard has a feedback mechanism that, in a market system, prevents things getting out of control. The persistent problems only occur when governments meddle in the markets.
Particularly funny is when I point out that your '70s inflation example is wrong and why, you simply repeat it.
The 1970s inflation destroyed savers and those that depended on fixed incomes. Every year in the 1970s had a higher inflation rate than the entire period under the gold standard.
I realize you've put a little effort into learning a little bit, so you obviously want to run around trumpeting your little knowledge and calling everyone else ignorant, which is laughable considering how much you obviously don't know.
Again we have empty words and no facts.
But let me counter with the real aphorism that applies for your continued avoidance of the real issues only to spout more dumb arguments, "A little knowledge is a dangerous thing."
I notice that you have yet to refute the facts that I brought up. I guess that when you are losing the argument it is better to switch topics and divert from the issues. The point is simple. Fiat money loses most of its purchasing power quickly while gold does not.
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VangeIV, as I already pointed out, reserve ratios were low even during the 19th century, which means that fractional-reserve banking dominated even then. The fact that you keep ignoring this fact suggests you don't really understand how the money supply works. Nobody used to live on long-term fixed-income contracts back then because of the constant interest rate volatility, the only reason we have fixed-income now is because of the recently steady and stable inflation that allows a person to write long-term contracts. Further, with the advent of variable-rate securities like ARMs or TIPS, interest rates don't even matter anymore. Again, an issue you don't understand so you just ignore it. Paper money systems haven't died in centuries, they just use better backing than gold now. Haha, I say that businesses want stable, predictable interest rates and you turn that into the favorite gold bug trope about "easy money and credit." They don't want easy money, they want to know that if they write a 5-year contract with a 5% yearly interest rate that the market rates won't swing wildly all over the place during those 5 years, randomly favoring one party over another.
The gold standard didn't stop any war because fractional-reserve banking always dominated, the govt just forced the fractional-reserve bankers to print more than they would or should have. I see, so you admit there were fractional-reserve busts in the 19th-century agricultural economy? So let me get this straight, all busts in the 19th century were the fault of the 70% or so in privately-issued FRB money, but all the long-term "stability" was because of the gold standard? Hilarious how you attribute all the good effects to the gold standard, which was only a minority of the money supply, and all the bad parts to FRB, with no rationale for why one caused the former and the other the latter. :) If we needed to learn anything about monetary theory or history, we would be the ones making constant mistakes or just avoiding the real issues, but it's only you doing that. :D
Haha, as I already said, you have no facts or arguments, I make arguments and link to numbers and charts, you link to pictures of currency. XD If you think gold has some magical property that allows it to avoid inflation when the gold supply is greatly increased, please state what that is, I'm sure it will be very funny. :) I already pointed out that you can't compare a single year in the 1970s to the entire 19th century and that there were years in the 19th century that had even higher inflation/deflation that weren't war years. The fact that you cannot address this argument, but go back to restating your original silly claim shows you have no rejoinder. Haha, let me know where these magic facts are that you claim to be bringing up, because I don't see them. Hilarious how you accuse me of switching topics when all you do is switch topics back to your gold bug talking points without actually addressing the points I raised that refute your silly points. It is clear that gold bugs are too dumb to understand these issues and too ignorant to be expected to add any worthwhile info, which is why you make "simple" points: you're not smart enough to realize your points are wrong. :) But by all means keep avoiding the issues and repeating your same old dumb points, it's always funny to read someone dumb who thinks he isn't, which basically describes all gold bugs. :)
VangeIV, as I already pointed out, reserve ratios were low even during the 19th century, which means that fractional-reserve banking dominated even then.
Show us the data please. I suggest that you do some reading. Rothbard's, History of Money and Banking in the US, might be a good place to start.
Had you done some reading you would have known that before the Civil War, when the gold standard was suspended so that Lincoln could fight his war, every bank kept its own specie reserves. The banks could not issue too many notes because they were limited by possible calls for redemption in specie by competing banks and by the general public. When you are off the gold standard of have a central bank to set reserves the banks are free to be far more reckless and keep less in reserves because the central bank is there to save them if that is required.
The fact that you keep ignoring this fact suggests you don't really understand how the money supply works.
You are not entitled to make crap up and call it a fact. The facts are actually clear; the problems were never with the gold standard but with governments and central banking. Even Bernanke had to ask, 'Why was there such a sharp contrast between the stability of the gold standard regime of the classical, pre-World War I period and the extreme instability associated with the interwar gold standard?'
(Bernanke, Ben S. 1993. The World on a Cross of Gold. Journal of Monetary Economics 31: 251-267)
Nobody used to live on long-term fixed-income contracts back then because of the constant interest rate volatility, the only reason we have fixed-income now is because of the recently steady and stable inflation that allows a person to write long-term contracts.
You are making stuff up again. Lots of people have lived off fixed income over the past seven decades. Most people who retired in the 1960s and seventies had company pensions that paid a certain percentage of their averaged income. When inflation hit in the 1970s those pensions became insufficient and many of these people became very poor. Sadly, most of their investments were in 'safe' bonds that became nearly worthless in a rising interest rate environment.
Savers in a gold standard do not have to worry about such things because their principal gains purchasing power and they can usually live off the 2-3% interest.
Further, with the advent of variable-rate securities like ARMs or TIPS, interest rates don't even matter anymore.
Of course they matter. If interest rates go up people that have ARMs will take a huge beating as they find that they cannot make the rising payments. And people who have TIPS will find that their bonds do not protect them from the loss of purchasing power that they experience because the government's inflation calculations do not fully account for items such as food, health care, energy, property taxes, excise taxes, etc. As John Williams has shown, the true inflation rate is probably three times what is being reported.
Again, an issue you don't understand so you just ignore it. Paper money systems haven't died in centuries, they just use better backing than gold now.
You can't be as ignorant as you try to appear. Please name me a paper currency that has lasted a century. How about 50 years?
Haha, I say that businesses want stable, predictable interest rates and you turn that into the favorite gold bug trope about "easy money and credit."
As I said, interest rates were a lot more predictable under a gold standard.
They don't want easy money, they want to know that if they write a 5-year contract with a 5% yearly interest rate that the market rates won't swing wildly all over the place during those 5 years, randomly favoring one party over another.
But such a contract is not possible because the market sets the 5 year rates and those can change very rapidly. None of this is a problem in a gold standard because the number of ounces that you will have to return in the future is known and there is no exchange rate problem to worry about.
The gold standard didn't stop any war because fractional-reserve banking always dominated, the govt just forced the fractional-reserve bankers to print more than they would or should have.
Even with fractional reserve banking you can't fight a big war under a gold standard because you will run out of specie very quickly. That is why Lincoln took the US off the gold standard to fight his war and why Europe went off the gold standard to fight World War I.
I see, so you admit there were fractional-reserve busts in the 19th-century agricultural economy?
When the crop failed lots of small banks went under because their loans went bad. But most of the busts were created by government meddling with the banking system. You would know this if you read the free book that I referenced before.
So let me get this straight, all busts in the 19th century were the fault of the 70% or so in privately-issued FRB money, but all the long-term "stability" was because of the gold standard?
The Federal Reserve was created in 1913, not the 19th century. And there were no major problems in the 19th century in comparison with what we saw after the world went off the gold standard. Two great wars, a massive depression, hyperinflations; they were all made possible by central banking and a fiat money system. Under a gold standard there could be no world wars because they could not be financed without the warring countries losing all their reserves.
Hilarious how you attribute all the good effects to the gold standard, which was only a minority of the money supply, and all the bad parts to FRB, with no rationale for why one caused the former and the other the latter. :)
Perhaps you area as ignorant as you try to appear. Like I said, the Federal Reserve was created in the 20th century. That is something that people who talk about monetary history would know.
If we needed to learn anything about monetary theory or history, we would be the ones making constant mistakes or just avoiding the real issues, but it's only you doing that.
Like I wrote before, you can't make crap up and call it a fact. So far you were shown to have exaggerated the inflation in the 19th century when I showed that the biggest supply shock ever could not temporarily raise the inflation rate by much more than 1.5% per year. You were wrong about the cause and extent of busts. You were wrong about the amount of growth and the improvement in the standard of living. You were wrong about the interest rate stability. You didn't even know that Lincoln took the US off the gold standard or that the Federal Reserve Banking System was created in the 20th century.
If you think gold has some magical property that allows it to avoid inflation when the gold supply is greatly increased, please state what that is, I'm sure it will be very funny. :)
I gave you the data you idiot. The greatest supply shock ever failed to create inflation. There is no magic. There is only discipline imposed by the requirement to back notes with gold specie. That should not be hard to understand. Even for a person who seems to be as dumb as you are.
I already pointed out that you can't compare a single year in the 1970s to the entire 19th century and that there were years in the 19th century that had even higher inflation/deflation that weren't war years.
Really, which ones? Please stop making crap up and show your work.
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Wow, you are dumb, you think the Fed invented fractional-reserve banking? No wonder every time I brought up reserve ratios, you would just ignore it, do you even know what a reserve ratio is? I'm sure Rothbard wrote a good book, even though I've never read it, I suggest you read it since you appear completely ignorant of these issues. I don't have to show you the data, anyone who knows anything about the money supply knows that fractional-reserve banking has been around for centuries. The fact that you want me to prove it to you just broadcasts your ignorance. Banks are not limited by specie under fractional-reserve banking because they do not keep just gold, they start backing their notes with other assets too. If they were so safe under the gold standard, why did they need the central bank to keep them safe, considering they did not go off the gold standard till way after the creation of the Fed as a central bank? Your story breaks down in so many places, it's hilarious that you don't realize it. :)
Haha, saying that fractional-reserve banking dominated in the 19th century is "making crap up?" Wow, you are completely out of your depth. There was no central bank in the 19th century, so you can't blame the "problems" on it. Does your Bernanke quote have any point or is it just another non sequitur in your sea of irrelevant asides? I said nobody lived on long-term fixed income back in the 19th century, your rebuttal? "Oh yeah? They did in the 1960s!" Haha, that's just hilarious. That's my whole point, that they could in this century because rates stabilized, except of course for the 1970s. Savers in a gold standard have to worry about far more crazy things, like what do I make of the rates that are 7% one year and -3% the next? As for variable interest rate securities today, if rates go down, lenders of the ARMs are getting less return, boo hoo. The point is everyone who's party to a variable rate contract is always paying the market rates, which is as it should be. Otherwise, you force the lenders to guess ahead of time what the long-term rates will be, which they have no idea of just like everyone else, a recipe for disaster if something unforeseen happens. TIPS will do a lot better job at protection than gold, considering gold fell in value for 25 years.
Paper currencies, let me throw the question back at you, where do you see widespread failures in paper currency? If you are so ignorant that you think no paper currency has lasted more than 50 years... well, actually that would be in keeping with your ignorance so far. :) As I pointed out in the rate charts, interest rates were a lot more volatile in the 19th century, a fact you cannot address so you just keep flatly denying it with no rationale. Funny how you say it's not possible to write a 5-year contract now, when the same chart shows much more smooth and stable inflation today. You can fight a big war and inflate your money supply under FRB without running out of specie, you just start backing your money with more varied assets, like real estate. The wartime govts forced the bankers to do so, for obvious reasons, but the bankers could have done so on their own anyway, that's how FRB works. Haha, what free book did you reference? Hilarious how you just make shit up in the middle of your comments. There were massive booms and busts under the gold standard and you yourself admitted there were huge wars in the 19th century. It is hilarious how you blame those wars for the inflation during the gold standard, yet then posit that the gold standard magically would have stopped the world wars of the 20th century. Only a gold bug could make arguments that are so riddled with holes. XD Wait, do you think FRB means Federal Reserve Banking or something, a term nobody has ever used? FRB refers to Fractional Reserve Banking and it was not invented by the Fed, as you seem to think. Haha, hilarious how you make up these things I was supposedly wrong about, when you are repeatedly wrong about those very issues. A true sign of a dummy is when someone's proven wrong and they just flatly claim everyone else is wrong, without being able to state a single reason why. Standard of living? When did we even talk about standard of living? Now you're imagining things that have no connection to what we're talking about.
Haha, I see so a gold supply that is greatly increased still imposes discipline magically somehow? I see you do not understand even the basic idea of supply and demand. It is fantastic that someone so obviously stupid can keep calling others dumb, it really takes a special kind of idiot to keep blathering on when they're proven wrong on every point. Lol, I say that there were years of very high inflation and deflation in the 19th century and you link to a CPI chart that washes out all detail, both because you can't see yearly detail that well in the raw CPI and because your chart is ridiculously scaled. XD I could just tell you the year, but what would be the point? I linked to the comment with that data above and have repeatedly referred to it since but you either didn't read what I wrote or it just flew over your head. I've tried to educate you with some actual knowledge and data about the money supply but it appears you're incapable of understanding it. Oh well, not my problem, it's just funny that people still hang on to antiquated and dumb ideas like the gold standard, particularly when your rejoinders to my detailed arguments basically consist of "No, you're wrong!" :D
Wow, you are dumb, you think the Fed invented fractional-reserve banking?
I have never said that. Fractional reserve lending has been with us ever since goldsmiths first began to warehouse bullion for their customers.
No wonder every time I brought up reserve ratios, you would just ignore it, do you even know what a reserve ratio is?
Had you read the references that I provided you would have found out that under a gold standard you can't have a systemic problem because of low reserve ratios. The reason is obvious. Without a central bank setting ratios to ridiculously low levels banks were vulnerable to competitors redeeming their notes for specie payment. Now it is possible to have a central bank and a gold standard but even in that case you can't create too many notes or loans because other countries will redeem notes for specie and the supply of money and credit will have to shrink. This is the reason why countries go off the gold standard to fight wars. They have to pay for those wars by inflation that comes from the printing press.
I'm sure Rothbard wrote a good book, even though I've never read it, I suggest you read it since you appear completely ignorant of these issues.
Let me put it this way. You are so ignorant of the issues that you don't even know what questions to ask. You are a perfect example of the superficial man, who thinks that he knows more than he actually does. The cure is simple; do your research and come up with real data to support your claims before you make them. Otherwise you will find out that individuals who know the history of money and interest rates will point out your ignorance to you.
I don't have to show you the data, anyone who knows anything about the money supply knows that fractional-reserve banking has been around for centuries.
Actually you do have to support your claim of inflation under the gold standard with real data because making crap up is not all that credible. As I said before, the greatest supply shock came with the discovery of gold in California. That massive increase in production was insufficient to produce any material inflation.
The data on this is clear; the general price index rose by 12.4% over an eight-year period which produced a compound price inflation rate of around 1.5 percent per year. Two decades later the purchasing power of gold was the same as it had been before gold was found in California even though there was a significant discovery in in Australia around that further increased supply.
You see, the data shows that your claim is absolutely wrong. Now you could point to high periods of inflation but you will find that those took place when the government suspended the gold standard to fight its wars.
Banks are not limited by specie under fractional-reserve banking because they do not keep just gold, they start backing their notes with other assets too.
Not when their notes say that you are entitled to redeem them in gold upon demand.
If they were so safe under the gold standard, why did they need the central bank to keep them safe, considering they did not go off the gold standard till way after the creation of the Fed as a central bank?
There was never a need for a central bank. Canada never had one and none of its banks went insolvent during the Great Depression, when the Fed was unable to protect depositors of thousands of banks. The central bank was developed to help the special interest groups in the financial sector, not depositors. Had you read any of the texts that I referenced you would know that.
Haha, saying that fractional-reserve banking dominated in the 19th century is "making crap up?"
As I said before, and as is written in the texts that I referenced, we know that fractional reserve banking was used in the 19th century. That is not the crap that you are making up. What is crap is the claim that the system is similar to what we have under a fiat system where reserves can be created out of thin air by a central bank which is free to increase the money supply as much as it wants to protect the banks while it robs savers of purchasing power.
Under a gold standard banks that had too many notes outstanding became insolvent when competitors redeemed their notes for specie and caused a bank run. Since there was no central bank to bail out those banks depositors and competitors ensured that the bank had prudent lending practices. No 19th century bank would have survived by writing mortgages to people unknown to them that bought houses with no money down and had no credit history or income documentation.
Wow, you are completely out of your depth. There was no central bank in the 19th century, so you can't blame the "problems" on it.
I never did.
Does your Bernanke quote have any point or is it just another non sequitur in your sea of irrelevant asides?
Yes it does. Bernanke attacked gold in his paper but his words make it clear that the gold standard created a stable system that modern central banking cannot replicate.
I said nobody lived on long-term fixed income back in the 19th century, your rebuttal? "Oh yeah? They did in the 1960s!"
You did not write clearly. And people did live on their savings in the 19th century just as they do today. Don't you read anything?
Haha, that's just hilarious. That's my whole point, that they could in this century because rates stabilized, except of course for the 1970s.
Rates are hardly stable. It takes the Fed's flood of liquidity and a massive carry trade to keep rates from rising but that only works until the holding duration shrinks to a certain level. The US used to borrow 30 years out but decided to 'save' money by moving down the borrowing curve. The financial system played along and borrowed short as it bought longer dated bonds that paid higher rates. As long as the Fed promised to make the trade profitable there was no problem with the actions. But now we have a big chunk of total debt maturing every six to nine months and the spreads are not as tempting as they were. That is why the currency is beginning to crack as is the bond market bubble and why those of us who saw the precious metals, agricultural commodity, base metal, and energy bull markets got very rich in the past decade.
Savers in a gold standard have to worry about far more crazy things, like what do I make of the rates that are 7% one year and -3% the next?
But they were never 7% one year and -3% another year for any lending done in gold. Try reading Homer and Sylla's great book, The History of Interest Rates and find examples where your claim would be true. Where would you find a -3% yield in the real world when holding specie would be a valid option?
As for variable interest rate securities today, if rates go down, lenders of the ARMs are getting less return, boo hoo.
Yes. They are getting a negative yield which causes them to lose purchasing power unless they have access to free money from their patron, the Fed.
The point is everyone who's party to a variable rate contract is always paying the market rates, which is as it should be.
There is no free market in a world where a central bank sets the short term rates. You can't have a free market in a world of central banks.
Otherwise, you force the lenders to guess ahead of time what the long-term rates will be, which they have no idea of just like everyone else, a recipe for disaster if something unforeseen happens. TIPS will do a lot better job at protection than gold, considering gold fell in value for 25 years.
You keep repeating the same thing over and over again. As I said, the rate on TIPS does not reflect the CPI rate as measured before hedonic adjustments, geometric averaging, and other methodological changes caused the reported inflation to be two to three times lower than it would have been under Carter or Reagan's administrations.
Paper currencies, let me throw the question back at you, where do you see widespread failures in paper currency?
Let us begin at the beginning, with the first paper currency, the Chao, which was issued by the Yuan Dynasty. It failed when the government kept printing but never had the specie to redeem the outstanding notes.
Let us move by picking any country that you want and look at its paper currency.
We can begin this by looking at the US. There the failure is obvious. The Continental and Greenback failed in the US. The Federal Reserve Note now has less than 5% of its purchasing power that the dollar had when the Fed was created, with most of the collapse coming after 1971, when Nixon closed the gold window.
Want to look at Germany? The gold standard was abandoned in 1914 when the link between the Mark (ℳ) and gold was severed to fight World War One. At that point the Mark became the Papiermark. The money printing during the War and subsequently led to the hyperinflationary period that saw the Papiermark become useless.
http://upload.wikimedia.org/wikipedia/commons/9/93/German_Hyperinflation.jpg
The next German currency was the Reichsmark, which began well and was implicitly backed by silver because some of the issued coins were .500, .625, and .900 fine silver. But that did not last long and coin quality and content declined as aluminum, copper, and zinc replaced the silver in the coins. The failed currency was replaced by the Deutsche Mark in 1948.
You want to look to France? Paper money in France was first introduced by John Law, who conned the French that paper credit money was a solution to their 3 billion Livres of debt.
http://en.wikipedia.org/wiki/File:John_Law_Paper_Money.jpg
That ended badly and the French wound up with the Assignat, which also became worthless. The French money problems were ended when it tied the franc to gold at a rate of 1 franc equaled 0.2903226 grams of gold. When France went off the gold standard it began to use the fiat franc which lost most of its purchasing power until it was replaced by the New Franc in 1960. the New Franc was also losing purchasing power but it was replaced when the EU decided to use the Euro as a common currency.
How about Russia? It has kept the name Rouble but has introduced new versions of the currency around seven times. Greece? Its hyperinflation destroyed the fiat currency in 1943. China again? In 1949 the old currency became worthless. Yugoslavia? The Dinar kept getting replaced by new versions, usually at a 100:1 ratio until there was a New Dinar worth 1 million old ones in 1992. A few weeks later came the New New Dinar worth 1 million New Dinars and then the Super Dinar worth 1 million New New Dinars. The government abandoned the currency and adopted the Mark. Anywhere you look you will find the same pattern. Mexico. Brazil. Argentina. Italy. Turkey. Romania. Equatorial Guinea. Hungary. Republic of the Congo. Bulgaria. Korea. Indonesia. Nicaragua. Honduras. Venezuela. Vietnam. Laos. Cambodia. Burma. India. Central African Republic. Gabon. Pakistan. Bangladesh. Chad. Haiti. Afghanistan. Burkina Faso. Cameroon. Poland. Zimbabwe.
All of the paper currencies failed while their pre-fiat counterparts held their purchasing power as long as they were under a gold standard.
If you are so ignorant that you think no paper currency has lasted more than 50 years... well, actually that would be in keeping with your ignorance so far.
I think that your ignorance is showing again. Calling the Mexican currency the Peso does not mean that it is the same Peso that Mexico was using fifty years ago. As I said, try doing some reading.
As I pointed out in the rate charts, interest rates were a lot more volatile in the 19th century, a fact you cannot address so you just keep flatly denying it with no rationale.
It is not true. Look at rates for treasuries under the gold standard and you see nothing that would support your argument.
http://tinyurl.com/259yed5
Haha, I see so a gold supply that is greatly increased still imposes discipline magically somehow.
That is what history shows us. The production of gold exploded with the discovery of California and Australia but during the two decade time frame of great production levels gold maintained its purchasing power. during the 'worst' period of inflation the compounded rate was 1.5% over an eight year period.
As I said, some research of the data would be helpful. So far you are not doing very well and have no facts to back up anything that you are saying.
Lol, I say that there were years of very high inflation and deflation in the 19th century and you link to a CPI chart that washes out all detail, both because you can't see yearly detail that well in the raw CPI and because your chart is ridiculously scaled.
You say while I provide actual data. The data shows that while the gold standard was in effect there was not much inflation. In fact, the USD gained purchasing power and interest rates were very low and very stable. Even that ignorant gold hater, Ben Bernanke, admitted that the financial system was very stable under the gold standard and without a central bank.
I could just tell you the year, but what would be the point?
The point is that you would have actual data. Of course, one year in an entire century is not exactly representative of anything, particularly if it is a year during which the US government took the country off the gold standard or happened to do something stupid like charter a central bank.
You don't need a central bank to have very low reserve ratios, I already pointed out a while back that reserve ratios were 15% in 1900, long before the creation of the Fed. They could do so because almost nobody redeems in gold and on the rare occasion they did, they could simply borrow from another bank. Since the supply of money is not limited by specie under FRB, the "gold standard" made little difference even then. Countries didn't "go off the gold standard" during the 19th century wars because they were never under a true gold standard in the first place, which would require 100% reserve ratios: the govts simply forced them to expand the money supply by backing with even more varied securities. Haha, everytime you call someone else ignorant or superficial, it's a huge joke, considering all the things you have been proven not to know so far. :D The only one who is repeatedly being pointed out as ignorant here is you. :) I already supported my claim of high inflation and deflation in the 19th century by linking to a comment with that data above, I can't help if you are too lazy to follow the links or too dumb to know how. Since I'm the only one who linked to any actual data on this topic, it's laughable for you to claim that I'm wrong, when you can't even muster up any data. XD Saying you will redeem in gold does not mean the notes are all backed by gold, otherwise you don't understand what a reserve ratio is. Just like today banks claim they will reserve in Fed Notes but that would be impossible if everybody actually liquidated, like in a bank run.
Haha, you say "When you are off the gold standard of have a central bank to set reserves the banks are free to be far more reckless and keep less in reserves because the central bank is there to save them if that is required." So I said, "If they were so safe under the gold standard, why did they need the central bank to keep them safe, considering they did not go off the gold standard till way after the creation of the Fed as a central bank?" Then you bash the central bank as though I was the one who suggested it as a good idea. Hilarious how when I just point out the stupid things you say, you then attack those things as though I said them, :) fairly typical of how dumb your arguments have been so far. The benefits you claim for 19th century banking were actually because there was no govt-influenced central bank, not because of the silly gold standard. The system is similar now because privately-issued FRB money backed by non-gold assets dominated back then and it dominates now. Gold bugs are ignorant of this fact because you don't really understand how FRB works, that the privately issued checking money is a larger part of the money supply and is backed by non-gold, non-Fed Note assets. The small percentage of the money supply that was backed by gold then and the 10-20% consisting of Fed Notes now is almost irrelevant. Nineteenth century banks wouldn't have issued mortgages to people they didn't know because they didn't have Fannie and Freddie guaranteeing their risk, not because of the silly gold standard. Bernanke's words make it clear that he doesn't know why one "gold standard" worked better than another, whatever else you're reading into it is your fantasy. Living on savings is not living on long-term, fixed income contracts: do you know how to read?
If you actually look at the rate chart that is behind my link above, inflation has been predictable and stable for the last 30 years, far better than almost any period in the 19th century. I hope you got out of those commodity, metals, and energy bubbles before they burst, just like the recent gold bubble is in for a historic implosion soon. Yet again you are ignorant of the volatility of inflation in the 19th century, I've referred to the linked comment that links to that chart several times. It's fascinating that you cannot follow a simple link. :) A central bank affects the free market but it does not make it something other than a free market, particularly a central bank as laissez faire as the Fed has been for decades. Lol, you accuse someone of repeating the same thing over and over? XD That's rich coming from you, when all I do is bring up new stuff, while you simply repeat over and over the same dumb gold bug arguments without even addressing my arguments. :D It's hilarious how everytime you accuse me of something, you are perfectly describing yourself, your lack of awareness is stunning and quite funny. :) Whatever the supposed problems with TIPS, they didn't lose value for 25 years like gold, hence still better than gold. A handful of historical failures of paper currencies or inflation of the Fed Note are not widespread failures in paper currency, yet another crazy claim that you cannot back up. Haha, who brought up the peso? It's funny how you keep encouraging reading, yet apparently you can't read. :) Linking to an Amazon book is not linking to rates, as who knows where the chart is in the book. So far I'm the only one to link to actual yearly inflation rates, while you occasionally link to useless web pages or pictures. :D
Haha, I actually linked to a post with data that showed gold supply had exploded in the last century and your response is? Simply repeating over and over again your trope about one short period in history that you purport shows that gold supply expansion magically doesn't lead to inflation, controverting all laws of supply and demand. Then you describe yourself perfectly yet again, "So far you are not doing very well and have no facts to back up anything that you are saying." :) Oh, I provided actual data, on a graph that can actually be read with a table underneath it; I can't help it if you are too lazy or stupid to follow a link. The point of not telling you the year is that I'm not going to do all your work for you and what would be the point? You would just ignore it like you ignore all arguments and data so far, simply repeating your gold bug platitudes over and over again. I indulged you simply because I like bashing dummies over the head with the truth, but it is clear, like all dummies, you are incapable of recognizing it, preferring instead to keep your eyes closed to keep your mad theories from leaving your head. Well, have fun losing all your time and money with that, your silly and ignorant claims have certainly amused me so far. :)
Haha, I actually linked to a post with data that showed gold supply had exploded in the last century and your response is? Simply repeating over and over again your trope about one short period in history that you purport shows that gold supply expansion magically doesn't lead to inflation, controverting all laws of supply and demand.
My response was the actual data. Inflation did not explode under the gold standard even when the gold supply increased substantially after the California and Australian gold discoveries. The only bout of inflation happened when the US was off the gold standard.
Then you describe yourself perfectly yet again, "So far you are not doing very well and have no facts to back up anything that you are saying." :) Oh, I provided actual data, on a graph that can actually be read with a table underneath it; I can't help it if you are too lazy or stupid to follow a link.
But there was no inflation dumdum. That is the point. Even when production increases substantially it cannot impact the total supply of gold by very much. That is not the case with fiat money where the central banks can double or triple the supply just by hitting a few keys.
The point of not telling you the year is that I'm not going to do all your work for you and what would be the point?
You have no year. That is the point. During Lincoln's War the US was off the gold standard.
You would just ignore it like you ignore all arguments and data so far, simply repeating your gold bug platitudes over and over again.
You have no data and are making crap up again.
I indulged you simply because I like bashing dummies over the head with the truth, but it is clear, like all dummies, you are incapable of recognizing it, preferring instead to keep your eyes closed to keep your mad theories from leaving your head. Well, have fun losing all your time and money with that, your silly and ignorant claims have certainly amused me so far. :)
Losing my money? I saw an opportunity when I turned 40 and retired because I made more in one year betting on the commodity cycle than I did in my 16 years of working. Since Embry, Faber, Rogers, Sprott, and a few others pointed out that the central banks were out of gold that they could throw at the spot market by leasing it to the bullion dealers those of us that paid attention and invested in bullion have seen the Dow to Gold ratio and Housing to Gold ratio collapse. For the record, my bigger interest is in silver because there is far less of it in storage than gold and the open short positions are massive. When there is a failure to deliver on the COMEX and the futures idiots have to take cash instead of the physical metals the price should explode.
If you actually look at the rate chart that is behind my link above, inflation has been predictable and stable for the last 30 years, far better than almost any period in the 19th century.
First, Mark likes to be an optimist and keeps using the reported inflation rate without adjusting for the methodological changes made by Clinton. The real inflation rate is three times higher than the reported rate.
Second, the inflation calculators tell us the opposite story from the one that you are trying to portray.
Let us begin by looking at the purchasing power change during the classical gold standard without a central bank. If we go to the web site below we find that:
It only took $0.67 in 1900 to buy you what $1 could in the year 1800.
On the other hand it took $22.30 in 2009 to buy you what $1 did in the year 1913, which was when the Fed was created.
Reference: http://www.measuringworth.com/ppowerus/index.php
In fact, you can't find any thirty year period under the gold standard that had the same loss of purchasing power as was seen during the past thirty years. That included the 1850 to 1880 period during which Lincoln created massive inflation for a short period by taking the USD off the gold standard. The 30 year period that ended when the USD was taken off the gold standard in 1861 showed no material inflation ($1.02 to buy in 1861 what $1 bought in 1831) even though the period included the massive supply shock from the California discovery.
As I said, you are making stuff up and have no data to support your fake claims. Go ahead and use the purchasing power calculator I referenced. Take any 30 year period that you want under the gold standard and find one in which the USD lost as much purchasing power as it did during the last 30 years. You can't do it. Which is why you keep making crap up.
I hope you got out of those commodity, metals, and energy bubbles before they burst, just like the recent gold bubble is in for a historic implosion soon.
No. I got into commodities in late 1999, a bit early but well after the triple waterfall decline was over and the banks were done with the serious part of their manipulation.
Yet again you are ignorant of the volatility of inflation in the 19th century, I've referred to the linked comment that links to that chart several times. It's fascinating that you cannot follow a simple link.
I see no inflation during the period when the USD was linked to gold. I see lots when it wasn't but that is your preference, not mine.
So I said, "If they were so safe under the gold standard, why did they need the central bank to keep them safe, considering they did not go off the gold standard till way after the creation of the Fed as a central bank?" Then you bash the central bank as though I was the one who suggested it as a good idea.
I guess that when you have no actual data to back up anything that you say a narrative is one way of avoiding discussing the issue. The bottom line is that you were wrong. There was no need for a central bank. Had you read the material that I referenced you would know why that was.
The benefits you claim for 19th century banking were actually because there was no govt-influenced central bank, not because of the silly gold standard.
That is not exactly true. For one, had you read what I referenced, you would know that there was a central bank in the 19th century before it was killed by Jackson. For another, no private banking is possible using fiat money because nobody would trust the issuer. You need a commodity backed money system whether the backing is gold, silver, copper or something else that is fungible, durable, and valued highly by a society.
The system is similar now because privately-issued FRB money backed by non-gold assets dominated back then and it dominates now.
It is not similar at all. In the 19th century a bank with reserves that were too low would find itself insolvent as competitors redeemed their notes. Unlike FRNs, you can't print gold. The fact that you don't understand the difference shows your lack of understanding of monetary history and monetary theory.
Gold bugs are ignorant of this fact because you don't really understand how FRB works, that the privately issued checking money is a larger part of the money supply and is backed by non-gold, non-Fed Note assets.
Sorry but it is you who do not understand the difference between the market's choice of money, which has been gold for several thousand years, and fiat money, which does not last more than a few decades before it is replaced, usually by a currency with the same name.
The small percentage of the money supply that was backed by gold then and the 10-20% consisting of Fed Notes now is almost irrelevant.
Making up numbers is not exactly a good way to support your position. The European banks were using leverage of 60:1 during the crisis and had little in the way of reserves. The American banks were not much better. There was never any equivalent of the 2008 crisis under the gold standard, which lasted for around a century because the leverage was much smaller.
Nineteenth century banks wouldn't have issued mortgages to people they didn't know because they didn't have Fannie and Freddie guaranteeing their risk, not because of the silly gold standard.
You are ignorant of the mortgage markets as well. My first mortgage, with the Toronto Dominion Bank, was issued by a bank that had no Fannie and Freddie guaranteeing its risks. I had no problem obtaining the loan because I had put down 35% of the value of the property and had enough income to handle the payments. Six years later, when I paid off my mortgage the bank was asking me if I was interested in getting another one for a rental property. My friends who have mortgages did not require a Fannie or Freddie to guarantee them. Neither did my parents, who got the loan because they had 50% of the purchase price as a down-payment, knew their bank and its bank knew them. How exactly do you think that the rest of the world issues mortgages? Fannie and Freddie created the problem and were never a part of any solution.
Bernanke's words make it clear that he doesn't know why one "gold standard" worked better than another, whatever else you're reading into it is your fantasy.
Try again. The USD was defined as a fixed weight of gold and that definition did not change. Even someone as ignorant as Helicopter Ben knows that. Why don't you?
Living on savings is not living on long-term, fixed income contracts: do you know how to read?
People purchased annuities with their savings. Try reading the material that I referenced. If you were curious enough you could even find the annuity rates or the interest rates for quality corporates, treasuries, or municipal bonds. But if you were curious you would actually know something about your monetary history by now.
Your response was one cherry-picked episode that you purport contravenes the laws of supply and demand. :) The production of gold has increased supply thirty-fold over the last century, I wouldn't call that not impacting the supply much. :) And just like with fiat money, the private bankers have all the power under FRB, as they can simply keep more of the gold or Fed Notes in their vaults and not lend it out, keeping inflation down as they're doing now. Yes, for you there is no year, because you don't want to look at the data that I have linked you to and repeatedly referred to. :D Haha, yes, keep speculating on commodities, I have no doubt you will one day be crying for a bailout just like the dummies who were recently speculating on real estate. :) I don't know why you are talking about Mark, the chart I keep referring to is done by the Fed. Wow, yet again back to the dumb long-term purchasing power argument? You gold bug dummies really can only hold one simple concept in your head, go back and read how I told you that doesn't matter. Haha, you are too dumb to even follow my links and then you say I don't have data, too funny. XD "Triple waterfall decline"? Wow, I can tell I'm dealing with a real mouth-breather here. Haha, I point out exactly how you screwed up and were inadvertently bashing what you yourself said about central banks, when I simply quoted you and asked you about it, and you persist in accusing me of saying a central bank was necessary. It is hilarious how you will avoid all evidence of your stupidity. :D
The pre-Jackson central banks are irrelevant because they weren't there for most of the 19th century, which is the period we're talking about. Private banking is possible without any commodity, that's what FRB is: the private bank backs its money with its investments and assets. It is clear why you gold bugs are so ignorant, you don't really understand how FRB works. Haha, yes, in your imagination, competitors were constantly raiding each other for their gold reserves. Also, no private bank can print FRNs either, funny how you don't seem to understand that and then accuse others of not understanding stuff. :D Hilarious how you accuse me of making up numbers but can't even specify which numbers are made up. :)
Lol, I think we've hit a new level of hilarity with you. I say that 19th century banks wouldn't have issued mortgages to people they don't know and your response is? "Oh yeah, a 20th century bank lent me money!" with no indication if they knew you or not. XD Then you say that your parents got a loan because the bank knew them. Wow, the stupidity of your counter-arguments is breath-taking. :D I stated long ago in this thread that Fannie and Freddie were dumb, please don't assume we are all as ignorant as you. Haha, first you quote Bernanke saying that one "gold standard" regime was stable and the other was highly unstable, then you claim nothing changed. I think a five-year old could make better, more consistent arguments than you. XD Haha, modern annuities were not available till the 20th century, yet you claim that people were buying such long-term fixed income contracts in the 19th century: your crazy claims never stop. :D Hilarious how you keep ignoring data and then accuse others of not being "curious," how about you try actually reading first or is that too hard for you? :D I could link to a 19th century episode of hard money vs soft money and really blow your mind, but I realize now you would just ignore it, as you do all contrary evidence to your gold bug fantasy.
The pre-Jackson central banks are irrelevant because they weren't there for most of the 19th century, which is the period we're talking about.
The First Bank of the United States wasn't closed down until 1811 so its inflationary policies cannot be discounted. That is one tenth of the period in question.
Private banking is possible without any commodity, that's what FRB is: the private bank backs its money with its investments and assets.
Yes it is but only if there is trust in the bankers and in the assets of the banks. If the 'assets' have no value as is the case with much of the mortgage backed paper that was held by the financial institutions they are technically insolvent unless they get bailed out.
It is clear why you gold bugs are so ignorant, you don't really understand how FRB works.
I think that you are making assumptions that you cannot support. It is because 'gold bugs' understand FRB and banking that they are gold bugs.
Haha, yes, in your imagination, competitors were constantly raiding each other for their gold reserves.
Read the books on banking history that I cited. That is exactly what happened when banks made too many loans and did not have the specie to meet redemptions.
Also, no private bank can print FRNs either, funny how you don't seem to understand that and then accuse others of not understanding stuff.
A bank can go to the Fed hat in hand and get FRNs as it wishes. The big banks were able to actually sell their bad mortgage paper to the Fed and get FRNs and USTs in exchange. And it does not need to have FRNs to make loans. All it needs is to click a few buttons and make an accounting entry. That is why the US financial system got in the trouble that it was in. (And still is in.)
Hilarious how you accuse me of making up numbers but can't even specify which numbers are made up.
The numbers that you claim show that there is big inflation under a gold standard would be a start. I provided you with empirical evidence that showed that was not the case as the greatest supply shock ever failed to create any inflation. I also pointed out that you probably got confused and looked at inflation when the government went off the gold standard and began to print money.
I say that 19th century banks wouldn't have issued mortgages to people they don't know and your response is? "Oh yeah, a 20th century bank lent me money!" with no indication if they knew you or not.
Don't you read? The mortgage companies created computer programs that would allow you to get approved in seconds. Your ignorance of what should be common knowledge is not my problem. It is yours.
http://tinyurl.com/ybgvfet
http://tinyurl.com/32p6kd4
http://tinyurl.com/25rthru
Then you say that your parents got a loan because the bank knew them. Wow, the stupidity of your counter-arguments is breath-taking.
You are reading something into my argument that I have not intended. My point is that prudent bankers should know who they are making loans to and whey they do not they are reckless. There was never any justification for negative amortization, low doc, and ARM loans to people with bad credit.
I stated long ago in this thread that Fannie and Freddie were dumb, please don't assume we are all as ignorant as you.
There is no such thing as Fannie and Freddie making decisions. Those are made by individuals and those individuals were not dumb because there was never any incentive to be prudent. When huge bonuses could be made by expanding the loan portfolio and making assumptions about future returns people like Franklin Raines did what was best for them. They took the nice salary, the huge bonuses, and the massive pension payouts when they could. The fact that Fannie and Freddie went under was of no concern to Raines and the loss of reputation is easily offset by a few hundred million in a bank in Bermuda that buys a lifestyle that could not be dreamed of had he chosen to be prudent.
Haha, first you quote Bernanke saying that one "gold standard" regime was stable and the other was highly unstable, then you claim nothing changed. I think a five-year old could make better, more consistent arguments than you.
I think that you are showing that you have a reading comprehension problem.
Haha, modern annuities were not available till the 20th century, yet you claim that people were buying such long-term fixed income contracts in the 19th century: your crazy claims never stop.
Annuities were available in the 19th century. They actually trace their beginning to Roman times. As I wrote, your ignorance is not my problem. It is yours.
Hilarious how you keep ignoring data and then accuse others of not being "curious," how about you try actually reading first or is that too hard for you?
What data idiot? I cited the inflation rates during the biggest supply shock to prove that there was no material inflation under the gold standard. You never provided any data.
I could link to a 19th century episode of hard money vs soft money and really blow your mind, but I realize now you would just ignore it, as you do all contrary evidence to your gold bug fantasy.
In your dreams you can pretend to do many things. In reality you are just an empty suit who believes that he knows far more than he actually does.
I say that 19th century banks wouldn't have issued mortgages to people they don't know and your response is? "Oh yeah, a 20th century bank lent me money!" with no indication if they knew you or not.
Don't you read? The mortgage companies created computer programs that would allow you to get approved in seconds. Your ignorance of what should be common knowledge is not my problem. It is yours.
http://tinyurl.com/ybgvfet
http://tinyurl.com/32p6kd4
http://tinyurl.com/25rthru
Then you say that your parents got a loan because the bank knew them. Wow, the stupidity of your counter-arguments is breath-taking.
You are reading something into my argument that I have not intended. My point is that prudent bankers should know who they are making loans to and whey they do not they are reckless. There was never any justification for negative amortization, low doc, and ARM loans to people with bad credit.
I stated long ago in this thread that Fannie and Freddie were dumb, please don't assume we are all as ignorant as you.
There is no such thing as Fannie and Freddie making decisions. Those are made by individuals and those individuals were not dumb because there was never any incentive to be prudent. When huge bonuses could be made by expanding the loan portfolio and making assumptions about future returns people like Franklin Raines did what was best for them. They took the nice salary, the huge bonuses, and the massive pension payouts when they could. The fact that Fannie and Freddie went under was of no concern to Raines and the loss of reputation is easily offset by a few hundred million in a bank in Bermuda that buys a lifestyle that could not be dreamed of had he chosen to be prudent.
Haha, first you quote Bernanke saying that one "gold standard" regime was stable and the other was highly unstable, then you claim nothing changed. I think a five-year old could make better, more consistent arguments than you.
I think that you are showing that you have a reading comprehension problem.
Haha, modern annuities were not available till the 20th century, yet you claim that people were buying such long-term fixed income contracts in the 19th century: your crazy claims never stop.
Annuities were available in the 19th century. They actually trace their beginning to Roman times. As I wrote, your ignorance is not my problem. It is yours.
Hilarious how you keep ignoring data and then accuse others of not being "curious," how about you try actually reading first or is that too hard for you?
What data? I cited the inflation rates during the biggest supply shock to prove that there was no material inflation under the gold standard. You never provided any data to show otherwise. Until you do there is no foundation for your unsupported claims.
I could link to a 19th century episode of hard money vs soft money and really blow your mind, but I realize now you would just ignore it, as you do all contrary evidence to your gold bug fantasy.
In your dreams you can pretend to do many things. In reality you are just an empty suit who believes that he knows far more than he actually does.
Your response was one cherry-picked episode that you purport contravenes the laws of supply and demand.
First, there was no inflation under the gold standard in the 19th century. Second, my 'cherry-picked' episode is the best case for YOUR SIDE OF THE ARGUMENT. Third, the laws of supply and demand were not contravened. The fact that you would conclude that shows that you have no objective critical thinking skills, a common trait among Keynesians.
The production of gold has increased supply thirty-fold over the last century, I wouldn't call that not impacting the supply much.
That is exactly what I pointed out; that supply had gone up. My point is that the increase in supply did not create inflation under a gold standard because supply is constrained by physical factors. You can double the money supply in a fiat system in a second. That is not possible under a gold standard where total supply can grow at 2-3% per year at best.
And just like with fiat money, the private bankers have all the power under FRB, as they can simply keep more of the gold or Fed Notes in their vaults and not lend it out, keeping inflation down as they're doing now.
Look at monetary history. Under a gold standard when banks can't redeem their notes in specie they go under. If they make too many loans their competitors redeem their own notes to drain specie away from the offending bank. If it has enough gold to meet demand then it will still be in business but its lower reserves will not allow it to make many loans until some of the outstanding ones are paid off or there are more deposits.
None of this is a problem in the current system where a bank can assume that its unmarketable holdings have increased in value and extend loans without doing the appropriate validation.
Yes, for you there is no year, because you don't want to look at the data that I have linked you to and repeatedly referred to.
What year? What data? What you wrote is, "I once saw a great graph that showed this, not sure where, but this is the closest I could find just now.
Perhaps you don't read well but your graph supports my argument. The big inflation spikes did not come under the classical gold standard when the federal government allowed the economy to work without much interference. It shows inflation during Mr. Madison's War and Lincoln's War. During Mr. Madison's War, prices exploded because American imports from England stopped and supply of goods collapsed relative to the supply of money. Even you should be able to understand that. The massive price rise during Lincoln's War was caused by both a decline in imports as demand grew for war goods and because the US went off the gold standard.
Your chart shows that after a century of stable purchasing power, inflation exploded after the formation of the Fed. Let us note here that neither WWI or Lincoln's War would have been possible without the principal players going off the gold standard. Had Germany, France, and England kept their currencies linked to gold no lengthy war would have been possible. The same is true for the US under the Lincoln regime.
Haha, yes, keep speculating on commodities, I have no doubt you will one day be crying for a bailout just like the dummies who were recently speculating on real estate.
Thank you for your concern but my 'speculations' have allowed me to retire at 41 quadruple my net worth and to pay off all of my debts. Given that I do not owe anyone anything that I can't pay off there is no need for a bailout. It is called basic math. You might try learning some.
Wow, yet again back to the dumb long-term purchasing power argument?
Yes. It is good when people are not robbed of savings by inflation.
You gold bug dummies really can only hold one simple concept in your head, go back and read how I told you that doesn't matter.
Try telling people on fixed income that it does not matter. As the man said, would you like more Kool-Aid with your Alpo sir?
Haha, you are too dumb to even follow my links and then you say I don't have data, too funny.
I did follow your links. They went to a chart that showed that the USD gained purchasing power under the gold standard.
"Triple waterfall decline"? Wow, I can tell I'm dealing with a real mouth-breather here.
And I can tell that you are not as knowledgeable about the subject as you claim to be.
http://tinyurl.com/36q6a9d
Haha, I point out exactly how you screwed up and were inadvertently bashing what you yourself said about central banks, when I simply quoted you and asked you about it, and you persist in accusing me of saying a central bank was necessary. It is hilarious how you will avoid all evidence of your stupidity.
I found that, for most people, evidence of stupidity is easiest to find by looking into a mirror.
Haha, yes, by all means, lets talk about a central bank that only existed for one-tenth of the period in question. After all, they might have caused all the inflation for the next 90 years! X) Mortgage-backed paper didn't have "no value," it had less value then it did previously, once the real estate market bust. Any monetary backing can have the same problem. Lol, it is precisely because gold bugs don't understand FRB that they are gold bugs: you look at the 19th century, when fractional-reserve banking dominated, and the 20th century, when fractional-reserve banking dominated even more, and magically assert that the 19th was better because of the gold standard. :D The only reason gold bugs make this claim is because they are ignorant of fractional-reserve banking and how it has allowed banks to increase the money supply for centures regardless of how much gold was in circulation. While specie redemption did act as a kind of restraint in some situations, by making sure that reserve ratios didn't fall too low, it was easily circumvented in most times. In good times, nobody worried so you could inflate away using FRB. The rest of the time a stressed bank could always borrow specie from other banks, just like current banks loan each other Fed reserves. A private bank cannot simply ask for Fed Notes, as you yourself noted they have to sell something in return, nor is a loan made simply by creating "an accounting entry." Your books have to balance with incoming deposits or you are commiting bank fraud and everyone working at that bank will go to jail. More evidence that your knowledge of fractional-reserve banking is pretty spotty.
I said there were episodes of very high inflation and deflation in the 19th century and linked to a previous comment that linked to that data. I can't help it if you don't know how to follow links. The reason that 19th century gold supply shock that you love talking about probably didn't create much inflation is because banks probably accounted for it by keeping more in reserves, temporarily raising their reserve ratios under fractional-reserve banking. It would be funny to read why you think it didn't create inflation if not for that FRB reason. If you believe the stable and moderate growth of the gold supply is what makes the gold standard such a great idea, it contradicts that to say that a gold supply shock made no difference: that implies the size of the gold supply wasn't that important in the first place. I'm well aware of no-doc mortgages, funny how you keep running away from the point about 19th century banks by bringing up irrelevant and obvious points about 20th-century lending practices. :) Yes, we completely agree about the benefits of bankers knowing their customers and the problems of low doc etc. Fannie and Freddie made plenty of decisions, like deciding to go heavy into subprime precisely when it was the worst time to go into subprime. Raines is an irrelevant flunkie, it is congress and Barnie Frank that were really at fault, which is why Barnie might lose his current election. :)
Heh, I point out the contradictions in your accounts of Bernanke and the gold standard and you can't make a single argument about the actual facts, then claim that it has something do with reading comprehension? Clearly the problem's yours, either that or you are employing what is known as the "big lie." Something resembling annuities have been used by very small groups of people for centuries, but my original statement never mentioned annuities, it talked about something very specific: long-term, fixed income contracts, which were virtually non-existent till modern annuities took off in the 1930s. Try reading some history, you might learn something. ;) Haha, "an empty suit who believes that he knows far more than he actually does," wow, you perfectly describe yourself. :) Your cherry-picked argument is hardly the best case against the gold bug, I already made that one: the huge increase in the gold supply during the 20th century and most countries deciding to drop the antiquated and irrelevant "gold standard" early in the 20th century. Haha, you exhibit a more common trait among Keynesians, an inability to mount an actual argument. If you believe a gold supply shock not leading to inflation doesn't contravene the laws of supply of demand under a strict gold standard, make an argument for why it doesn't. You can't so you flatly assert the opposite, just like how most dumb Keynesians argue. :)
You said gold supply had gone up without much impact, I pointed out that the 20th century growth of thirty times is a big impact. You then point out that growth didn't cause inflation during one episode during the 19th century, which has nothing to do with the 20th century. You can double the money supply under a gold standard in a second also, you simply lower the reserve ratio for fractional-reserve banking from 10% to 5%. In fact, reserve ratios have been falling for centuries. Get back to me when you understand how fractional-reserve banking makes that possible, both under a gold standard and under a fiat system like today. :) Funny how I mention that banks could raise their reserve ratios to keep inflation down and your response is that "when banks can't redeem their notes in specie they go under." Funny how even when I'm making the opposite argument about banks hoarding gold your response is the same dumb gold bug cliche about specie raids supposedly keeping banks honest. It shows the dumb argumentation of gold bugs: memorize some misguided, supposed benefits and then mouth them over and over again, even though I was talking about the opposite situation: banks hoarding gold or Fed Notes. No current bank "assumes" anything about its holdings: they have to sell their holdings for cash or more liquid assets like treasuries or get people to invest more money based on the perceived value of their holdings. I don't think you understand how a modern bank actually works.
Aah, you finally discovered the graph I linked you to, now let's see if you know how to read an actual graph and tables. Yes, it's true that wars led to great inflation and then a bust/deflation when the war finished: that was true both of the Civil war and the '70s inflation caused by Vietnam. Even you should be able to understand that your claims of how the gold standard stops wars are clearly disproven because it didn't stop those two 19th century wars. If it is so easy to get off the "gold standard," clearly it is no use talking about its supposed "anti-war" properties. And I already explained to you how long-term purchasing power, ie comparing the CPI after a century, is irrelevant and that what actually matters is short and medium-term rate volatility, which is what destabilizes contracts and growth. Now see if you can recognize the great rate volatility of the 19th century and how the last 30 years have been placid by comparison. Does the term "41 quadruple my net worth" mean anything to you? Because it means nothing to me or anyone else, just gibberish. Is that the same basic math that contains statements like "41 quadruple"? No thanks, you can keep such crazy "math" to yourself, nobody else is interested. :) Haha, you reference dumb sales terms like "Triple waterfall decline," meant to sucker dumb consumers into making investments that they have no clue about, and then call others not knowledgeable? That is funny. X) A little tip, don't invest based on those dumb "beat the market" books and such idiot "technical investing" terms, you will lose your shirt and "41 quadruple my net worth." :D I've been trying to hold a mirror in front of you but you keep closing your eyes. ;)
VangeIV, assuming you're the same guy writing comments on other threads, I don't think you're a complete idiot, as you've written some decent comments in other threads. But the money supply can be a very complex concept that only a few economists can even wrap their heads around, as evidenced by this recent EconTalk podcast talking about the post-WWI attempts to go back to the gold standard:
http://www.econtalk.org/archives/2010/10/irwin_on_the_gr.html
But you appear ignorant of how there hasn't been a real gold standard in centuries because of fractional-reserve banking, which allows the money supply to expand ten-fold without a single nugget being added to the gold supply, simply by lowering reserve ratios. This is the basic blind spot for most gold bugs, which is why they're gold bugs. ;) They don't understand that fractional-reserve banking has led to conflicts of hard money vs soft money for centuries, including in the 19th century:
http://en.wikipedia.org/wiki/Specie_Circular
I've tried to point you at evidence that should lead you to ask some tough questions, rather than simply swallowing the gold bug propaganda whole, now it's up to you to reason your way through this data rather than burying your head in the sand.
...the money supply can be a very complex concept that only a few economists can even wrap their heads around, as evidenced by this recent EconTalk podcast talking about the post-WWI attempts to go back to the gold standard:
http://www.econtalk.org/archives/2010/10/irwin_on_the_gr.html
First, I am glad that you listen to Russ Roberts. I subscribe to his podcast and try not to miss any episodes. Second, let me note that I have some time for Douglas Irwin. I have read his material on free trade and did look at his paper about France and the gold standard. I see no support for the claim that the Great Depression was caused by the gold standard as Eichengreen suggests in the papers that Irwin references without really looking at them carefully enough. Given that I rejected those papers years ago for very valid reasons that have been documented in other postings I am not going to give Irwin the benefit of doubt. This is particularly the case when I see that on my Amazon list I have ordered Irwin's next book, Peddling Protectionism: Smoot-Hawley and the Great Depression, in which he shows the big role that protectionism played in the Great Depression.
The bottom line is simple. Many Keynesians have tried to blame the Great Depression on the gold standard but have failed to convince any rational critic. While they can support their claims by cherry picking data a full analysis shows that their claims do not hold up very well. Bob Murphy has done a good job attacking this line of thinking so I suggest that you read his book or papers on the subject.
But you appear ignorant of how there hasn't been a real gold standard in centuries because of fractional-reserve banking, which allows the money supply to expand ten-fold without a single nugget being added to the gold supply, simply by lowering reserve ratios. This is the basic blind spot for most gold bugs, which is why they're gold bugs. ;) They don't understand that fractional-reserve banking has led to conflicts of hard money vs soft money for centuries, including in the 19th century:
http://en.wikipedia.org/wiki/Specie_Circular
You are confused. The gold standard is one thing. Fractional Reserve Banking is another. While I do not support Fractional Reserve Banking as some credible economists do (Lawrence White comes to mind), my knowledge of banking and monetary history leads me to conclude that the gold standard limited the banks' fraudulent lending practices because of the need to redeem notes in specie. I gave you plenty of references to look at.
I've tried to point you at evidence that should lead you to ask some tough questions, rather than simply swallowing the gold bug propaganda whole, now it's up to you to reason your way through this data rather than burying your head in the sand.
I first began to debate monetary issues with my grandfather when I was five. Having lived through a hyperinflationary depression he was quite aware of the dangers of fiat money systems and of the virtues of money that can't be created out of thin air. While my teachers never really spent much time on monetary theory I have read many books on the subject and would have to say that I can detect BS when I am exposed to it. Most of what you claim to be truth is narrative that is designed to divert attention from what matters. Good luck with your bets on fiat money. I would rather go with the market's choice of money instead.
You said gold supply had gone up without much impact, I pointed out that the 20th century growth of thirty times is a big impact.
Wrong. First, the greatest supply shock for gold came with the discoveries in California and Australia. There was no equivalent production increase in the twentieth century. Our current production may be greater but it comes off a huge base so it is smaller in percentage terms. Second, we were not on the gold standard for most of the 20th century. Most countries abandoned the gold standard so that they could inflate their money supplies in order to run deficits and finance the warfare/welfare state.
You then point out that growth didn't cause inflation during one episode during the 19th century, which has nothing to do with the 20th century.
What inflation was caused by the gold standard in the 20th century again?
You can double the money supply under a gold standard in a second also, you simply lower the reserve ratio for fractional-reserve banking from 10% to 5%.
If you have a competitive banking system where other banks can turn in your notes for specie you will not keep reserves at 5%. That is only the type of Ponzi scheme that can be run when you have a central bank gaming the system and money that can be created out of thin air to save the reckless lenders. A gold standard imposes discipline on everyone. That is why the central banks, governments, and the politically connected interests hate it.
In fact, reserve ratios have been falling for centuries.
Link please. You say many things. But you usually fail to support them with anything factual. I suspect that you are talking about the cover ratio but given your lack of knowledge about the subject I do not wish to speculate. Note that the market is capable of correcting a situation where a central banks sets a low cover ratio. Holders of notes simply demand gold and force discipline from the outside or outright default that imposes austerity measures on the offender.
Get back to me when you understand how fractional-reserve banking makes that possible, both under a gold standard and under a fiat system like today. :)
I understand perfectly that banks can misbehave. But you fail to understand that holders of notes can ask for specie and force a bank to become insolvent. It is that threat of insolvency that forces depositors to judge the bank just as foreign central banks judge a debtor nation.
Funny how I mention that banks could raise their reserve ratios to keep inflation down and your response is that "when banks can't redeem their notes in specie they go under."
My point is valid but does not deal directly with that part of your statement. History shows that when banks issue too many notes they risk redemptions that forces insolvency. The same thing happened when France (there is that country again) forced the US to redeem their notes for gold because it did not like the inflation created to fight the Vietnam War and to fund the Great Society. France got a lot of gold before Nixon threw in the towel and defaulted by closing the gold window at the NY Fed. The USD has lost more than 80% of its purchasing power in the subsequent 39 years.
No current bank "assumes" anything about its holdings: they have to sell their holdings for cash or more liquid assets like treasuries or get people to invest more money based on the perceived value of their holdings.
As I argued above, many of the 'assets' held by the banks have no market value because there is no market for them. Under any objective audit most of the large US banks would have been declared insolvent a number of times.
I don't think you understand how a modern bank actually works.
I understand perfectly. What we have is a confidence game that fails and requires that taxpayers, prudent banks, and savers bail out the degenerate gamblers who are protected by the Fed and Treasury.
I see, so you "see no support" for Irwin's claim and reject Eichengreen's papers, but cannot make a single argument for why that's so. X) Irwin's claims actually hinge on FRB a lot, not sure if even he knows that. If banks were raising their reserve ratios and lowering the total money supply that way, that's actually a problem caused by FRB. However, the reason they were likely doing so was because they were scared of a specie raid, so the underlying reason was still the dumb gold standard. But this problem persists to this day, now that Bernanke has again flooded bank reserves to hold off just such a currency raid, so both systems suffer from this fatal flaw. However, the main reason for deflation during the gold standard was likely all the FRB banks that went under and lowered the total money supply that way, which Irwin mentions but then chooses to focus on the gold hoarding instead. No, as always, you are the one that's confused, as nobody asserted that the gold standard and FRB are the same thing. I see, so banks increased the money supply tenfold through FRB but somehow magically having them keep that last 10-15% in reserve held back inflation from going up that little bit extra? What a joke, you clearly have no grip on how the private non-gold backed money supply has dominated the amount of gold-backed notes for centuries.
Haha, I present evidence of how the "gold standard" was such a joke even back in the 1830s that they had to pass a law to try and require payment for govt land in gold and silver, and your response is that it's a "narrative that is designed to divert attention from what matters"? Again, you can't even attempt an argument, so you try to just wish it away. I also note that after you asked for my inflation numbers all this time, while somehow being so blind that you couldn't find it, now that you did find it, you don't even mention the 19th century inflation volatility it clearly shows. Obviously you would rather just wish it away and ignore it. Those of us who can actually detect BS can make arguments for why something is BS, but you clearly have no ability to do either, so you just avoid data and wave away actual arguments and information that is contrary to your gold bug fantasy. Did your great 19th century supply shock multiply gold supply by 30 times? No, but supply did go up that much in the twentieth century and I already showed you the data for it. Hilarious how you are so ignorant that you will keep repeating the same gold bug nonsense even when I've shown you the actual data contradicting you. Yes, I already mentioned that we went off the gold standard in the 20th century and mentioned that as evidence of its undesirability, hilarious that you just repeat what I said as though you are saying something new. X) Nobody said the gold stanard caused inflation in the 20th century, hilarious how you will just make up irrelevant questions that have nothing to do with what we're talking about so that you can try to distract from the fact that you have nothing to bring to the actual topic. :D
The gold standard didn't impose any discipline because reserve ratios for fractional-reserve banking before the creation of the Fed had already hit 10-20%. Haha, you are completely ignorant of falling reserve ratios and ignore all the data contradictory to your gold bug fantasy presented so far, and now you want data about reserve ratios? Go look for it yourself. If you are so ignorant that you are unaware of this basic fact, it makes perfect sense why you have fallen for the gold bug scam. :D Lol, it makes no difference whether I use cover ratios or reserve ratios, the fact is they all fell for centuries. I use the term reserve ratio because we still use reserve ratios with Fed Notes today, so my terminology stay consistent. It is the hallmark of a fool like you to try and distract from your ignorance of the actual data by raising irrelevant terminology. :D As I already noted, your specie raids are impotent if banks lend gold to each other on a coordinated basis, as they no doubt did, and as they definitely do today with interbank lending of Fed reserves. Lol, I keep pointing out why these specie raids have been irrelevant for centuries, but you are ignorant of the history and have no counter, so you just keep repeating the specie raid argument over and over again. X) Who cares if your point about specie raids might be "valid" if it has nothing to do with the gold/cash hoarding situation I was actually talking about? :D All bank assets have a market value, some minority are just greatly depressed to maybe 5-30 cents on the dollar right now. Calling that "no market value" is such a gross overstatement as to be complete nonsense. While FDIC insurance and some other fees do force the prudent to pay for the profligate to some extent, the bailout problem wasn't with the banks but the investment banks and AIG and Fannie/Freddie, all of which have almost nothing to do with the core banking/money supply issues we're talking about.
It is fairly obvious that you are complete ignorant of the real issues here, which is why you can't even muster up an argument against the data and arguments I have brought up. What's hilarious is how you keep failing to even make an argument, yet keep telling others to learn more. XD It's like someone grossly obese telling everyone else to eat less, hilarious. X) Well, I've gone a couple rounds with you and beat you over the head with the actual arguments and data but it's clear you probably don't even understand the basics of how all this works and are not bright enough to even begin to try to understand it, which is why you keep failing to even attempt a counter-argument and simply keep repeating your tired arguments that have been shot down already. It's been fun beating you over the head with actual arguments and data but when you bring a knife to a gunfight, it gets boring shooting you with actual arguments/data after a certain point so I think I'll leave it at this. I leave you with your own advice that you obviously haven't taken: try doing some actual reading and thinking about what you've read because it's obvious you are completely unprepared to even understand these topics right now, let alone discuss them. :)
I see, so you "see no support" for Irwin's claim and reject Eichengreen's papers, but cannot make a single argument for why that's so.
You can find support for why Iriwn, Eichengreen and Bernanke are wrong by reading Chapter 5 of Rothbard's book, which was cited before as support for my position. It was the bank of England which got Strong to inflate in order to help Britain when France balked at inflating to help out Governor Norman, and it was that inflation that set the stage for a great crash that was turned into a Great Depression by meddling politicians who opposed a liquidation of malinvestments.
As I also pointed out, Irwin himself is writing a book that provides a much better explanation for the Great Depression than Eichengreen or Bernanke do. While Iriwn is still wedded to the, 'France did it,' myth and the book is likely to be a bit disappointing the subject is still a strong argument against Eichengreen's simplistic approach. Neither Eichengreen nor Bernanke have ever shown that they understood what caused the Great Depression and I have already provided links to authors that have a much better handle on the story. In case you missed it, in addition to Rothbard, whose book is cited above again, Higgs offers a wonderful explanation about how Hoover and FDR took a market correction and turned it into a Great Depression by creating regime uncertainty that prevented capital formation. From what I can see many in the establishment are finally coming around and are now using the regime uncertainty idea to show why Obama is doing so much harm to the economy by taking the same approach as Hoover and FDR did.
Irwin is relying on the wrong scholarship. Instead of buying into the Keynesian mythology about the depression he should have looked at the development of the bubble which, when it burst, laid the foundation for the political class to turn a needed correction into a Great Depression. The information that should have helped Irwin, had he been willing to do the research could easily be found by going to sources that Eichengreen and others like him typically avoid. Here is one very interesting source that sheds some light on how the actions of central bankers in France, England, and the US set the stage.
What we clearly have are people who do not understand the nature of money or who benefit from their position in the current fiat scheme fighting hard to sustain a system that cannot work and has never worked. Men are not angels and in the real world there is a clear need for a check on power. Central bankers and the large banks hate gold because it imposes discipline and prevents the transfer of wealth from workers and savers to established financial insiders who can use inflation to get a greater and greater share of national income. That game is now over and we are seeing gold reestablish itself as a reserve asset of choice for individuals that do not trust the system. While there is still a great war going on that sees gold go through some very violent corrections that scare off the uninformed the big trend is favorable to those that see reality and understand monetary history. Gold is going up in value against the USD and most currencies and will continue to go up until the central banks are closed down or until there is a link established between it and national currencies.
Haha, I present evidence of how the "gold standard" was such a joke even back in the 1830s that they had to pass a law to try and require payment for govt land in gold and silver, and your response is that it's a "narrative that is designed to divert attention from what matters"?
There was a bimetallic standard in the 1830s and governments were exploiting the artificial ratio to create some inflation. You should know that.
Again, you can't even attempt an argument, so you try to just wish it away. I also note that after you asked for my inflation numbers all this time, while somehow being so blind that you couldn't find it, now that you did find it, you don't even mention the 19th century inflation volatility it clearly shows.
You only cited a chart that showed that there was no inflation during the gold standard. The biggest bout of inflation came when the US actually went off the gold standard so that it could fight Lincoln's war. All the data supports my view and refutes yours. In case you have forgotten, here is a chart that you provided elsewhere. It proves my point and shows that you can't read very well.
Did your great 19th century supply shock multiply gold supply by 30 times?
I think that if you want to pretend that you know something about economics and finance it helps to understand simple math. Let me help you here by giving you a simple example.
Start with a monetary base of 100 tons of gold and an expected annual production of around 2 tons. That means that you expect the money supply to grow by 2%. Instead there is a major discovery and production is 8 tons. That translates to a 300% increase in the growth of money supply.
If we move forward in time and are now looking at a production rate of 60 tons we can argue that yes, production has gone up by 30 times from the 2 ton figure in the past. But that does not matter because we have to look at the base that it is coming from and then it only matters if gold is still used as money. Your case fails both of these tests because no modern period has caused production rates to go up by 300% within a one or two year period and because our base is so much higher that it makes the increase small.
If you actually LOOK at the historical data, you find that the greatest increase in production came early in the game, after gold was found in California. You will also see that peak mine production came after the adoption of the heap leaching process, which allowed companies to extract lots of gold from very low grade deposits. This took place after 1980, where there were no major currencies linked to gold and that it did not have the same type of impact as the discovery in California did.
Your narrative fails to counter my point, which remains valid. The discovery of gold in California and Australia was the greatest supply shock in recorded history. You claimed that this was highly inflationary but I showed that that after 20 years the price levels were exactly where they started from. I also showed that during the period of supposedly 'high inflation,' the compounded rate was somewhere around 1.5%, which would be considered quite low by current central bankers and far lower than the average year under a fiat money standard.
As usual, you have nothing but empty words and broken logic that falls apart as soon as it is examined.
Nobody said the gold stanard caused inflation in the 20th century, hilarious how you will just make up irrelevant questions that have nothing to do with what we're talking about so that you can try to distract from the fact that you have nothing to bring to the actual topic.
Perhaps it is your muddled writing style but if you are not making the point above why are you talking about gold production rates in the 20th century?
You have to stop saying what you claim to have been saying and start to provide a structured logical argument supported by actual data and references, not claims that you expect others to find because you can't produce them.
The gold standard didn't impose any discipline because reserve ratios for fractional-reserve banking before the creation of the Fed had already hit 10-20%.
Of course it did. Banks that lent issued too many notes were unable to redeem them in specie and went out of business when their competitors cashed in those notes. The Fed was created in secret to protect the protect the large New York banks from such competitors.
Haha, still at it I see, repeating the same idiotic arguments over and over again. I point out that inflation volatility was much higher in the 19th century, you change the subject to long-term inflation, a useless stat. I point out that the gold supply blew up 30 times recently and would have let to a lot more inflation if we were still under a gold standard. Your response is deeply stupid, "We weren't under a gold standard recently so we didn't have inflation." What?! :D I point out that if a gold supply shock in the 19th century had no effect on inflation, that implies either the gold standard is irrelevant or that it was actually FRB that dampened the shock, you simply ignore this huge hole in the gold bug scam. I point out that reserve ratios were already so low that FRB money that wasn't gold-backed was dominant even in 1900, you go back to your favorite stupid argument about specie raids again, that you simply repeat over and over again even when I was talking about gold hoarding, the opposite situation when specie raids are easy to fend off. XD It is clear that you cannot even understand the basic logic behind these issues and so simply repeat the same stupid arguments that you've read in some gold bug propaganda. Have fun repeating such stupid arguments that you don't even understand how dumb they are. :)
You are not a complete idiot, because you wouldn't even have heard of Rothbard or Higgs or the gold standard in that case, but you are a functional idiot because you just repeat dumb arguments that you have read someplace, with no idea if they are even relevant to the debate or are even internally consistent. :) I've bashed you over the head with all this a couple of times and it's been fun reading how idiotic your responses are but at some point reading you repeat "specie raid, specie raid" no matter what the situation got boring.
I point out that inflation volatility was much higher in the 19th century, you change the subject to long-term inflation, a useless stat.
As I wrote before, the US was not on a gold standard during the Civil War, which is the period that contributed most to the volatility. And if you look at your own citation you will see that there was not much volatility at all. Purchasing power was very stable, particularly for an agricultural economy.
I point out that the gold supply blew up 30 times recently and would have let to a lot more inflation if we were still under a gold standard.
I pointed out that you don't understand mathematics very well. The growth in the gold supply was very modest and far smaller than the supply of fiat money. For example there was never a single year in which the supply of gold increased by more than 5%. But we have seen many years in which the supply of money has been increased by that much.
Your poor math skills are your problem, not mine. Feel free to ignore the gold story and keep on gambling on fiat money and bonds that promise to pay you in fiat money. In a market economy it only makes sense that money moves from those that are ignorant and reckless to those that are knowledgeable and prudent.
Your response is deeply stupid, "We weren't under a gold standard recently so we didn't have inflation."
Where did I write that? If you are going to use quotation marks make sure that you actually quote what I wrote, not stuff that you made up. Now it is possible that I may have made a typo or put in a word that did not belong. But I certainly did not write the phrase that you claim that I wrote.
I point out that if a gold supply shock in the 19th century had no effect on inflation, that implies either the gold standard is irrelevant or that it was actually FRB that dampened the shock, you simply ignore this huge hole in the gold bug scam.
No. You said that increases in gold were highly inflationary. I pointed out that the data showed otherwise and that the greatest supply shock in history could not create much inflation. The reason is obvious. No matter how much gold you find and dig up in a year it will still be a small percentage of the above ground supply.
I point out that reserve ratios were already so low that FRB money that wasn't gold-backed was dominant even in 1900, you go back to your favorite stupid argument about specie raids again, that you simply repeat over and over again even when I was talking about gold hoarding, the opposite situation when specie raids are easy to fend off.
You said something that you could not support with actual data. I pointed out that reserves could not be very low because depositors would fear losses and would move their money elsewhere or that competing banks would redeem the bnak's notes for specie. I provided you with a link to a book on the history of banking in the US but it is clear that you have no interest in learning.
It is clear that you cannot even understand the basic logic behind these issues and so simply repeat the same stupid arguments that you've read in some gold bug propaganda. Have fun repeating such stupid arguments that you don't even understand how dumb they are.
I provide links and data to support my arguments. You make up stuff and cannot support your own arguments. You actually provide a chart that shows that purchasing power was very stable under the gold standard yet you claim the opposite.
Perhaps you are too stupid to understand but I do not believe that is the case. I think that your problem runs much deeper. You are stubborn and refuse to admit an error when you have made it. You have invested a lot of time in creating your false view of money and interest rates and have no desire to figure out why that view needs to be changed before you wind up making a grave error in judgment. (If you already haven't made one, which would explain why you cling on to your false view.)
You are not a complete idiot, because you wouldn't even have heard of Rothbard or Higgs or the gold standard in that case, but you are a functional idiot because you just repeat dumb arguments that you have read someplace, with no idea if they are even relevant to the debate or are even internally consistent.
Well, Higgs certainly believes that my views are relevant because he still keeps making similar arguments to the ones that I make and rejects your nonsense.
I've bashed you over the head with all this a couple of times and it's been fun reading how idiotic your responses are but at some point reading you repeat "specie raid, specie raid" no matter what the situation got boring.
All you have done is illustrated that you have no understanding of monetary history. You might try some of the links I have cited because you can still learn a lot if you wish to.
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