Posted on 08/21/2007 11:34:38 AM PDT by BGHater
As markets went on a rollercoaster ride last week, our economy is coming close to a day of reckoning for loose credit policies being followed by the Federal Reserve Bank. Simply, foreign banks we have been relying on to buy our debt are waking up to the reality of much higher default rates than predicted, and many mortgage backed securities have been reduced to “junk” ratings. Wall Street fears the possibility of tightening credit and the tightening of America’s belts. Why, they say, “if Americans spend only what they can afford, think of the ripple effects throughout the economy!” This is the cry, as the call comes for the fed to cut rates and bail out companies in trouble.
More inflation is, however, never the answer to inflation.
The truth is that business involves risk, and businesses that miscalculate risk should be liquidated, so their assets can be reallocated to businesses that correctly judge risk and make profits. Instead, the Fed has injected $64 billion into the jittery markets, effectively amounting to a bailout that keeps these malinvestments afloat, but eventually they will become the undoing of our economy.
In addition to the negative reactions in financial markets, many Americans have taken on too much personal debt owing to exotic mortgage products and artificially low interest rates. Unfortunately, these families are now in the position of losing their homes in unprecedented numbers as the teaser rates expire and the real bills are coming due.
The real answers are, and always have been, found in the principles of the free market. Let the market set the interest rates. If we had been functioning under a true and transparent free market system, we would not be in the mess we are in today. Government, like the American household, needs to live within its means to get back on stable fiscal ground.
We’ve been headed in the wrong direction since 1971. This week marks the 36th anniversary of Nixon’s decision to close the gold window, which convinced me to seek public office to call attention to the runaway money train that would come in the aftermath of that decision. The temptation to print and spend money with impunity, like the temptation to max out lines of credit, is too strong to for government to resist. While Nixon brokered exclusivity deals with OPEC to prop up demand for the tidal wave of green pieces of paper the Fed pumped into the markets, the world is tiring of marching to the beat of our drum in order to secure their energy needs. The house of cards Nixon built is now on the verge of collapsing on our heads, and on our children’s heads.
As the dollar weakens, it becomes ever clearer that we need a return to sound, commodity-based money for a secure future. Money based on real value, not empty promises and secretive backroom machinations, is the way to get out of the current calamity without causing even bigger problems.
You have any evidence that prices remained stable? More stable than they have been in the last 50 years?
or drifting lower for more than a century,
You think drifting lower for a long period of time is a good thing?
Just because most goldbugs are financial illiterates does not mean that a gold/silver standard is stupid.
Maybe not stupid, unworkable for sure.
Numerous economists have written of the inefficiencies that arise from floating exchange rates
Probably many have also written about problems with a gold/silver standard.
I am confident the trajectory of scientific and engineering development, indeed all human development, would be quite different if not guided by bureaucrats.
Sure.
What if they were creating things in the real world? It would be a very different place.
Maybe they need to be guided into different careers, by bureaucrats.
Attacking goldbugs does nothing to fight that decay.
Neither does supporting a gold standard.
You might be surprised to learn that the founding fathers gave the power of coining the money to the federal government. They wanted to copy the highly successful model of Colonial Scrip.
I don’t think this issue is particularily conservative or liberal.. more like pro-indentured servitude, versus pro-freemen.
It's almost universally true that the demand for something is balanced by the demand for other things. This includes currencies which can be traded for other things.
The idea is not to back our currency with a "large quantity" (why large?) of a commodity, but to make the commodity itself the currency.
Large because the united states has a lot of wealth, and if we only have a small portion of the world's gold backing out currency we are more susceptible to price manipulation through hoarding and dumping.
The actually gold backs the paper currency. It represents the gold itself. The paper currency is backed by the gold, but it is also true that gold is the currency and that the paper is just a convenient representation.
Demonetizing federal reserve notes and monetizing gold would send the demand for FRNs to zero, and the demand for gold up. But the demand for gold would still be in equilibrium with the rest of the economy.
Equilibrium infers that it doesn't fluctuate. The purchasing power of gold definitely fluctuated when the US was using it as a currency.
The commodity would not be taken out of circulation, just the opposite, it would circulate!
It would circulate as a currency. It would however pull gold away from other uses by making it extremely expensive to use for other purposes, and for what? So we can have the illusionary feeling of stability brought to us by having a currency based on shinny stuff.
There is an enormous amount of gold in the vault at the NY Federal Reserve. If it was wrong to store gold do you think they'd store it?
The Federal Reserve invests in gold because it is liquid, and it tends to go up in value when the markets go down abruptly. It's is a hedge investment against a market crash.
What's really going on is big boys own and trade gold as always. We have the same right they do. But the big boys have marginalized us off into the paper money ghetto where we can be abused by the inflation they cause.
No one is stopping you from purchasing gold. Invest in gold all you want.
That it is pretty is a tiny bit of what makes gold the money par excellence. But it is the only monetary asset that is not simultaneously someone else's liability.
So what are the advantages of having a currency that is not debt based? Are you saying that it is better if the value of our currency doesn't change with respect to the currency of another country? That will only work if the world converts to using gold as a currency, not just the US.
What is so bad about a debt based currency?
Which do you think is more valuable now?
The idea that $100 worth of gold is worth more than a $100 worth of someone's debt is illusionary.
The debt becomes worth less if there is increased risk that the debtor will be unable or unwilling to fulfill that debt. The relative value of the debt and the gold may also change if people decide gold is coming into fashion and people start buying more gold jewelry. Or maybe gold becomes used more in industrial applications. The relative values fluctuate.
You are so worried about the value of our currency dropping, what the hell do you think has been happening since 1913? A dollar will buy in groceries what 5 pennies maybe 3 pennies by now would have bought in 1913. At no time between 1813 and 1914 was there an inflation like that. Maybe 2:1, and a deflation of 1:2, but not an inflation of 100:3.
Actually I'm not worried about slow, steady inflation. I'm worried about rapid fluctuation both up and down that throw markets into chaos. Having your currency become inflated in value is great, as long as it stays inflated. However, it the value bounces around, it creates too much uncertainty and investment suffers.
I don't worry about slow inflation, because I don't stuff my money in a mattress, or hoard in the form of gold in a vault. I invest it.
A small amount of inflation is considered desirable because it encourages investment. Investment keeps our economy growing, which benefits everyone. It is a concept that has served our country very well.
Is an IOU a commodity?
It most definitely is. Debt is traded all the time. Mortgages are traded, some of which are relatively stable investments that are well secured, others are risky investments.
Debt is often not a very liquid investment, but it is traded like other commodities.
Currencies are traded, and you were the one that pointed out that they are based on people's debt.
It is in the Constitution, Congress has the power (which originally was vested in the several states until delegated, and could revert) to coin money and regulate the value thereof.
So they can coin money and regulate it's value. That means that the government has authority to take actions effecting the value of the money.
Coining money means stamping gold and silver coinage, not printing money.
So you are arguing that creating money in any form other than coins is unconstitutional?
The Constitution does not stipulate that the currency be gold, or any precious metal. It does stipulate that the government may regulate the value of that money, which doesn't really mesh very well with reading into the Constitution that the value of currency must be dependent on the value of gold or any other precious metal.
In that same part of the Constitution it also stipulates that the federal government has the authority "To borrow money on the credit of the United States". It says that a mere three lines about where it says the government can coin money.
If the government buys on credit, it basically hands out IOUs. Such IOUs are a tradable commodity.
You get rid of it by getting rid of it. Shut it down...
I don't really see the connection between the Fed and all the other things you mention in that paragraph.
Getting rid of the IRS would provide a great benefit to our country economically and also by weakening the ability of elected officials to provide benefits to favored supporters.
Reducing the welfare state would greatly reduce government's drag on the productivity of our nation and would provide less encouragement for deadbeat illegal immigrants to come to the United States. It would likely have the opposite effect on those willing to work hard to get ahead, because America would be even more of a land of opportunity than it is now. However, those who are willing to work to get ahead are far less of a problem than those who want a free ride off of our government.
I am still unconvinced that there are benefits to returning to gold as a currency, nor do I think it is even close to practical to do so.
Of course I also don't see slow but controlled inflation as a problem as long as the Fed softens major market corrections and does a reasonable job of preventing a major crash or at least lessens such a crash. You can't really do away with market fluctuations. Such corrections are a normal part of a healthy market, however the Fed has done a decent if far from perfect job of preventing long term harm to the market that could result in a major depression.
In fact, the records of the Constitutional Convention admit of no conclusion but that the Founders utterly rejected Colonial Scrip, which was regarded as an utter failure, and, indeed, a moral failing.
There is a lot of data on long term prices. Here is the first graph I found with Google. Note that the prices levels are the natural log of the prices, making the increases seem a lot less than they really are (1820=ln(100)=4.61; 2000=ln(3000)=8.
If you really do have any interest in understanding the case for the gold standard (which I am begining to doubt), you should already know that since 1913, the dollar has lost roughly 96% of its value; prices have gone up by a factor of 25x or more (roughly 30x according to this data).
A gold standard would prevent the government from printing money to pay the bills. The governemnt does not currently print money to pay the bills.
If you really do have any interest in understanding the case for the gold standard (which I am begining to doubt),
I understand the case you're trying to make. I also understand that it would be terrible for our economy, that's why I'm against it.
you should already know that since 1913, the dollar has lost roughly 96% of its value;
I understand how inflation has eroded the dollar. That's why you should minimize your dollar holdings.
Excellent! See how much more stable annual inflation has been in the last 50 years, especially the last 25, as compared to the prior 130?
As a Paulestinian, you aren’t one to accuse another of being a liberal.
What you identify as pricing stability in consumer prices is persistent positive inflation, and the reduction in variance is probably the result of monopolization and business concentration fueled by government regulation; in other markets as much as Federal Reserve manipulation.
But you continue to miss the essential linkage between the gold standard and freedom. Perhaps the best explanation I have ever seen came from Warren Buffett’s father, a Congressman from Nebraska. I don’t have the original source, but here is an abstract with comments:
Rep. Howard Buffett, father of Wall Street legend Warren Buffett, was too far ahead of his time, so few listened to the concerns and even fewer appreciated his wisdom when he addressed a group of businessmen on May 4, 1948. To our good fortune, his address was published two days later in The Commercial and Financial Chronicle, and has been reprinted by the Committee for Monetary Research & Education (10004 Greenwood Court, Charlotte, NC 28215-9621), a not-for-profit organization dedicated to the restoration of sound money.
The passage of time has proven Rep. Buffett to be right, so the ideas of this brilliant Congressman from Nebraska should be reexamined in the light of our quest for reform and our need to regain control of Congress. His words speak for themselves.
“Today Congress is constantly besieged by [special interest] groups seeking benefits from the public treasury. Congressmen find it difficult to persuade themselves not to give in to pressure groups. With no bad immediate consequence it becomes expedient to accede to a spending demand. The Treasury is seemingly inexhaustible. Besides the unorganized taxpayers back home may not notice this particular expenditure - and so it goes.”
“Because [a politician’s] continuance in office depends upon pleasing a majority of the pressure groups,” there is a natural propensity for over-spending. Rep. Buffett recognized this reckless tendency to be a political fact of life, with predictable and discouraging results if left uncontrolled.
“From 1930-1946 your government went into the red every year and the debt steadily mounted. Various plans have been proposed to reverse this spiral of debt.”
“One is that a fixed amount of tax revenue each year would go for debt reduction. Another is that Congress be prohibited by statute from appropriating more than anticipated revenues in peacetime. Still another is that 10% of taxes be set aside each year for debt reduction.”
“All of these proposals look good. But they are unrealistic under our paper money system. They will not stand up against post-war spending pressures. The accuracy of this conclusion has already been demonstrated.”
“Under the stream-lining Act passed by Congress in 1946, the Senate and the House were required to fix a maximum budget each year. The statute providing for a maximum budget has fallen by the wayside even in the first two years that it has been operating and in a period of prosperity.”
The demise of Gramm-Rudman sounds like an exact replay of this episode from the past. Rep. Buffett’s words ring true as if they were spoken just yesterday, not 43 years ago. His understanding and insight truly reaches across the decades. But Rep. Buffett did not stop with an accurate statement of the problem. He also provided the solution. He understood why Congress was no longer the quaint little institution it was during his youth. He knew what was needed to set things right and to bring unbridled spending under control.
“Before 1933 the people themselves had an effective way to demand economy. Before 1933, whenever the people became disturbed over Federal spending, they could redeem their paper currency in gold, and wait for common sense to return to Washington.”
“That happened on various occasions and conditions sometimes became strained, but nothing occurred like the ultimate consequences of paper money inflation.”
“When the people’s right to restrain public spending by demanding gold coin was taken away from them, the automatic flow of strength from the grass-roots to enforce economy in Washington was disconnected.”
“With a restoration of the gold standard, Congress would have to again resist handouts. If Congress seemed receptive to reckless spending schemes, depositors’ demands over the country for gold would soon become serious. That alarm in turn would quickly be reflected in the halls of Congress. The legislators would learn from the banks back home and from the Treasury officials that confidence in the Treasury was endangered.”
“Congress would be forced to confront spending demands with firmness. The gold standard acted as a silent watchdog to prevent unlimited public spending.”
Rep. Buffett clearly understood the consequences of his recommendation. He also recognized the outcry that would result among those who would criticize the restoration of the Dollar’s direct and transparent link to Gold.
“Most opponents of free coinage of gold admit that restoration is essential, but claim the time is not propitious. Some argue that there would be a scramble for gold and our enormous gold reserves would soon be exhausted.”
“Actually, this argument simply points up the case. If there is so little confidence in our currency that restoration of gold coin would cause our gold stocks to disappear, then we must act promptly.”
Ironically, even though Gold redeemability was not restored, much of our Gold stock has disappeared. The 22,100 tonnes held in May 1948 has been drastically reduced to 8,100 tonnes today. This dissipation happened in a way that Rep. Buffett would have found alarming because he understood irredeemable currency posed a threat that could deplete American wealth. The “gold is not subject to demand by American citizens. It could all be shipped out of this country without the people having any chance to prevent it.”
The reduction of the Gold stock robbed the American people. They created the wealth that built it, but they were helpless from stopping its dispersal. Nevertheless, what remains is still the world’s largest hoard of Gold, and it can be put to effective use by reestablishing Dollar redeemability into Gold. What motivated Rep. Buffett? Although it may be hard to understand or accept in today’s environment of cynicism and flagrant self-interest, his words reveal him to be a true statesman, whose aim was to serve his country. In one introspective moment, he provides a frank and candid personal assessment.
“In politics votes [are of] vital importance to an elected official. That situation is not ideal, but it exists.”
“Perhaps you are now saying to yourself: `That’s just what I have always thought. The politicians are thinking of votes when they ought to think about the future of the country. What we need is a Congress with some `guts.’ If we elected a Congress with intestinal fortitude, it would stop the spending all right! “
“I went to Washington with exactly that hope and belief. But I had to discard it as unrealistic. Neither the President [Harry Truman, a Democrat] nor the Republican Congress is under real compulsion to cut Federal spending. And so neither one does so, and the people are largely helpless.”
“There is only one way that these spending pressures can be halted, and that is to restore the final decision on public spending to the producers of the nation. The producers of wealth - taxpayers - must regain their right to obtain gold in exchange for the fruits of their labor. This restoration would give the people the final say-so on governmental spending, and would enable wealth producers to control the issuance of paper money and bonds.”
Rep. Buffett expressed a sincere concern for the taxpayers who votes put him into office. “Far away from Congress is the real forgotten man, the taxpayer who foots the bill. He is in a different spot from the tax-eater or the business that makes millions from spending schemes. He cannot afford to spend his time trying to oppose Federal expenditures. He has to earn his own living and carry the burden of taxes as well.”
“But for most beneficiaries a Federal paycheck soon becomes vital in his life. He usually will spend his full energies if necessary to hang onto this income.”
“The taxpayer is completely out-matched in such an unequal contest. Always heretofore he possessed an equalizer. If government finances weren’t run according to his idea of soundness he had an individual right to protect himself by obtaining gold.”
Rep. Buffett championed the cause of sound money because he understood that human freedom is dependent upon money redeemable in Gold. By analyzing the regimes of dictators, which invariably aimed to control the country’s money as an important part of the process to secure their absolute power, he concludes that the “connection between money, redeemable in Gold, and the rare prize known as liberty” is irrefutable.
“In a free country the monetary unit rests upon a fixed foundation of gold or silver independent of the ruling politicians” and is “redeemable for a certain weight of gold, at the free option and choice of the holder of paper money.” The Dollar lost this virtue in 1933.
The remedy proposed by this brilliant Congressman from Nebraska is not new. Rather, it is a fundamental principle important in the history of this country. It is a safeguard against Congressional mismanagement enshrined in the Constitution, specifically the monetary powers and disabilities as stated in Article I.
Rep. Buffett served four terms in Congress. Would the limitation of his service to three terms have been better for this country? I think not. Term limitation and other suggestions to control Congress are well intentioned and may have some useful benefit, but it is naive to expect them to control Federal spending and stop the snowballing national debt.
Rep. Buffett accurately understood that “Our finances will never be brought into order until Congress is compelled to do so. Making our money redeemable in gold will create this compulsion.” We could do well by learning from his insight, and once again make our money redeemable into Gold. There is no single action that could do more to effectively reform Congress, nor do so in a more democratic way.
However, it will not be an easy task. Rep. Buffett said with considerable foresight: “I warn you that politicians of both parties will oppose the restoration of gold [and] those elements here and abroad who are getting rich from the continued American inflation will oppose a return to sound money. You must be prepared to meet their opposition intelligently and vigorously.”
That was so excellent, I had to bookmark it.
Yes, 3% inflation every year is more stable than 5% inflation followed by 5% deflation.
But you continue to miss the essential linkage between the gold standard and freedom.
You mean the freedom to experience massive booms and busts in quick succession? I think we can do with less freedom to have panics which throw 20% out of work or knock off 10% from GDP. But maybe that's just me.
“From 1930-1946 your government went into the red every year and the debt steadily mounted.
While we were under the gold standard? Say it isn't so.
This dissipation happened in a way that Rep. Buffett would have found alarming because he understood irredeemable currency posed a threat that could deplete American wealth.
And yet we're wealthier than ever.
Goldbugs of the world, unite!
Large because the united states has a lot of wealth, and if we only have a small portion of the world's gold backing out currency we are more susceptible to price manipulation through hoarding and dumping.
Equilibrium infers that it doesn't fluctuate. The purchasing power of gold definitely fluctuated when the US was using it as a currency.
It would circulate as a currency. It would however pull gold away from other uses by making it extremely expensive to use for other purposes, and for what? So we can have the illusionary feeling of stability brought to us by having a currency based on shinny stuff.
So what are the advantages of having a currency that is not debt based? Are you saying that it is better if the value of our currency doesn't change with respect to the currency of another country? That will only work if the world converts to using gold as a currency, not just the US.
What is so bad about a debt based currency?
If a currency is debt-based, then how do you measure debt? It is like trying to measure a puddle of water with another puddle of water insead of soaking it up and sqeezing the liquid into a measuring cup.
If I want to know what my worth is, I might add my assets (house, car, boat) to any money owed me, and subtract money I owe. Under a gold system of official money I can signify my wealth in terms of a weight of gold. If my worth is eqivalent to 1/2 pound of gold, that makes sense. It is compared to the amount of gold every other member owns until the amount equals the total gold in the community. My 1/2 pound could be .00000034% of the total gold, and 95% or 105% of my most hated rival depending on who is ahead. There would only be short term debts. If everyone decided at once not to be a borrower or lender, debt could be immediately removed from the system (by being paid) and still there'd be plenty of money left over in the form of gold and silver coin with no loss of collateral. Factories would still be able to produce, people would still be able to buy and sell. A nation can count its wealth the same way and compare it to other nations.
But the old saying about the national debt, it's ok, we owe it to each other, what sense does that make? In a debt based system, all the money there is arises because all the debtors (including the government) went into debt. If I want to know my worth now, I'll be adding the currency value of my assets to currency owed me minus currency I owe and arrive at a number. But what does the number mean? .00000034% of the total community debt? 95% or 105% of my rival? It is like a race which has people running backwards and is won based not on when someone crosses a finish line, but when a horn blows, everyone stops and we measure the distance between people. Those further back lose and those further ahead lose too because the race has been rigged so that the horn was blown before they ever got close to the starting position.
If all the debtors decided to be debt free, there'd be no official money left, and because of the mathematics of debt, some interest on the debt would remain and the lenders would require the surrender of collateral to settle the last of the debt. You'd see unofficial money, krugerrands, maple leaves, gold eagles, starting to be exchanged, bags of pre 1965 would be opened and parted out for small change. But no we don't allow that in this example. The economy stops, or reverts to barter the hard way.
Currency as debt is just awkward. It confuses concepts and make it hard to get good information. Gold as currency provides excellent information and it even tells you how much you owe, in gold. If gold and debt is apples and oranges, it is one situation where you want to compare apples with oranges, so you can see the difference. This is unlike other situation where you get accused of comparing apples and oranges, or comparing dissimilar things as if they are the same. Measuring wealth with debt when you have debts to be measured too is like comparing oranges with oranges and in this case is not helpful.
Actually I'm not worried about slow, steady inflation. I'm worried about rapid fluctuation both up and down that throw markets into chaos.
So they can coin money and regulate it's value. That means that the government has authority to take actions effecting the value of the money.
So you are arguing that creating money in any form other than coins is unconstitutional?
The Constitution does not stipulate that the currency be gold, or any precious metal.
http://www.usconstitution.net/const.html
Is that so hard to understand? Any time someone breaks another law the feds are right after them. Debts are being paid left and right without gold and silver coin, yet where are the feds to enforce this law?
Thank you for the exchange.
Stability in the form of a constant creep of consumer prices must be balanced against the constant expropriation of savings, instability in currency rates, and other negative effects. No accurate model of the economy exists to offer a solid conclusion as to whether constant inflation is associated with greater wealth creation; what we can say is that the inflators (governments) assume a greater role, and leave a bigger footprint in the economy.
But even if greater wealth were created, which I rather doubt, wealth is not freedom. Hitler created greater wealth in the German economy—for a while. And the Roman Empire was wealthier than the old Republic, but it was not a Free Republic. I guess it all comes down to whether materialism trumps human freedom or not. I had rather hoped that most of the people on this forum would strike the balance, particularly in questionable cases, on the side of human freedom.
You never answered my previous question. You think prices drifting lower for a long period of time is a good thing?
But even if greater wealth were created, which I rather doubt, wealth is not freedom.
Neither is poverty.
I had rather hoped that most of the people on this forum would strike the balance, particularly in questionable cases, on the side of human freedom.
Because gold equals freedom? LOL!
Art. 1. Sec. 10. Cl. 1. No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts....
You understand that the Federal government is different than a state. LOL!
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