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Enough With The Goldbug Preaching

by Drew J Jones Fri Dec 2nd, 2005 at 06:47:34 AM EST

back from the front page

My undergraduate degrees in economics and political science involved dealing with an enormous amount of ideological nonsense.  The economics professors were largely conservatives.  The poli. sci. professors were all liberals.  I expect ideologues in the latter field, but, recently, the gold-bulls in the world of economics seem to have taken the crown as academia's true crazies.  So let's see if we can put this beast that we knew as the Gold Standard to rest, once and for all.

Gold Standard supporters -- aka, "Goldbugs" -- are dancing in the aisles right now, as gold hit $500/ounce today, briefly (an 18-year high).  I seem to remember a lot of these folks having bought gold in the early-1990s and then losing their asses in it during the boom.  But I'm interested in the serious political and economic philosophy behind this debate that has been held over many decades.

So jump below the fold, as I attempt to indoctrinate you all into the view that goldbugs are morons who deserve to spend their lives in East-European CIA prisons.

Goldbugs, from the Cato Institute to the Ludwig von Mises Institute, love to talk about the Austrian School theory of the business cycles.  Without going back over it -- I would have to actually dig out Mises's book from the messy, bottomless pit that is my shelf, and that is a torture I do not wish to endure once again -- the Austrians and Libertarians believe that the policy of central banks, to raise and lower interest rates as the economy needs "cooling" and stimulating, will inevitably cause inefficiencies and, therefore, wider fluctuations.  The facts tell a different story:

(White bars show expansion.  Black bars show recession.  If you're having trouble viewing the chart, you can also find it here.)

Essentially, this chart shows expansions and recessions in the US from, roughly, 1795 to 1992.  Note that the Great Depression was only the fourth-worst downturn in US history, and was not the only severe recession that was followed by another severe recession, as Milton Friedman incorrectly observed back in the 1960s when he was pushing his theories.  Contrary to the Goldbugs' view of mainstream central bank policy, the business cycle has become smoother since the rise of the Keynesian school of expansionist thought, when the combination of deficit spending and money-printing became popular.

The Gold Standard ended, if I remember correctly, in 1933.  Looking at the chart, you can tell me how the economy has looked since then.  Bear in mind, also, that this smoothing of the cycle has come during the rise of 20th-Century Welfare-Statism -- the Satan of libertarians.  Once again, this contradicts the predictions of the militant free marketeers, who argue that greater government intervention will lead to severe distortions in the  market and, therefore, wider fluctuations.

I think the essential point is clear:  The Gold Standard is a piece of history, long gone, and no amount of ideological vomit on the pages of The Wall Street Journal (the "birthplace" of Supply-Side Economics) will change this.  It's supporters are only supporters because they refuse to accept the essential truths of 20th-Century economic thought -- that the market is not God, and that the government can play a role in making the lives of people, interacting in the market, better.  To them, government is an obstacle, to be fought, even if it means being dishonest.  To the reasonable among us, government is a tool to be monitored, yes, but to be used as a means to improving, socially and economically, upon the efficiency of the market.

So, when your conservative friends preach to you the virtues of gold and the inherent danger of the central bank, you'll know that they don't know what they're talking about.  And, if they believe gold is really worth $500/ounce in the long run and that paper currency is done for, I've got an apartment in Baghdad I'd love to rent them.

Unquestioning belief in markets is about like any other faith based belief structure.  Perhaps comforting, but hard to prove
by HiD on Tue Nov 29th, 2005 at 10:02:05 PM EST
Actually, it's more like primitive myth than modern religion: possible to disprove.
by Colman (colman at eurotrib.com) on Wed Nov 30th, 2005 at 04:32:57 AM EST
[ Parent ]
...Post-Autism> I suggest scrolling down the page to the "petitions". There are several, and here is the first one
Most of us have chosen to study economics so as to acquire a deep understanding of the economic phenomena with which the citizens of today are confronted. But the teaching that is offered, that is to say for the most part neoclassical theory or approaches derived from it, does not generally answer this expectation. Indeed, even when the theory legitimately detaches itself from contingencies in the first instance, it rarely carries out the necessary return to the facts. The empirical side (historical facts, functioning of institutions , study of the behaviors  and strategies of the agents . . . ) is almost nonexistent. Furthermore, this gap in the teaching, this disregard for concrete realities, poses an enormous problem for those who would like to render themselves useful to economic and social actors.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Nov 30th, 2005 at 06:08:14 AM EST
I do not want a return to the gold standard; however, I have noticed that in nearly every major country, the rate of inflation is greater than the interest rate on short term government bonds.  So I own some gold mining stocks as a hedge against inflation.  Are you worried about inflation?  If so, what are you doing about it?
by corncam on Wed Nov 30th, 2005 at 09:54:20 AM EST
That is partly because most central banks are obsessed with "inflation targets". With interest rates as low as they are and stagnant wages, maybe deflation would be a good thing. This wouldn't be "stagflation" as the economy keeps growing at a normal rate.

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Nov 30th, 2005 at 10:34:54 AM EST
[ Parent ]
I'm not terribly concerned about inflation.  But which major countries are you talking about?  The two that immediately come to mind are the US and the UK -- neither of which can be characterized as having inflation rates higher than their interest rates.  (Well, okay, if we count the inflation index from the past quarter in the US, then I suppose it barely exceeds the interest rate, but oil prices are coming down a bit, so don't bet on that to continue.)

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Wed Nov 30th, 2005 at 10:47:45 AM EST
[ Parent ]
How about the Eurozone? (it's very possible that the numbers contradict me on this).

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Nov 30th, 2005 at 10:50:09 AM EST
[ Parent ]
Latest data:

A society committed to the notion that government is always bad will have bad government. And it doesn't have to be that way. — Paul Krugman
by Migeru (migeru at eurotrib dot com) on Wed Nov 30th, 2005 at 10:58:14 AM EST
[ Parent ]
Let me preface this by saying that I apologize if I'm not wording this correctly, because it's 11:35 AM in Florida, and I'm still not quite awake (my fiancee also didn't warn me that it was 35 degrees outside this morning, so throw a bit of shock on top of the sleepiness):  

You're right about the Eurozone.  Not good.  And, apparently too, about the US.  Britain's interest rates are still substantially higher than the inflation rate, being the good, though perhaps pompous, little inflation-targeters that they are.  Still, I'm not terribly concerned.  (Concerned?  Yes.  Terribly so?  No.)  Note that a substantial part of the upward trend in inflation comes in the last few months of the report's time period -- meaning, during the most powerful period of the energy-price surge.  (As Jerome has pointed out, in a previous diary on home-heating costs, that problem may well continue for Europe heading into the winter, but more on that in a moment.)

You all are in a better position to tell me about this, but:  How have corporate profits looked over the past few months?  I suspect they have been less than spectacular in Europe, as businesses should tend to allow some profit to be eaten away before raising prices, so as not to hurt demand.  (Profits were far from wonderful in the US, unless your store happened to sell those damned iPods.)  Wal-Mart, for example, had a weak quarter, which of course (since it's "Always-Low-Prices" Wal-Mart) sent Wall Street into a near-panic for a bit.

Here's my concern about the Eurozone, and why I bring up this concept of falling corporate profits prior to rising prices:  With the price of energy increasing, profits are eaten away.  Then, prices rise, and interest rates will also rise.  (Not all businesses are created equal, so there's no reason to expect the process to occur in the neat, clean stages I'm talking about.)  So you've got a couple of factors taking shots at the Continental European economy, and a recovery that should (hopefully) be rather robust might be severely dampened.

I don't intend for that to sound like "doom and gloom".  But, obviously, energy prices are critical to the economy and can help swing the economy dramatically in one direction or another.

Also, after the dot-com bust, with the American economy not responding very well to ever-lower rates at the Fed, it seems like we've been willing to put up with a bit more inflation, if it means getting the economy back on solid ground.  (There's a contradiction there, I know.  You can't find solid ground without stable prices, but bear with me.)  I'm not sure how much of that may apply to the Eurozone.  Your governments tend to keep a tighter money supply than we do, though probably not for long now that Ben Bernanke, "Mr. Inflation-Target," is headed for the Fed Chair.

As always, I could be wrong about all of this.  So feel free to correct me or disagree.

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Wed Nov 30th, 2005 at 11:46:22 AM EST
[ Parent ]

Thanks for those links - I was surprized by the data, which I have summarized below:

Australia      3.0    5.6
Canada         2.6    2.7
Denmark        2.0    2.1
Euro Zone      2.4    2.1
Japan          -.7    0.0
New Zealand    3.4    7.0
UK             2.5    4.5
US             4.3    4.0

So short term interest rates are less than inflation in the US and Eurozone, and roughly equal in Canada and Denmark.  Meanwhile, the UK, Australia and New Zealand have higher short term rates, which Japan has deflation.  

by corncam on Wed Nov 30th, 2005 at 12:05:33 PM EST
[ Parent ]

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