Gold

by joelado Mon Apr 29th, 2013 at 08:57:09 PM EST

Remember when real estate was the only sure bet investment? It had real... estate value. You could pass it down to your children. You could live on it, or in it. It had physical size and was tangible. However, its value went up and up and up, far beyond its real affordability. Why? How? Because the banking game had changed and people who were not bankers were throwing money at unsophisticated ordinary citizens and telling them they could afford these homes and the extra demand pushed the price of houses up. When the houses became more expensive they just increased the amount of money they could loan people of a certain income. Prices went even higher and these non-traditional bankers started making loans to people without checking their credit worthiness or doing a check on anything. Volume was the watchword for these brokers. With every loan they made they collected a fee, and they experienced none of the consequences if the loan went bad after. Then they turned around and sold these mortgages in pieces of paper, telling the purchasers that the value of their paper was guaranteed because, even though these were risky investments, they were backed by something of real value, actual houses, which at the time was an unmistakably safe investment. Real estate had only gone down in value twice in the United State's history and that was during the Great Depression and again during the Reagan years associated with the savings and loan crisis. Even though the new bank/brokerage houses were doing the very same things that lead to the Great Depression, in their eyes, the United States was an endless ocean of prosperity, it was like the atmosphere or the seemingly limitless number of fish in the sea, their illegal activity couldn't possibly pollute it or diminish it, at least not to the extent that it would create any real damage to our economy. For them there wasn't any danger of the United States going into anything that remotely looked like a Great Depression; to the new bank/brokerage houses that was like talking about ancient history. Things were different now. We have smart phones and super fast computers; we drive sophisticated cars that run on gasoline. Besides, real estate is real estate and will not go down in value. Unfortunately, we know now that that type of thinking is ludicrous. So use that critical thinking to think about what people are telling you about our money and gold?

The true value of gold is what others are willing to give up or do to get it from you. Gold, just like real estate, only has value when conditions are right to support that value. The value of gold is relative to the value of its importance to what you buy given a particular set of circumstances. Let me give you an example. If I am starving and I will die soon if I don't get food and I have gold in my pocket, I will want to exchange that gold for food real fast. Gold has no value for me in comparison to food. However, if the food supply is limited and the person who has food also needs it to survive, my gold is worthless. It is worthless to both or us because you can't eat it and survive. The decision of whether you will get food at all for your gold depends on either the goodness of the food holder's charity or the timing when the food holder thinks there will be more food. Chances are the food holder will only give you at most a portion of his food for gold, and more likely then not, he or she will want all your gold for an amount of food that will most likely not sustain you. You can substitute anything that has a myth of value for the word gold here, such as jewels, platinum, stocks, bonds, money and even mansions. Let me explain. During the Bataan Death March wealthy people signed over mansions for food only to die anyway. Suddenly faced with dying their mansions weren't that valuable anymore. Back to my point, things only have value relative to their worth during a given circumstance. It is an illusion to thing otherwise. So I am going to ask you, why do you think gold is any different than paper money? When you ask your self this question I want you to remember how real estate was discussed at the beginning of this post?

Paper money is the truest form of exchange under trading goods themselves for goods, or at least it should be. It truly has no value on its own. The value of paper money is in the exchange of goods. For example, socks are worth a buck a pair, let's say, and shoes are worth 10 bucks. You can also say shoes are worth 10 pairs of socks. Money is just a medium of exchange. If you put gold into the equation things get more complicated. Let's say that you purchase wool and knitting needles with 2 bit of gold and you make ten socks. You go to buy shoes but the person isn't willing to sell you his shoes for your 10 socks. He wants gold. He says you have to have ten bits of gold first. So you have to go to someone who has gold to buy gold but the only gold in this economy is the gold you first used to purchase your wool and needles that you used to make socks. You go to him and he wants three pairs of socks for the one bit of gold, because he wants to rent shoes from the guy with the shoes when he goes outside and renting shoes only costs one bit of gold and he plans to go out twice. Now, think of this simple example on a Macro level.

Why is gold valuable? One reason is that it is not a common metal found in abundant quantity. It is scarce compared to the demand for it. Just imagine how valuable gold would be if it was the medium of exchange for the world's economy. Very few people would be capable of possessing it. All the gold in the world would not equal all of the active money being handed over for goods in a single day in the current size of our world's economy. It doesn't take a genius to realize that gold simply doesn't work in a modern economy as it didn't work in my example about the socks.

There is another factor, perhaps an even more important one about how money works in our economy that makes using gold not beneficial to the ordinary citizen. The factor is how ordinary people and businesses create added value goods. Money is created in an economy by adding value. For example, clay has little value alone. You or I, if we know where to look for it, can probably get clay for free. However, you take that clay, shape it, glaze it and fire it and it becomes a useable bowl. This is something that has value to a lot of people. Let's say that those people specialize in making spoons, or soup or something else. Let's say you have made more bowls than you need and you want to explore the idea of not using your hands to eat soup out of your bowls. You are willing to exchange a bowl that you made to a person who has made spoons in excess of what they need. You come to an agreement that the bowl is worth four spoons. The value of the clay, plus your know-how and labor now has a measurable value in spoons. Spoons, in this example, become the de facto currency since compared to other goods spoons have a traded value when it comes to bowls. Bowls have an exchange value measured in spoons, thereby creating the "spoon" standard much like the so called "gold" standard. Substitute currency for spoons and now the bowl has an added value over clay of some figure of money. You, the lowly bowl maker has just created money in an economy over the value of nearly valueless clay. This happens almost every time goods or services are exchanged in our economy.

I know it is hard to believe, but you can replace the word "profit" quite comfortably with the words "value added" without messing up the meaning too badly. You purchase bowls in bulk that are priced at a value added over clay, and you sell the bowls in smaller quantities in a nice display at your retail establishment at an added value over bowls purchased in bulk. Every step of the way creates money. In order to deal with the ever-expanding value of raw materials being turned into value added goods you need something that will grow with it, and gold can't do that. In order for gold to keep up with this enormous engine of economies creating money, mining of gold would have to be on a level comparable to how we mine for coal or drill for oil. Gold, like oil and coal is a finite commodity. We probably in a year or two after switching to a gold standard would begin talking about peak gold.

Currency, however, doesn't have these problems. It is just a medium of exchange. The value of goods and services should not be based on the currency, but the value of your goods or services against all goods and services. What makes the value of money go up or down isn't a factor of the money itself, but its supply in the economy. In order for money to not go up or down in value is how close the government agency hits the mark of how much money was created during a particular period. In the United States the agency in charge with matching the production of money so as not to create inflation or deflation is the Federal Reserve.

Our reserve bank tries to keep the amount of money in our economy at the level of the economies creation of money. This is a bit of guesswork and is not an exact science. If they project too low then the value of currency will increase and you have deflation, if they put too much money into the economy the value of currency will decrease and you have inflation. The Federal Reserve adds or detracts money from the economy by printing money and lending it to the banks that circulate it into our economy in the form of loans. If interest rates are high, fewer people get loans and the money supply in the economy drops, if interest rates are low, loans are more affordable and many more people barrow money and increase the money supply.

The Federal Reserve is not a private institution; it is, however, an independent institution wholly owned by the Federal Government and the therefore owned by the citizens of this country. It is independent to free it from politics so that it may concentrate on its mandates. It has two mandates, the first is to keep inflation under control and the second is to keep unemployment low. It makes a profit over its expenses and hands its profits to the US Treasury. This is apposed to the Federal Reserve banks that distribute the money from the Federal Reserve. They own unsalable "shares" in the Federal Reserve, which entitles them to 6% of the Fed's earnings. The Fed and the Federal Reserve Banks make up the entirety of the Federal Reserve system. The Federal Reserve system is necessary because we industrious Americans keep taking things that are worth nothing or of little value and making them more valuable, (i.e. making clay into bowls). We create money in our economy and so the money supply has to increase with that. The Federal Reserve controls interest rates at the bank level by the interest rates it is willing to lend to banks. (Oh, so that is why they report the Federal Reserves interest rates so much on the news.) The interest rates asked for by the Fed are directly linked to two things, the cost of borrowing and the rate of inflation; however, inflation has other factors affecting it as well. Remember that when interest rates are high people and businesses tend to barrow less. This dampens economic growth, but maybe necessary to slow down inflation. If it makes interest rates low then businesses and people tend to barrow more and grow their businesses and employ more people. However, more money flowing to people and businesses tends to increase demand and that causes inflation. Remember the example of the cost of real estate? Banks made credit to people wanting to buy houses really easy and it inflated the prices of homes? Low interest mortgage loans that were too easy to get by nearly everyone, caused housing prices to go up and up, in other words, caused there to be inflation in the housing market. This can happen with an entire economy such as one the size of the United States as well.

Gold doesn't have the capacity to do anything that the Federal Reserve Bank can do to regulate inflation or deflation. Gold doesn't allow money supply to keep up with money creation, which is what happens in a sound economy. Gold is a limited supply commodity that is finite. All the mined gold in the world today would fill up a little over two Olympic sized swimming pools. It won't reach to cover the entirety of the United State's economy and there ain't a prayer that it will cover the worlds economy.

Moving to the gold standard would probably cause a supreme amount of deflation.

Deflation has economic problems that can be just as bad as inflation. If we tried to use gold as our currency, we would have massive deflation. Massive deflation leads to money hording rather than investing and banks can't lend because the value of things are going down. Deflation is mostly associated with depressions.

Just like what happened in the housing market and the supposed incorruptibility of the value of real estate, we have been manipulated in believing the value of certain things such as gold don't go down only to have them change in value dramatically. If you can't remember back 14 or 15 years ago to the end of the 1990s let me remind you, gold had gone down in value to a 22 year low. That means that those who had purchased gold close to their retirement as a sure bet in the late 1970s, for the intervening 22 years of their life, they would have seen their savings drop by 69%. If someone had saved 100 thousand dollars and purchased gold with it in the late 1970s, at the end of the 22 years, provided that they hadn't touched it for living expenses, they would have had only gold worth $31,000 by the end of the 1990s. If they would have kept their money as cash in a bank, they would have been far ahead even while earning relatively low interest on their deposit. I am sure with every drop in the price of gold during those 22 years; investors were told that gold had enduring value, that you can't beat gold as an investment, etc. etc. But the reality was that gold went from a high of over $800 per ounce around 1980 to a low of somewhere around $250 in 1998 and stayed there until 2001. That drop in value would have given us an inflation rate of over 14% a year for 22 years on average. The truth of the matter is that most of that 69% drop occurred in the first 5 years. Most average citizens would have experienced an inflation rate of 50% or more per year. 50% inflation for half a decade would have been devastating to our economy. Given this historical reality anyone can understand why gold doesn't work as a currency anymore.

If we truly are thinking of social and economic justice then think of this. One percent of the wealth of the United States is controlled by 1% of the population. Murphy's golden rule: whoever has the gold makes the rules.

During deep recessions there isn't a lot of economic activity so interest rates come down to encourage companies to barrow and pump that money into the economy. That part of our economy is not working the way it should work. Businesses are holding huge amounts of cash on the sidelines. They don't even need to barrow to do what they may want to do. Growth has stopped and many businesses have gone out of business. Ordinary citizens have gone bankrupt or had their homes foreclosed on or are upside down on their mortgages. The housing market, which would normally be the leader out of a recession, is still in very bad shape with trillions of loaned dollars still at very high risk.

How did we get in this mess? We repealed a very important law called Glass-Steagall. Glass-Steagall prohibited investment houses from entering into the mainline banking business of lending to homeowners and small businesses traditional loans. Allowing investment houses, now often referred to as investment banks, into traditional banking is what created the mortgage crisis and destroyed our economy. It is Wall Street for the last decade and the Republican controlled congress of the Clinton era and not the Federal Reserve that screwed things up.

In conclusion gold simply isn't a good investment right now since it is at economic bubble values, gold won't hold its value over time because investors will abandon it so that they can use the cash from its sale to invest in something else that will be growing in value or is proclaimed to have the ability to retain its value over currency, also, gold won't be a good substitute for US currency because there just isn't enough of it around to make it a practical currency. In order for our economy to work we need a money supply that can grow with the creation of money that happens naturally in a healthy economy. Currency that has no real commodity value such as paper and coin money is an ideal medium of exchange as long as the supply is controlled in the economy the way the Federal Reserve controls the entrance of money into our economy. We as a nation could reduce the swings of inflation and deflation of our currency by instead of only backing the US currency with the full faith and credit of the US government, we instead index the value of the US dollar to the cost of goods commonly traded between countries. This would enhance the dollar as "the" exchange currency by having the US government promise to exchange the US currency with supplies of goods on the index. This would make the Federal Reserve's job a lot easier since heavy swings of inflation and deflation would largely be non-existent. The Federal Reserve would only have to get close to what the money supply should be for that time period, but the index value would be the ultimate arbiter of the value of the currency. In other words sell your gold and invest in yourself and in things with which you have experience.

Gold | 54 comments (54 topical, 0 editorial, 0 hidden)

Re: Gold (none / 0)

In order for our economy to work we need a money supply that can grow with the creation of money that happens naturally in a healthy economy.

No we don't.

"Money supply" is a will-o-the-wisp that lacks any meaning which is both well-defined and interesting.

Cash flows are the dog. Money supply is the tail. You should never allow the tail to wag the dog.

Currency that has no real commodity value such as paper and coin money is an ideal medium of exchange

But the medium-of-exchange function is only one of the three major functions of currency, and not the most important one.

We as a nation could reduce the swings of inflation and deflation of our currency by instead of only backing the US currency with the full faith and credit of the US government, we instead index the value of the US dollar to the cost of goods commonly traded between countries.

No you can't. Commodity pegs are deflationary. Doesn't matter whether the commodity is gold or a trade-weighted basket of imports.

This would enhance the dollar as "the" exchange currency

The dollar's role as reserve currency arises from the US' hegemonic position in the international trade and tribute system, not from any particular idiosyncrasy of American monetary policy.

The Federal Reserve would only have to get close to what the money supply should be for that time period, but the index value would be the ultimate arbiter of the value of the currency.

This approach to central banking was abandoned for very good reasons.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 30th, 2013 at 04:56:51 PM EST

Re: Gold (none / 0)

Why don't you argue fully each point. You didn't offer any explanation about what you are saying and it is unclear what you mean many most of the time.

But the medium-of-exchange function is only one of the three major functions of currency, and not the most important one.

What are the other two and why isn't it the most important.

This approach to central banking was abandoned for very good reasons.

??? When was this ever tried?

"Money supply" is a will-o-the-wisp that lacks any meaning which is both well-defined and interesting. Cash flows are the dog. Money supply is the tail. You should never allow the tail to wag the dog.

??? Meow?

by joelado on Tue Apr 30th, 2013 at 07:33:43 PM EST
[ Parent ]

Re: Gold (4.00 / 3)

joelado:

But the medium-of-exchange function is only one of the three major functions of currency, and not the most important one.
What are the other two and why isn't it the most important.

Money - Wikipedia, the free encyclopedia

In the past, money was generally considered to have the following four main functions, which are summed up in a rhyme found in older economics textbooks: "Money is a matter of functions four, a medium, a measure, a standard, a store." That is, money functions as a medium of exchange, a unit of account, a standard of deferred payment, and a store of value.^[5] However, modern textbooks now list only three functions, that of medium of exchange, unit of account, and store of value, not considering a standard of deferred payment as a distinguished function, but rather subsuming it in the others.^[4]^[20]^[21]

Each function is also described in greater detail on that page. Personally, I like the rhyme.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Wed May 1st, 2013 at 05:17:36 AM EST
[ Parent ]

Re: Gold (none / 1)

Yes, but money isn't these things in series it is all of these things at the same time and none of these is more important than the other since they are inseparable when attached to money. This explanation actually defies the concept of inflation and deflation. Money can't be a store if it deflates in relation to the value of it against goods. This little saying is a description of the ideal of money, which is exactly what my solution is speaking to when I talk about it being indexed. In my approach indexing happens only once at a specific point in time. After that the value of money can only change as items on the index change as there perceived value to other goods on the index change. Since the value of goods generally don't change dramatically in relation to each other without some balancing the value of the indexed money will remain somewhere in the middle between the values of the goods.

Take a lesson from this. In periods of hyper-inflation people change their money into goods as fast as they can in order to not get stuck with money that looses its buying power over time. Real money shouldn't do this. However, governments on occasion massively overproduce money with no regard to how much money is being created in the economy. With such a massive amount of money available there is too much money chasing too few goods. The only way to stop this spiral is to starve the economy of money by ratcheting up interest rates to a rate that it literally breaks the back of inflation. Hyper-producing money, even indexed money like I am envisioning will do the same thing to it as has happened in the Brazil, Argentina and the Wiemar Republic. Matching supply with creation is still necessary. With stable currency you get all the rest of the functions. Only with stability will money be a store of value. If you sell an orange today you will want to be able to purchase an orange tomorrow with that money. Something that doesn't happen with hyper-inflation. Because of stability of value and that it holds its value you can use it as a standard or more universal medium of exchange and because the money maintains its value over time, at the end of the year you can take an accounting of it rather than having to convert it into goods and using an inventory to determine its value.

I have to say your reply was very good. You are a student of economics. That is great. Keep learning, but don't be afraid to explore it until you get a full understanding of it. With understanding is when you learn the most.

by joelado on Wed May 1st, 2013 at 11:17:20 PM EST
[ Parent ]

Re: Gold (none / 0)

joelado:

The only way to stop this spiral is to starve the economy of money by ratcheting up interest rates to a rate that it literally breaks the back of inflation.

excuse my ignorance, but apart from the obvious one of attracting people to save more, (lowering churn, and thereby having less dollars chasing goods), what other effects does raising interest rates have?

less venture capital looking for startups, as people are happy to just let their money quietly accumulate rather than take risks?

less consumption as people salt their money into savings accounts rather than spend it in the shops?

leading to more creative destruction as businesses that don't thrive go under and stop wasting retail space unproductively?

my german friend says people are spending more in germany now, because after the cyprus bail-in, people trust bank savings accounts less. is this intentional, do you think?

nice to see you writing about economics here as well as electric transport, Joe!

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu May 2nd, 2013 at 05:05:03 AM EST
[ Parent ]

Re: Gold (none / 0)

hey, i reread your diary better and see that you already answered some of my questions, thanks for an interesting piece.

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty

by melo (melometa4(at)gmail.com) on Thu May 2nd, 2013 at 05:17:52 AM EST
[ Parent ]

Re: Gold (4.00 / 2)

Yes, but money isn't these things in series it is all of these things at the same time and none of these is more important than the other since they are inseparable when attached to money.

Not so. The unit of account function clearly takes precedence and is the source of the other two.

The probably best known illustration of this fact being the Confederate greenbacks - they were a medium of exchange and a store of value right up until they ceased being a unit of account for the Confed gov't (on account of the Confed gov't ceasing to exist). Then, overnight, they were not.

By contrast, even during the most extreme hyperinflationary episodes, when the currency has lost all ability to act as a store of value, it remains the unit of account. Which causes it to remain a medium of exchange. On the opposite end of the spectrum, the IMF's Special Drawing Rights serve as store of value and unit of account, but not as medium of exchange - all they do is sit in various central banks' strategic currency reserves.

Bitcoin is a well-known example of an attempt to create a currency which functions as medium of exchange and store of value without functioning as a unit of account. This is a very large part of the difficulties Bitcoin has experienced in becoming anything more than a way to make wire transfers without being oppressed by all the tyrannical laws against money laundering.

Money can't be a store if it deflates in relation to the value of it against goods.

Likewise false: Nobody promised you a risk-free, tax-free, costless store of value. Well, maybe somebody did, but if so they're selling you a bill of goods, and you need to back away slowly and avoid eye contact.

Money does not have to be a perfect store of value, it just has to not be so much worse than the best readily available alternative as to induce you to store your operating capital in something more bothersome than the coin of the realm.

In my approach indexing happens only once at a specific point in time. After that the value of money can only change as items on the index change as there perceived value to other goods on the index change.

This is a commodity basket peg.

Please present at least a handful of historical examples of commodity pegs (basket or otherwise) which did not fail messily.

Since the value of goods generally don't change dramatically in relation to each other without some balancing the value of the indexed money will remain somewhere in the middle between the values of the goods.

And that is A Bad Thing.

A stable financial system requires 7-8 % nominal annual growth. And a sustainable mature industrial system can deliver on the order of 0-1 % real growth.

If you want both your financial system and your industrial system to function at the same time (and you generally do), then that gap has to be bridged.

Being unable to devalue or reflate the currency in response to a serious industrial depression is Unhelpful.

Take a lesson from this. In periods of hyper-inflation people change their money into goods as fast as they can in order to not get stuck with money that looses its buying power over time. Real money shouldn't do this.

Actually, that's a feature, not a bug.

Hyperinflation only happens when you have a substantial foreign deficit, import dependence on important goods, and suddenly lose access to the international credit markets.

When that happens, you have two options: Hyperinflation or Austerity.

Austerity is always the wrong policy. Always and everywhere. Even when the alternative is hyperinflation.

However, governments on occasion massively overproduce money with no regard to how much money is being created in the economy. With such a massive amount of money available there is too much money chasing too few goods.

Cute just-so story. Any historical examples of this actually happening?

Hyper-producing money, even indexed money like I am envisioning will do the same thing to it as has happened in the Brazil, Argentina and the Wiemar Republic.

Except that none of those examples are in any way, shape or form related to the just-so story you just told.

The Brazilian hyperinflation was the classic story of import dependence (petroleum), impaired foreign account (due to the second oil crisis and aforementioned petroleum import dependency) and sudden loss of access to the international credit market (due to the '82 Mexican default).

Argentina was a perfectly standard failure of a pegged currency, and resulting abrupt change in the terms of trade (which isn't even properly speaking inflation in the first place). It takes some not negligible chutzpah to cite the Argentinian experience in support of currency pegs.

Wiemar was another standard import dependence (petroleum, rubber, cotton), impaired foreign balance (Versailles debts, French occupation of Rhein-Ruhr) and loss of access to international credit markets (occupation of Rhein-Ruhr, '20-21 depression).

With stable currency you get all the rest of the functions.

No, with stability of the purchasing power of the currency you encourage hoarding of the currency, which is destabilizing to the payment system.

Only with stability will money be a store of value. If you sell an orange today you will want to be able to purchase an orange tomorrow with that money.

Nobody can promise you that you can buy an orange with that money tomorrow, because nobody can promise you that there will be oranges to buy tomorrow.

People who promise you a riskless and costless store of value are selling you a bill of goods: The future is fundamentally uncertain, and people who wish to store value for the uncertain future must therefore be prepared to pay a premium for that extraordinary privilege.

Because of stability of value and that it holds its value you can use it as a standard or more universal medium of exchange

This is a fairie tale version of history.

In the version of history in which the rest of us live, people began using the unit of account which was invented to account for deferred payment of taxes and export goods as a store of value by pre-paying taxes, and as a medium of exchange by using the standard deferred payment contracts to purchase goods for other than export purposes.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 2nd, 2013 at 07:56:58 PM EST
[ Parent ]

Re: Gold (none / 0)

Why don't you argue fully each point.

Because the full argument would take most of a diary per point. Diaries which have already been written, here and elsewhere.

More effective to unpackage them if and when they cause objection.

This approach to central banking was abandoned for very good reasons.

??? When was this ever tried?

Quantity targeting was one of Friedman's pet theories, and Volker tried to do it for some years during the '70s, until finally realizing that it is unworkable on several levels.

"Money supply" is a will-o-the-wisp that lacks any meaning which is both well-defined and interesting. Cash flows are the dog. Money supply is the tail. You should never allow the tail to wag the dog.

??? Meow?

Try defining money supply.

Then take a look at your bank statement for the last month/quarter/year/whatever.

According to your definition of "money" from before, how much money did you spend over the last month?

Clearly, money is not only cash and central bank reserves, even though these are the only legal tender: The "money supply," to be a meaningful element of economic analysis must include at least all demand deposits at legally run financial institutions.

But if you include demand deposits, why not also include time deposits? By what logic are the two distinct? Why exclude treasury bonds? Why, indeed, exclude any financial instrument acceptable as collateral against loans from respectable high street banks?

There's no solid reasoning by which one can draw a line in the sand, point to one side and say "here are all the financial instruments which are called 'money,'" and point to the other side and say "and here are those financial instruments which are not considered 'money.'"

The statement that a particular instrument is or is not 'money' is a statement of similar character to the statement that Queen Victoria was a better queen than Queen Elisabeth: A statement not without meaning and not without interest, but fundamentally not amenable to quantitative analysis. And therefore not amenable to non-discretionary policy rules.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu May 2nd, 2013 at 07:06:29 PM EST
[ Parent ]

Re: Gold (none / 0)

Interest paid on loans can't be called money value added growth of the money supply because it is being paid from a residual growth in the money supply elsewhere to pay off the loan and its interest. Interest acts like a tax in this case. However, the ability to sell money for an interest payment is a very important tool/lever to the creation of money in the real economy. There is a way to measure the real growth of money when adding value to goods. It is much harder to map out the creation of money when looking at services. It is difficult to look at what is being taught today as economics since it moves away from classical economics. This is why I am such a follower of Paul Krugman. Most of the time he doesn't stray away from the fundamentals of economics. The standard assumptions we are taught in economics in our econ 101 don't loosen their hold as we go on to study economics further. They are there and ever present. Yes, there are other variables that add to the complexity of understanding the problems fully, but forensically, when you dig down to the root cause of an economic crisis, you will always find the fundamentals staring back at you. Hyperinflation may have multiple triggers but when you look at them closely the underlying motivating factors are classic in nature. Too much money for too few goods. Try holding an auction with a group of people who are not working together where no one has more than $100 to bid and start the bidding at $101 for an item. Think about it. Now introduce an item of value and have no reserve into that same auction. See how many people will participate in bidding. With no reserve the beginning value is in essence as low as one cent. If there are no other goods to be sold that day and the object up for auction is of value but lets say the perceived value outside the auction would be around $60 and that the value of the $100 would become $50 the following day at the auction, what do you think would happen? You can talk about all sorts of things having to do with money and the value of goods but the fundamentals will always apply. It is the very essence of properly understood economics. Stop learning you lessons as merely memorization. You have to internalize your understanding of the economic principles. You have to understand the meaning and to be able to see through your understanding when these things reoccur. Your head has been spun around to the point where you don't believe what you know and can see. I am sure for a better grade, but your economic education is lost on you if you can't dismantle what you are being told apply your understanding of what you have learned and come to either an agreement or disagreement to what is being communicated. Sometimes the fundamental assumptions are too simplistic to describe a situation fully, but it doesn't mean they aren't there.

by joelado on Thu May 2nd, 2013 at 10:51:29 PM EST
[ Parent ]

Re: Gold (none / 0)

My posts are not for people who think they know economics beyond the understanding of most people. My posts are economic lessons for people who may think they do not understand economics. My hope is by going through the logical steps people can understand better those things in their experience of the economy. People are seeing a run up in the price of gold. Why is this happening? Gold is a limited resource and because of fears of inflation, there money not being able to purchase as much in the future, people are looking for ways to maintain the buying power of their savings and gold is where people run to when there is a fear of inflation. However, too many people going after a limited quantity of gold pushes the price of gold up. What happens to gold if the fears of inflation are not realized? What happens to gold if the economy improves? What happens when Cyprus sells off its gold reserves to payoff its national debt? These are things people who are being told to buy gold need to understand. I am not a gold hater any more than I was a .com hater or a housing hater or a tulip hater when those were run up. What I am a hater of is for ordinary people with limited understanding of the realities of the market get caught up in investing their hard earned money into things that will suddenly change. Gold, when the economy recovers, will loose its luster. True investors who bought early will get out of gold to participate in the greater economy that is sure to see greater growth from here on out for a while. Large investors may take a loss against golds current peak, but they will have ridden gold for a long time so their gains will still be there even if gold should loose a good portion of its value. The small, unsophisticated gold investor my have just entered the gold market and without the ability to sell quickly at the first sign that gold values are heading down, will take a bath. Inflation is in check. Housing is coming back. Manufacturing is up. Interest rates are low. For the small investor, it is time to get out of gold now. That is all I am saying. If this were the late 1990s I would probably be telling people to get in. But, getting in and getting out of gold requires one thing that gold not be money, because if it were there would be no need to get in or out.

by joelado on Thu May 2nd, 2013 at 11:15:47 PM EST
[ Parent ]

Re: Gold (4.00 / 3)

Well, gold standard is bad (except for gold mine owners) and I don't think you will find anyone here arguing otherwise. Gold speculation is gambling and as in poker, if you can't tell who the fish is, it is you.

The problem is that last part of your diary:

European Tribune - Gold

We as a nation could reduce the swings of inflation and deflation of our currency by instead of only backing the US currency with the full faith and credit of the US government, we instead index the value of the US dollar to the cost of goods commonly traded between countries. This would enhance the dollar as "the" exchange currency by having the US government promise to exchange the US currency with supplies of goods on the index. This would make the Federal Reserve's job a lot easier since heavy swings of inflation and deflation would largely be non-existent. The Federal Reserve would only have to get close to what the money supply should be for that time period, but the index value would be the ultimate arbiter of the value of the currency. In other words sell your gold and invest in yourself and in things with which you have experience.

Pegging the dollar to a bag of goods is a bad thing, just as pegging the dollar to gold is a bad thing.

Lets take your orange example. Say that the amount of oranges goes down (for some reason, perhaps related to global warming or pesticides). This means that orange consumption must go down. So who will not get any oranges?

If your priority is low inflation, keeping the value of the currency, those that already has money are to get oranges. Thus those who has not money stored must be denied new money, which means decreasing wages. But since wages are sticky in practise it means unemployment. And decreasing wages and unemployment means decreasing purchasing power, so companies that serve those workers goes bankrupt, sending their workers into unemployment, and so on. This is the austerity road.

The other option is to let oranges increase in price, in effect inflation. If the workers are sufficiently well organised to get corresponding wage increases this means that those who held money get fewer oranges, if they are not it means decreasing real wages and fewer oranges for the workers.

The advantage with inflation over unemployment is that it keeps everybody in production, churning out real goods and services. And as you note, that is what ultimately gives money value.

I should note that a third option is the oranges are crucial to the well-being of the population (avoiding scurvy for example) is to share the oranges. Everybody gets one half except sailors that get a whole. This means state controlled rationing.

While practising austerity can be observed in southern Europe right now, the inflation and rationing responses I wrote about here:

European Tribune - What happens during real resource austerity?

Faced with real resource austerity Sweden (and probably Switzerland) increased labour in production, reducing unemployment while production shrinked. Inflation was high during the transition phase. This was of course a political choice, one made easier by the rise of the labour movement and a war going on just outside the border.

Sweden and Switzerland both had 27-28% inflation in 1939. Note that this did not set off any inflation spiral into hyperinflation.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri May 3rd, 2013 at 03:31:34 AM EST
[ Parent ]

Re: Gold (4.00 / 2)

Sweden and Switzerland both had 27-28% inflation in 1939. Note that this did not set off any inflation spiral into hyperinflation.

Because hyperinflation requires substantial debt denominated in foreign currency or indexed debt (such as, for instance, debt indexed to a basket of goods which is what all debt would look like if joelado's proposals about currency were adopted).

The Euro will ~~outlive~~bury us all --- Jean-Claude Juncker

by Carrie (migeru at eurotrib dot com) on Sat May 4th, 2013 at 11:17:02 AM EST
[ Parent ]

Re: Gold (none / 0)

My posts are economic lessons for people who may think they do not understand economics.

This does not excuse you from engaging with people who do know economics when they challenge your pernicious policy recommendations.

People are seeing a run up in the price of gold. Why is this happening?

Animal spirits? Inflation hedge? And why should anyone care?

Gold is a limited resource and because of fears of inflation, there money not being able to purchase as much in the future, people are looking for ways to maintain the buying power of their savings and gold is where people run to when there is a fear of inflation.

Is this a conclusion you have come to after studying this particular market for some time? Or are you simply telling a just-so story to illustrate a textbook point?

In the latter case, please stop making shit up.

Latching on to a current price trend in some market to illustrate a "stylized fact" of economics, without having researched the actual history of the trend in question is fundamentally dishonest. Worse, it teaches your students that empirical reality exists merely to illustrate the conclusions of theory, rather than as the final arbiter of acceptability of a theory.

It is a chronic problem with a certain strain of economists that they seem to think that it's OK to make shit up about data as long as the data is in the headlines and the shit made up conforms to their pet theory. It's not, and if we ever want the economics profession to be more than a particularly harmful species of quackery - right down there with homeopathy, applied kinesiology and crystal healing in scientific rigor - then economists need to grow the fuck up and stop doing it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 4th, 2013 at 11:03:40 AM EST
[ Parent ]

Re: Gold (none / 1)

Interest paid on loans can't be called money value added growth of the money supply because it is being paid from a residual growth in the money supply elsewhere to pay off the loan and its interest.

You haven't gotten to the point where you can discuss growth in the "money supply" yet: You don't get to skip over providing a rigorous, quantitatively precise and policy-relevant definition of the "money supply."

If you want to make non-discretionary policy rules about the "money supply," then you need to define the "money supply" in a quantitatively precise and policy-relevant way.

Which you haven't and you can't.

There is a way to measure the real growth of money when adding value to goods.

Then please explain it.

The standard assumptions we are taught in economics in our econ 101 don't loosen their hold as we go on to study economics further.

No, they were just always bullshit, and all further studies built on top of them likewise relate to reality only by coincidence.

Hyperinflation may have multiple triggers but when you look at them closely the underlying motivating factors are classic in nature. Too much money for too few goods.

That is just simply not true. Hyperinflation is an exchange rate phenomenon - it has nothing at all to do with your mythical "money supply."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 4th, 2013 at 10:47:17 AM EST
[ Parent ]

Re: Gold (none / 0)

There's no solid reasoning by which one can draw a line in the sand, point to one side and say "here are all the financial instruments which are called 'money,'" and point to the other side and say "and here are those financial instruments which are not considered 'money.'"

Economists (even neoclassicals) talk about "near moneys", "inside money", etc... It's just that the concepts of monetary economics have not been integrated with either macroeconomic or microeconomic models.

See IMF's epic plan to conjure away debt and dethrone bankers (Ambrose Evans-Pritchard, 21 October 2012). Also Minsky and the Narrow Banking Proposal (Levy Institute Policy Brief 125, August 2012)

The real challenge for financial reform is to develop a vision for a financial structure that would simplify the system and the activities of financial institutions so that they can be regulated and supervised effectively. Some paths to such simplification, however, are not worth treading. Against the backdrop of renewed present-day interest in the Depression-era "Chicago Plan," featuring 100 percent reserve backing for deposits, Senior Scholar Jan Kregel turns to Hyman Minsky's consideration of a similar "narrow banking" proposal in the mid-1990s. For reasons that eventually led Minsky himself to abandon the proposal, as well as reasons developed here by Kregel that have even more pressing relevance in today's political climate, plans for a narrow banking system are found wanting.

The Euro will ~~outlive~~bury us all --- Jean-Claude Juncker

by Carrie (migeru at eurotrib dot com) on Fri May 3rd, 2013 at 04:07:09 AM EST
[ Parent ]

Re: Gold (none / 0)

Economists (even neoclassicals) talk about "near moneys", "inside money", etc... It's just that the concepts of monetary economics have not been integrated with either macroeconomic or microeconomic models.

But that does not mean that you can quantify them in a manner that makes them amenable to quantitative analysis.

Which you need to, if you are going to make non-discretionary policy rules.

You can do that with interest rates (more or less), but not with the "money supply." Recall the discussion of whether €Z tsys are or are not part of the €Z money supply. (Summary for those who didn't follow that discussion: They are as long as the ECBuBa keeps accepting them as collateral against the overdraft facility.)

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 4th, 2013 at 11:32:30 AM EST
[ Parent ]

Re: Gold (4.00 / 3)

Good article, I can see it correctly addresses some points of interest in the US "policy" debate (such as whether the Fed is a "private bank"). I would only quibble with

We as a nation could reduce the swings of inflation and deflation of our currency by instead of only backing the US currency with the full faith and credit of the US government, we instead index the value of the US dollar to the cost of goods commonly traded between countries. This would enhance the dollar as "the" exchange currency by having the US government promise to exchange the US currency with supplies of goods on the index.

but I see JakeS has already addressed that. As you say

Moving to the gold standard would probably cause a supreme amount of deflation.

And as Jake says, any commodity standard is just as deflationary (en energy or entropy standard would, too, much to the chagrin of physics/engineering types like us).

What you need for macroeconomic stabilization is some form of Abba Lerner's "functional finance", that is, the ability to spend fiat money into the economy in amounts sufficient to mobilize idle resources (idle workers, idle machines, idle land) when the economy is functioning far from full employment. Idle money doesn't need to be mobilised (say, through lowering interest rates, or raising inflation expectations). It needs to be made redundant by the issue of fresh money to mobilize real resources. Any inflationary excess can be taxed later (as inflation can only set at near full employment --- hyperinflation is another matter having to do with foreign-denominated debt which neither the US nor the Eurozone suffer from).

The Euro will ~~outlive~~bury us all --- Jean-Claude Juncker

by Carrie (migeru at eurotrib dot com) on Fri May 3rd, 2013 at 04:48:26 AM EST

Re: Energy Standard (none / 0)

Sorry Migeru, but a standard unit of energy is the only absolute there is.

Do not confuse an energy standard unit of measure or numeraire with an energy currency.

There are several quite disparate - but related - possible types of energy currency possible where deflation and entropy may be issues.

An energy standard unit of measure for value is entirely different from the energy-based, land-based and deficit (fiat) based currencies, and every other form of value, which may be priced against that value standard.

A metre or kilogramme - which are also standard units of measure - are stable, and so is a standard unit of energy as a unit of measure for value.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Fri May 3rd, 2013 at 02:16:07 PM EST
[ Parent ]

Re: Energy Standard (none / 1)

You mean that I can have a contract in a 1 Joule denomination that has no connection with being redeemable for 1 Joule of actual energy?

Then what is the point? It's the same as having a fiat currency of 1 ounce gold denomination. The denomination is just cute or atavistic. It's no more a gold currency than the above example is an energy currency.

And if the energy currency is redeemable, it's deflationary.

The Euro will ~~outlive~~bury us all --- Jean-Claude Juncker

by Carrie (migeru at eurotrib dot com) on Fri May 3rd, 2013 at 06:39:04 PM EST
[ Parent ]

Re: Energy Standard (none / 1)

Actually the only useful kind of money is the kind where perceived value is tied directly, in an obvious way, to productive activity.

Current ideas about money all assume money is essentially a thing - even if it's an abstract one.

It would be far more useful to consider money as a set of political relationships, and as a process by which the health (or not) of those relationships could be quantified.

This would be the exact opposite of the current system, where the least healthy and most dysfunctional relationships and social processes create the most (supposed...) money, and where there's a bizarre atavistic pull towards reinstating absolute value units based on physical objects as a failed attempt to remedy this.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Fri May 3rd, 2013 at 07:37:09 PM EST
[ Parent ]

Re: Energy Standard (none / 1)

And what has happened with our money over the last 40 years is that its purchasing power has seriously declined, almost in inverse proportion to the asset inflation that has been encouraged by monetary authorities - even while wages have at best held steady and for most have declined in terms of purchasing the necessary basket of goods and services required to be a presentable member of society. This has been mediated by the creation of vast financial 'wealth', much of which is far more of a liability than an asset, especially considering that the liabilities, when something goes wrong with part of the $700 trillion in derivatives, are visited upon the non-participating, the bottom 97% of society, so that the participants can continue to maintain that the 'wealth' they 'created' is still real.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri May 3rd, 2013 at 07:52:34 PM EST
[ Parent ]

Re: Energy Standard (none / 0)

Everything is measurable by reference to an absolute unit of energy in a way that makes sense to individuals. naturally that unit must be relevant in scale: ie you do not measure a room in light years or angstrom units, so I think we will see a unit which is the energy equivalent of (say) 10 kilo watt hours; or maybe the energy equivalent of 1MMbtu.

Whatever works.

Unqualified Labour is energy: intellectual value of knowledge and knowhow enables us to put our manpower to best use over time.

The use of intellectual value (knowledge and knowhow) to save (carbon-based) energy will be one of the big trades of the 21st century.

Saving energy by 'least energy cost' use of space (or transcending space - eg ICT) is also inherently valuable. cf Kunstler's characterisation of suburbia as the greatest misallocation of resources in history.

Gold itself is just embedded energy, and as it gets scarcer more and more energy is expended to get at it: cf Bitcoins and of course emissions credits which - like gold and Bitcoins - monetise past energy use (of carbon post-combustion) rather than intrinsically valuable future use of carbon fuel.

What we are talking about here is simply keeping score in energy. That's what going on to an energy standard means.

And if you want to see the results of going onto an energy standard, Denmark - which has essentially mandated least carbon fuel input for given electricity, heat and power outputs - represents something of a work in progress.

I call the resilient decentralised outcome of 'least energy cost' policies a 'Natural Grid' - as opposed to the toxic outcomes of the least £ cost and least $ cost National Grids.

As for deflationary energy currency, yes and no. Currency based on finite energy resources like non-renewable carbon fuels would be deflationary, but currency based upon renewables will not IMHO be deflationary since they are based upon an abundant resource.

However, renewables are of course capable of being enclosed since the land/location from which they are sourced is rivalrous.

But the truly infinite - and non-rivalrous - value is the value of knowledge and knowhow.

There are other forms of value such as the value of communication (I recall reading that 10% of economic value generated - in dollar terms - in Bangladesh related to mobile telephony), care, kudos, sentimental value and so on.

Currency is not needed for the exchange on credit terms of 'people-based' value, and although a unit of account is necessary for exchanges of all of them, I think we will need to go beyond a unit of energy to measure some of them.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Mon May 6th, 2013 at 08:09:00 PM EST
[ Parent ]

Re: Gold (none / 0)

Quibble you may, however, the meaning of what I am trying to say in that paragraph seems not to have been transferred properly. There is no assumption that the price of goods is controlled with what I am calling an indexed currency. Remember the index is only done once to establish a baseline for the value of the currency. After that market forces rule on goods and services, but the value of the currency doesn't change. The best way to see this is to find items on the index that have not changed in price for some time after the indexing. By looking at these items you can determine whether there has been a fair rise or drop in the price of a good or service due to understandable market forces or is there unnatural market forces at work such as hording, price gouging, natural or man made disaster, weather factors, failure for production to match demand or over production, etc. So oranges can go up or down in value as markets and circumstances dictate. They will go up or down in price quite naturally without affecting the value of the "indexed currency." If oranges become too expensive, people will switch to some other fruit. Therefore, if the industry would want to maintain market share over apples, it may have to find a more efficient way to produce oranges over apples and reduce the cost to consumers in order to stay competitive.

The indexed currency will not be made up of one or two goods, such as being pegged to gold or oil, but thousands of goods and standardized services. The value of those goods and services can only go up and down based on their perceived value to other goods and services on the larger index and that particular good or services market condition. Market conditions being its supply; over, under or adequate, to the demand of that particular good or service. In this scenario money always returns to an equilibrium in macro while the price of individual goods and services reflect their natural value and supply.

If there is unemployment that means that demand for goods and services has dropped or companies have learned to do more work with less workers. If this drop in demand is because wages are not high enough to generate demand, then some sort of stimulus may be employed to create more employment. If wealth is accumulating in to too few hands, then greater taxes on the wealthy may be in order in order to pay for this stimulus. At no point does austerity come into the picture in this scenario. It frees governments to barrow when economic times have become hard for the citizenry and it allows it to develop stores of money during good economic times in preparation for economic change.

With money maintaining a center point of hard value while the price of goods and services goes up and down naturally, economies can return to the work of growing and expanding and exploring new products and services, without the fear that some arbitrary turn of events rendering all its citizens work and risk invalid.

A hard steady currency makes all things possible. It also allows for something that we haven't talked about here yet and that is to currency from circulation when value has been destroyed. The housing crisis in the US obliterated 13 trillion dollars of home value in the real marketplace. Prices of homes that were at the height of the bubble are in places 1/5th there value today. However, the value of the money still lives on in the form of loans. The loans are for what the houses used to be worth, but the value of the houses is far less than what is currently owed. The action of the central bank should be to pay off the loans and allow the home owner to refinance at the current value of the home. The Fed takes a loss on the loan to the home, but the banks to loose the real money they lent out and now are flush with cash to make more loans and that would be a stipulation of the Fed purchasing the loans is that the banks could not sit on the money but they must put that money back into the economy in terms of business loans. The Fed would then bring up interest rates to reflect the added supply of money being distributed though the purchase of these underwater loans and reducing any added money supply all in proportion.

by joelado on Sat May 4th, 2013 at 12:43:24 AM EST
[ Parent ]

Re: Gold (4.00 / 2)

Forget the oranges, it was a bad example. Say that you have a draught causing bad crops over all, a world-wide decline in extraction of a critical raw material that is used in most goods, a tsunami or earthquake that destroys your industrial heartlands or a blocade that limits access to world markets. You now have less goods over all.

You claim that the money will retain their value, but how will they do that? And how will that not be deflationary?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Sat May 4th, 2013 at 03:07:48 AM EST
[ Parent ]

Re: Gold (none / 0)

A world wide calamity to all goods would actually cause the indexed to show an inflation of the value of goods. However, it would be short lived. Businesses would recover and begin competing again to meet the unmet demand. A world wide calamity affecting all products is unlikely. Most likely a calamity would befall only a region at most. If it is a necessity like food, other producers would be able to provide the need. There would be upward pressure on prices of those goods taken out of production, but, again, after the crisis is over markets would return. While the crisis is going on, other goods and services, unaffected by the crisis would maintain their value. People can substitute goods as well, such as if the oranges are affected they can eat apples for a period of time. It can't solve all problems, but it can reduce the major affects of wild swings in the value of money. The thrust of the indexed currency is that goods are valued against each other for their value. If oil becomes more and more valuable against other goods the price of oil will go up, but it will go up in value in proportion to how other goods are perceived against oil.

by joelado on Sat May 4th, 2013 at 06:45:54 PM EST
[ Parent ]

Re: Gold (none / 1)

The 20th century called. It wanted to let you know that everything you just wrote is wrong.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 5th, 2013 at 03:55:30 AM EST
[ Parent ]

Re: Gold (none / 1)

Ok, I get how the index is intended to be composed, but that is not what I am after. Lets for arguments sake say that whatever calamity we are modelling here affects all items in the index equally so the composition is no longer an issue.

Btw, a calamity does not need to be world wide, as long as it has severe effects on the access to goods in the area using the currency. A blockade for example mainly affects the country in blockade. But nevermind that, a world-wide calamity has effects on all currency-areas so it is one example.

joelado:

A world wide calamity to all goods would actually cause the indexed to show an inflation of the value of goods.

I am unsure what you mean. Does the currency loose value in that less of the items in the index can be bought for the same amount of currency? If so, in what way is it pegged?

Or does it retain value in that the same amount of currency can buy the same amount of indexed goods? If so, how does the state withdraw enough money to keep the currency steady?

joelado:

However, it would be short lived. Businesses would recover and begin competing again to meet the unmet demand.

Not if the economy using the currency enters a deflationary spiral where it is better to sit on the money then to invest. And that happens when in a downturn the government drains the economy of currency (which means there are no buyers for products) in order to keep the value of the currency left in circulation (which means owners of money don't loose value by keeping their money). Then you get a lot of businesses scaling down and trying to keep as much cash as possible. And that is a problem for any economy where the state is focused on maintaining the value of the currency, for example because of a peg to an index.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Mon May 6th, 2013 at 02:46:01 PM EST
[ Parent ]

Re: Gold (none / 1)

The indexed currency will not be made up of one or two goods, such as being pegged to gold or oil, but thousands of goods and standardized services. The value of those goods and services can only go up and down based on their perceived value to other goods and services on the larger index and that particular good or services market condition. Market conditions being its supply; over, under or adequate, to the demand of that particular good or service. In this scenario money always returns to an equilibrium in macro while the price of individual goods and services reflect their natural value and supply.

So you're basically indexing money to the GDP deflator. And this is a good thing, exactly why?

The reason nominal money values matter more than real values is that legally enforceable contracts are denominated in money. And the reason contracts are denominated in money instead of in specie is that it protects the contracting parties from the vagaries of access to real assets.

And the reason why commodity pegs are deflationary is that occasionally there are more outstanding claims to the commodity than there is the commodity. And that is really bad. But that can never happen with fiat non-redeemable money because, you know, it's non-redeemable.

The Euro will ~~outlive~~bury us all --- Jean-Claude Juncker

by Carrie (migeru at eurotrib dot com) on Sat May 4th, 2013 at 11:13:46 AM EST
[ Parent ]

Re: Gold (none / 0)

The value of my so called indexed currency stays the same because it is based upon the value of goods as related to each other as well as the particular goods particular supply circumstance. The index currency is less vulnerable to overall inflationary pressure because of opportunity cost.If people go wild and inflate the price of oranges buy bidding up the price of oranges there will be an equal reduction of demand across the index balancing out the inflation of one of the indexed items with the drop in demand of the others. The entry of money into circulation is crucial. Too much money will be inflationary and to little money will cause deflation. However, since the money is valued at the price of all goods as related to each other the price of goods on the index tends to not go up relative to each other unless there is a significant change in their demand or supply. Since there is competition and persons willing to take risks to enter the marketplace with competing goods and services entry requires either greater efficiency by the new entrant or there being an expansion of demand that is unmet by existing firms. The items on the index that change the least on the index are the benchmarks of value to the rest of the goods on the index. If spoons cost a dollar and a quarter later they still cost a dollar, bowls should cost 10 spoons. If they don't you can legitimately ask why? If the increase or decrease has a real explanation, such as the bowl factories in a given region were destroyed by a volcano, well that is a good reason for there being fewer bowls and there hasn't been any change in demand. Bowls should cost more. However if one bowl manufacturer suddenly ratchets up the price of its bowls, one can wonder why? But the marketplace becomes the ultimate arbiter of the real value of the bowls. Consumers can switch to another bowl company. Money being hard and indexed means these valuations are possible. If the value of money is fluctuating against existing goods it would be hard to figure out if it was the bowls that were actually going up in value or was it the currency going down. Since the value of currency is based on a wide range of goods and that if anyone wished to bailout of the currency they could do so having their currency exchanged by the goods available as priced on the index, the question would be why would anyone want to bailout of the currency since its value in goods is guaranteed. In this way the index would act as a powerful force to maintain the full faith in the currency and therefore free it up to be used widely as a safe haven to store value or put in other words a hedge against inflation. Unlike gold the value of the currency is less affected by supply issues since a greater demand for the currency would be met with an equal increase in the supply of the currency to meet that demand without inflating or deflating it. There would have to be a lot of making sure that value of the currency stays steady.

by joelado on Sat May 4th, 2013 at 07:29:39 PM EST
[ Parent ]

Re: Gold (none / 0)

The index currency is less vulnerable to overall inflationary pressure because of opportunity cost.

Yes, imposing suboptimally low levels of inflation (or even outright deflation) is the purpose of basket pegs.

Everyone who is still reading along with you already knew that.

What you have signally failed is to provide any argument whatever for why having too low inflation is a good thing.

It looks as though you are attempting to create a currency which facilitates a particular form of intermediated barter. But industrial society does not work through intermediated barter. So if you want to persuade anybody who knows how industrial society actually works that your currency is a good idea, you have to argue both (a) that intermediated barter is a feasible way to organize society, and (b) that intermediated-barter societies are sufficiently better than industrial societies to justify the cost and risk of tearing down industrial civilization in order to conform to your model of intermediated barter.

Or you could just revise your model so that it conforms to the realities of industrial civilization, instead of trying to force-fit industrial civilization into a fantasy world of Benthamite utility-optimizing individuals.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 5th, 2013 at 04:06:32 AM EST
[ Parent ]

Re: Gold (none / 0)

The value of my so called indexed currency stays the same because it is based upon the value of goods as related to each other as well as the particular goods particular supply circumstance.

Because the mix of goods in the economy doesn't change through technological change, innovation or cultural change in consumption preferences.

Right.

The Euro will ~~outlive~~bury us all --- Jean-Claude Juncker

by Carrie (migeru at eurotrib dot com) on Sun May 5th, 2013 at 04:34:53 AM EST
[ Parent ]

Re: Gold (none / 1)

These iPad things are a fad. As long as the index takes account of buggywhips, we'll be fine.

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

by Drew J Jones (pedobear@pennstatefootball.com) on Thu May 9th, 2013 at 09:43:30 AM EST
[ Parent ]

Re: Gold (4.00 / 2)

Here's Keynes on your basket of goods and your index... or very similar ones to yours at any rate:

Thirdly, the well-known, but unavoidable, element of vagueness which admittedly attends the concept of the general price-level makes this term very unsatisfactory for the purposes of a causal analysis, which ought to be exact.
Nevertheless these difficulties are rightly regarded as 'conundrums'. They are 'purely theoretical' in the sense that they never perplex, or indeed enter in any way into, business decisions and have no relevance to the causal sequence of economic events, which are clear-cut and determinate in spite of the quantitative indeterminacy of these concepts. It is natural, therefore, to conclude that they not only lack precision but are unnecessary. Obviously our quantitative analysis must be expressed without using any quantitatively vague expressions. And, indeed, as soon as one makes the attempt, it becomes clear, as I hope to show, that one can get on much better without them.
The fact that two incommensurable collections of miscellaneous objects cannot in themselves provide the material for a quantitative analysis need not, of course, prevent us from making approximate statistical comparisons, depending on some broad element of judgment rather than of strict calculation, which may possess significance and validity within certain limits.
But the proper place for such things as net real output and the general level of prices lies within the field of historical and statistical description, and their purpose should be to satisfy historical or social curiosity, a purpose for which perfect precision¾such as our causal analysis requires, whether or not our knowledge of the actual values of the relevant quantities is complete or exact¾is neither usual nor necessary. To say that net output to-day is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement that Queen Victoria was a better queen but not a happier woman than Queen Elizabeth¾a proposition not without meaning and not without interest, but unsuitable as material for the differential calculus. Our precision will be a mock precision if we try to use such partly vague and non-quantitative concepts as the basis of a quantitative analysis.

(The General Theory, Chapter 4)

The Euro will ~~outlive~~bury us all --- Jean-Claude Juncker

by Carrie (migeru at eurotrib dot com) on Sun May 5th, 2013 at 04:38:56 AM EST
[ Parent ]

Re: Gold (none / 0)

The indexed currency will not be made up of one or two goods, such as being pegged to gold or oil, but thousands of goods and standardized services.

The size of the basket makes no difference to the unsustainability of a basket peg.

The value of those goods and services can only go up and down based on their perceived value to other goods and services on the larger index and that particular good or services market condition.

Most goods and services which are of crucial interest to the economy - food, fuel, infrastructure, pensions, health care - are unsuitable for trading in a free market.

Any policy prescription which relies on "the market price" of goods and services can be applicable to less than half of your GDP - and not the most interesting half either.

Market conditions being its supply; over, under or adequate, to the demand of that particular good or service. In this scenario money always returns to an equilibrium in macro

snicker

while the price of individual goods and services reflect their natural value and supply.

giggle

Any equilibrium-based theory of macroeconomics is pseudoscientific horseshit.

It frees governments to barrow when economic times have become hard for the citizenry and it allows it to develop stores of money during good economic times in preparation for economic change.

No, it does not: The government has no intertemporal budget constraint.

Please stop with the loanable funds bullshit.

With money maintaining a center point of hard value while the price of goods and services goes up and down naturally, economies can return to the work of growing and expanding and exploring new products and services, without the fear that some arbitrary turn of events rendering all its citizens work and risk invalid.

In other words, workers and entrepreneurs have to accept more than their fair share of the unavoidable uncertainty, because voluntarily idle money must be protected from arbitrary turns of events.

Arbitrary turns of events happen. The question is whether they must be paid for by savers (rich, idle, serve no useful economic function) or by workers and industry (both rich and poor, not idle, produce actual stuff).

Hard money quackery makes sense only in a modeling universe where fundamental uncertainty about the future does not exist. Since that universe is not our universe, such models should be abandoned and their policy recommendations ignored.

[Snip description of bottom-up bailouts]
The Fed would then bring up interest rates to reflect the added supply of money being distributed though the purchase of these underwater loans and reducing any added money supply all in proportion.

I was with you right up until the last sentence.

The Fed should not in any way, shape or form attempt to force the not-bailed-out part of the economy to carry more of the bailout cost than it already has by raising the remuneration of voluntarily idle money. There is no good reason whatsoever to impose deflationary policies on the rest of the economy in order to reflate the housing market.

Just accept that the housing bubble was a fuckup that has permanently denuded the value of the US$, allow that inflation to propagate out of the housing sector into the rest of the economy, and call it a day. Don't compound the previous asset price inflation fuckup by adding a deliberate consumer price deflation fuckup on top of it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat May 4th, 2013 at 11:30:50 AM EST
[ Parent ]

Re: Gold (none / 0)

There is no relevance to whether you find something interesting. I am sure you find other things interesting too, but that you find one thing or another interesting is of no relevance to your argument.

With a hearty Hoo Hoo Hoo.

Right now the world has a lack of good governance, so wishing that governments would put money aside in good times seems wishful thinking. However, the government of many northern European nations have managed to put money aside and are financially much better off that those nations that have failed to do so. So there is some precedence for this having happened in the passed. Since indexed many will retain its value over gold over a much greater period of time, behavior of saving money for bad times to come will actually be rewarded, rather than the opposite where governments put money aside for future hard times only to have hyperinflation punish them for their efforts by removing the buying power of the currency.

Fears about hording money are not supported if the money stays steady. People are going to want to invest their money so that it works for them. They can still take varying degrees of risk with their savings. Money put into a real lending bank is used to grow businesses. It does not stand idly by. Money used to purchase stocks or bonds gets used to expand the economy and therefore expand employment. It is only when there is a real prospect of deflation that money moves to the sidelines because overtime the purchasing power of money grows. There are trillions of dollars sitting in low interest paying accounts because businesses are waiting for the current deflationary pressures to end. Once deflation ends and the economy begins to grow that money will come rushing in to investments in the hope that they will stay ahead of inflation. Boom and bust cycle. With the currency being steady and hard, investors are most likely to choose to invest their money since more likely than not it will grow their wealth (net worth).

guffaw

The aside into the mortgage crisis was a tangent from my hope to explain the value of a hard currency over the risk of gold. However, it was an interesting exploration into the economy at large. If value gets destroyed in an economy there has to be some sort of way to reflect what has actually happened in the economy. The investment bank/houses, through a vast easy credit scheme, have artificially created value and then when the bubble burst the value was destroyed. However, the artificial value increase has been captured in the form of loans and remains an artificial drag on our economy. Consumers opportunity to spend into the economy is locked up instead in loans that were based on an artificial price of their homes that the banks themselves created. The homeowner should not be the only group punished for this in our economy. The banks should take on the responsibility of releasing the homeowner from a large portion of this burden since they were the group that created the conditions for this crisis to happen in the first place. However, they won't do it. Enter the Fed. The Fed has the power to release the homeowner from the overburden of the entire loan and make the owner whole again by allowing the homeowner to refinance the home with no equity. Balance is established because now the mortgage loans are backed by the value of the homes at this point in time. The homeowner has more money to be able to spend into the economy to keep other portions of the economy going, however, the homeowner punished by having all of the equity removed and is forced to start all over again paying for his or hers home. The banks will be punished by not being able to use the money in the general home mortgage market. They need to use that money to loan to medium and small businesses or home loans in very economically depressed areas, which are riskier than standard home loans. The Fed's job will become especially hard since they will have to try to curb inflation from all this extra money being freed up to banks and home owners. I suggest that they increase interest rates to curb the inflationary pressure. LMHO :)

by joelado on Sat May 4th, 2013 at 08:26:13 PM EST
[ Parent ]

Re: Gold (none / 1)

What you have not adequately explained is why the Fed should care about inflation that has already happened?

The inflation that you want the Fed to "prevent" happened when housing prices were run up. It just wasn't counted back then, because it happened as asset price rather than consumer price inflation, and the Fed does not count asset price inflation.

Now you want the Fed to prevent the asset price inflation from spilling over into consumer price inflation, at the cost of imposing an overall deflationary bias on economic policy.

Well fuck that: Deflation is always and everywhere the wrong policy. I say let consumer prices catch up to asset prices - inflate our way out of the crisis, instead of trying (and failing) to deflate our way out of it.

And no, that will not be hyperinflationary, because hyperinflation and ordinary inflation have totally different underlying causal stories that have basically nothing to do with each other.

Fears about hording money are not supported if the money stays steady.

What do you mean by "the money stay steady?"

(For someone who claims to write for the benefit of non-economists, you use a surprisingly obscure (and idiosyncratic) jargon.)

It is only when there is a real prospect of deflation that money moves to the sidelines because overtime the purchasing power of money grows.

Even if that were true (and it's not - money hoarding is much more widespread than that), commodity basket pegs are deflationary.

With the currency being steady and hard, investors are most likely to choose to invest their money since more likely than not it will grow their wealth (net worth).

That was Hayek's postulate. Hayek was wrong about that.

Really, this is not a discussion we should even be having: Hard currency economics was proven conclusively and totally wrong in the 1870s. And in the 1920s. And then again in the 1930s.

Right now the world has a lack of good governance, so wishing that governments would put money aside in good times seems wishful thinking.

Governments do not need to put money aside in good times.

Governments who set aside money in good times, as if they were operating under an intertemporal budget constraint (which they are not), is a sign of bad governance. Because it means that the government does not understand its monetary system.

However, the government of many northern European nations have managed to put money aside and are financially much better off that those nations that have failed to do so.

In other words, governments of many NEU countries were incompetent fuckwit ideologues who built their incompetent fuckwit ideology into the foundational treaties of the EU.

Why you would make this incompetence out to be a virtue, I have no idea. Unless you suffer from a severe case of Austrian ~~theory~~theology.

Since indexed many will retain its value over gold over a much greater period of time, behavior of saving money for bad times to come will actually be rewarded,

Which is what you don't want, unless you like major industrial depressions.

There is no relevance to whether you find something interesting. I am sure you find other things interesting too, but that you find one thing or another interesting is of no relevance to your argument.

Ah, so you belong to the school of thought that finds flatscreen TVs to be as crucial to the material provisioning of society as petroleum.

Yeah, that would explain why you come up with silly policy prescriptions like basket pegs.

rather than the opposite where governments put money aside for future hard times only to have hyperinflation punish them for their efforts by removing the buying power of the currency.

Hyperinflation has nothing to do with the rest of your discussion - you are not discussing exchange rates at all, and hyperinflation is an exchange rate phenomenon.

Please stop making up unfounded scare stories to get political buy-in. It's fundamentally dishonest and harmful to the democratic process.

People are going to want to invest their money so that it works for them.

Say's fallacy.

They can still take varying degrees of risk with their savings. Money put into a real lending bank is used to grow businesses. It does not stand idly by.

Loanable funds fallacy.

Money used to purchase stocks or bonds gets used to expand the economy and therefore expand employment.

Moar loanable funds fallacy.

There are trillions of dollars sitting in low interest paying accounts because businesses are waiting for the current deflationary pressures to end. Once deflation ends and the economy begins to grow that money will come rushing in to investments in the hope that they will stay ahead of inflation.

Say's fallacy meets the loanable funds fallacy.

The aside into the mortgage crisis was a tangent from my hope to explain the value of a hard currency over the risk of gold.

Why should anybody care about gold? Let the muppets pile into gold and get fleeced.

Macroeconomic planning should not be made with reference to that sort of collective mania.

However, it was an interesting exploration into the economy at large.

In other words, a just-so story.

Please stop telling just-so stories. It's intellectually dishonest.

If value gets destroyed in an economy there has to be some sort of way to reflect what has actually happened in the economy.

There is. This is called "inflation." And it's perfectly harmless. Which is why we shouldn't give a shit about it.

[Discussion of bottom-up bailout]
The banks will be punished by not being able to use the money in the general home mortgage market.

Loanable funds fallacy.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun May 5th, 2013 at 03:51:29 AM EST
[ Parent ]

Re: Gold (none / 0)

Dude. You have got to do something other than rote responses. What is worse is that you are responding to your misunderstanding and not to what is being discussed. It is like watching you say ah when being hit on the knee by a reflex hammer. Hyperinflation occurs in country and not only as a reflection of the countries currency against foreign currency. You have been miss educated in what is called "garden gaming." Making false leaps into plateaus of argument and then spending time there, when the premise for being their was wrong in the first place. This was a fad of academic argument back in the 1970's and probably still hangs around at Universities. Unfortunately, you are a victim of that. Learn to be calm. Learn to be an explorer. Learn to go beyond what you have memorized and internalize your education to incorporate the core of its meaning into your fuller understanding. Without your understanding your education is, I am afraid, wasted.

by joelado on Sun May 5th, 2013 at 10:38:02 PM EST
[ Parent ]

Re: Gold (none / 1)

While Jakes style of argument might not be ideal to convince the person concerned I can't help but agree with him that you are the one making leaps from unjustified assumptions.

Your argument hinges on it being possible to control inflation by manipulating the quantity of money in circulation. In fact on the quantity of money being the only cause for inflation. Yet consider these two thought experiments:

I live in Hickswoood working a precarious job. To be able to work you need a car since there are no other means of transportation. If I loose my job I won't have access to credit. So the rational thing to do is hold enough precautionary savings to be able to procure a car even when unemployed. If nothing major happens I won't ever use those savings. How does the money I hold influence inflation?

by generic on Mon May 6th, 2013 at 05:28:57 AM EST
[ Parent ]

Re: Gold (4.00 / 2)

Your argument hinges on it being possible to control inflation by manipulating the quantity of money in circulation. In fact on the quantity of money being the only cause for inflation.

As far as I can tell joelado accepts the quantity theory of money, and the loanable funds theory of investment, while castigating JakeS for "rote learning" and repeating academic arguments from the 1970s. JakeS argues that joelado is also repeating by rote academic arguments from the 1930s.

Joelado is in good company, economic conventional wisdom currently subscribes to both loanable funds and the quantity theory...

In the long run, we're all misquoted — not Keynes

by Carrie (migeru at eurotrib dot com) on Mon May 6th, 2013 at 05:54:09 AM EST
[ Parent ]

Re: Gold (none / 0)

The two scenarios that you use are examples of hard currency. Most businesses in the United States extend credit to their customers at no interest if they pay their bill in a timely manner. When I owned a store I would typically be extended 90 days to pay an invoice. My trick was to sell the goods purchased by that invoice in 90 days, therefore using the sale of the goods to pay for the bill and to give me a margin which would go towards my rent, my salary etc. Now look at it from a hyper inflation scenario. If I purchase the goods on an invoice but money is dropping in value by half in 90 days thereby affecting the manufacturers profit margin in real purchasing power manufacturers would not extend the credit period of 90 days and the manufacturer's pricing would be going up to keep pace with inflation in terms of real value. In my scenario money doesn't have any value, it is mainly a medium of exchange of goods. The index looks at all goods and compares their value to each other. The indexed currency reflects that value so that market wide changes in inflation or deflation are not reflected in the value of the currency. It occupies a middle. If we were to make interest rates very low and access to credit very easy the general public would barrow a lot more putting money into the economy at a rate that might be more than the expansion of created value by the actions of the economy itself. This would deflate the value of the and inflate the value of goods because the amount of money in circulation would ratchet up demand ahead of the economies ability to produce goods. Those more able to afford more would bid up the price of goods and there would be inflation. Some inflation has a beneficial affect because it is the harbinger of expanding demand and eventually producers produce more to meet the demand and inflation stops as the market returns to equilibrium. However, in my scenario the inflationary pressure would occur do to ventures trying to expand markets with new products adding employees who would then have money to spend on more goods. This is a much slower process, but it is a steady one. There is a factor in my scenario that there could be periods where there is innovation or that people because of a fad become risk avers and do not attempt any new ventures. This would cause a deflationary period because there would not be any job growth and there wouldn't be any money spent by entrepreneurs and as industry becomes more efficient there will be more goods but there won't be an expanding economy to absorb those goods so they will eventually compete on price, which will user in a period of deflation. That is kind of a strange world scenario since humans innovate quite naturally. A stagnant period where there is no innovation seems quite unlikely.

As for your car savings, if you keep your savings in a mattress it will not have a beneficial or detrimental affect on the economy. Since you won't have that much inflation with the indexed currency, as long as you don't have a fire or someone robs you, it will maintain its purchasing power over all the goods on the index combined but not individually. But why do that? You can deposit your money in a bank, that will loan your money out to people or firms willing to pay the bank with interest and the bank is willing to pay you interest for using your money. You could use your money to start a business yourself and possibly earn many times the money you saved. You could invest it in the stock market and get a return in equity as well as dividend payments. If everyone who earned money stuffed it in a mattress then there wouldn't be money flowing into the economy and the pressure on existing goods not having buyers would be deflationary. But, more likely than not, people earn a paycheck, start businesses or save/invest to earn money to purchase things. As long as people eat, cloth themselves and want shelter, there will be an economy.

by joelado on Mon May 6th, 2013 at 07:30:15 PM EST
[ Parent ]

Re: Gold (none / 0)

Now look at it from a hyper inflation scenario. If I purchase the goods on an invoice but money is dropping in value by half in 90 days thereby affecting the manufacturers profit margin in real purchasing power manufacturers would not extend the credit period of 90 days and the manufacturer's pricing would be going up to keep pace with inflation in terms of real value.

But (even, for the sake of the argument, accepting your false-to-fact model of hyperinflation) there are plenty of perfectly habitable halfway houses between a totally rigid, depression-inducing currency and a hyperinflationary currency.

If the currency loses, say, 8 % per year, it comes to just a hair under 2 % over aforementioned 90 day period. The supplier will still extend the 90 day credit - your credit risk and his P&O totally swamps the very minor diminution of the value of his accounts receivable.

In my scenario money doesn't have any value, it is mainly a medium of exchange of goods. The index looks at all goods and compares their value to each other.

Facilitating trade is only a small part of what money does for industrial society. If the principal use of currency were to facilitate trade, the gold standard would be perfectly sufficient. And it isn't, so it isn't.

You can deposit your money in a bank, that will loan your money out

That's not how banks work in the real world.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 7th, 2013 at 06:06:50 PM EST
[ Parent ]

Re: Gold (none / 0)

If your core claim is about hyperinflation, then you need to argue that (a) hyperinflation matters to modern industrial societies, that (b) hyperinflation is worse than the alternative (which is a deflationary general depression) and that (c) your proposal prevents hyperinflation.

You don't get to hop-skip-jump across points (a) and (b), and you don't get to argue them with just-so stories and long-debunked fallacies like loanable funds and Say's fallacy. You have to provide compelling historical analysis.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon May 6th, 2013 at 02:31:53 PM EST
[ Parent ]

Re: Gold (none / 1)

It's a rote response, because you've fallen into fallacies that are sadly common. You're not an explorer. You're spouting nonsense that has been thoroughly debunked for anyone interested in finding the truth for many decades.

You might as well be arguing that the earth is flat.

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

by Drew J Jones (pedobear@pennstatefootball.com) on Thu May 9th, 2013 at 12:22:11 PM EST
[ Parent ]

Re: Gold (none / 0)

Not like a unified currency wasn't tried in the European Union.

by joelado on Thu May 9th, 2013 at 07:35:38 PM EST
[ Parent ]

Re: Gold (none / 1)

I'm not sure what your point is with this comment. As (I think) Jake noted, for someone who claims to write about economics for non-economists, you appear to have a remarkably hard time with both writing and economics.

You're like the Anti-Krugman.

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

by Drew J Jones (pedobear@pennstatefootball.com) on Fri May 10th, 2013 at 07:33:43 AM EST
[ Parent ]

Re: Gold (none / 0)

Really, this is not a discussion we should even be having: Hard currency economics was proven conclusively and totally wrong in the 1870s. And in the 1920s. And then again in the 1930s.

And will again in the 2010s

In the long run, we're all misquoted — not Keynes

by Carrie (migeru at eurotrib dot com) on Thu May 9th, 2013 at 11:00:47 AM EST
[ Parent ]

Re: Gold (none / 0)

Yes. Not like economies like North Korea desire to get a hold hard currency anyway they can. What currency would that be?

by joelado on Thu May 9th, 2013 at 07:37:28 PM EST
[ Parent ]

Re: Gold (none / 1)

North Korea desires hard currency, in the meaning of foreign currency, so that they can exchange it for foreign goods and services. Though the words are the same, that is different from the desire to have your own currency hard, ie pegged.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri May 10th, 2013 at 05:51:16 AM EST
[ Parent ]

Re: Gold (none / 0)

We could all have been spared to this, the emotional argumentation on natural resources is already well portrayed in the american media. We get here the same inconsistencies (the paper stock can grow faster than the gold stock but still the later should devalue) and fake data (e.g. gold declining 22 times from 1979 to 1990). Joe only missed the link between fire arms and gold.

At the end of the day the physical gold market in the US is close to irrelevant at a global scale; the real action is in the East/Pacific. This US-centric debate between gold lovers and gold haters doesn't matter much.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Mon May 6th, 2013 at 04:12:30 AM EST

Re: Gold (none / 0)

I am not a gold hater I am just telling you why I think at this point-in-time that gold is a bad investment. Gold's value, in my opinion, is inflated because it was perceived as a safe haven against currencies that could suddenly deflate. And there is a possibility that major world currencies could indeed deflate causing very high or even hyperinflation scenarios because major governments, in particular the United States government has added large amounts of currency and borrowed heavily in order to stave off the worst affects of the financial crisis. Trillions of dollars have gone to US and European banks to keep them solvent. The independent Federal Reserve Bank of the US has purchased billions upon billions of US bonds so that the US government can continue borrowing without absorbing too much of the commercial credit so as not affect the overall economy. If the US government begins to pump that money into the economy while the money standing on the sidelines enters the economy we could have an inflationary scenario. However, that is unlikely because the money in the US economy is being held by just a few hands. There are just so many houses, yachts and jets rich people can buy. They have caused some inflation in luxury homes and similar sundries, however, that really doesn't trickle down to the rest of the economy.

by joelado on Mon May 6th, 2013 at 07:54:22 PM EST
[ Parent ]

Re: Gold (none / 0)

Dear Joe, you are once again echoing the sort of talk we get in the anglo media. Gold demand is coming from the economies whose currencies are appreciating, not from Europe or the US. Take a look at this graph:

I hope I won't be excommunicated from ET for linking to ZH :)

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Wed May 8th, 2013 at 03:39:24 PM EST
[ Parent ]

Re: Gold (none / 0)

Joe read this carefully, several times even:

Reuters: China gold imports to keep growing after hitting record high

Net gold flows from Hong Kong to China, the world's No. 2 gold consumer after India, jumped to 223.519 tonnes in March from 97.106 tonnes in February, smashing a previous record of 114.372 tonnes in December, data from the Hong Kong Census and Statistics Department showed on Tuesday (www.censtatd.gov).
That makes up more than half of record gold exports to China from Hong Kong in 2012, which stood at 557.478 tonnes.
In March, Shanghai gold futures fetched premiums of more than $30 to global prices, making it cheaper to buy the metal overseas.
April could see imports swell further after the drop in international prices spurred frenzied buying in Asia, leading to a shortage of gold bars and coins in Singapore as well as Hong Kong, which is China's main source for gold imports.

luis_de_sousa@mastodon.social

by Luis de Sousa (luis[dot]de[dot]sousa[at]protonmail[dot]ch) on Wed May 8th, 2013 at 04:11:30 PM EST
[ Parent ]

Re: Gold (none / 0)

The Chinese are purchasing gold. Great. I guess that means that the situation has changed to create circumstances that will maintain the value of gold. Tell me what is making Chinese people purchase gold? Could it mean that they are making more money and can afford to purchase gold? Could it be that Chinese woman are interested in purchasing gold jewelry and that there are a lot of them? I am not a gold hater. My argument was that gold should not be used as a substitute for money and that gold can go up and down in value based on its particular circumstance at a given time. Demand for gold is the chief arbiter of its value. My opinion was that I felt the price of gold was due to people being told that it was a safe haven from currencies that would rapidly become less valuable because the economies like the United States failed to put in austerity measures. For those who invested recently in gold, I am happy that you haven't lost your shirt, this week. :)

by joelado on Wed May 8th, 2013 at 07:49:59 PM EST
[ Parent ]

Re: Gold (none / 1)

We as a nation could reduce the swings of inflation and deflation of our currency by instead of only backing the US currency with the full faith and credit of the US government, we instead index the value of the US dollar to the cost of goods commonly traded between countries.

WTF?

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

by Drew J Jones (pedobear@pennstatefootball.com) on Thu May 9th, 2013 at 10:28:14 AM EST

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