Is the US dollar the next bubble to burst?

[dre]

I'd be "paying back three times as much purchasing power"? If it were gold backed currency and I continued making payments in gold backed currency, essentially I would be making my payments in gold and the ounce I used two decades ago to make a payment would be worth about 10 payments today.

If I had a fifty dollar gold coin that bought two good suits when it was worth $50, and today the $50 gold coin is worth approximately $2000 fiat paper dollars, it will still buy two good suits. All that's occurred over time is the devaluation of the dollar brought about by inflation.

Currency, if specie, can be a store of wealth. If it is fiat paper of course not. No one told me that though, I wish someone would have told me that when I was 21. Our economic education is definitely lacking for some reason. It's just boring I guess. Wink! Wink! Nudge! Nudge!

Why don't we first make "money" into a fiat currency and then turn it into a simple record of transaction with electronic debiting and crediting. Oh...wait...that is what we are doing.

Currency, if it is not specie or a commodity of some sort, needs to be backed by "money". In order for currency to be stable it cannot exceed what backs it. What backs our fiat currency is confidence in the government and stability of the country, the size of the economy is supposed to control governments creation of "money" but it isn't a constraint they will live by. Our currency is not backed by a commodity, government determines the amount of "currency" it will print or create which is a form of wage and price controls. They try to keep it slightly inflationary, not linear, but predictable as you say . However, governments notoriously overspend, and what eventually occurs is they create too much currency and it becomes valueless over time.

Once government takes control of the currency and the creation of money. It is only a matter of five or six decades or at best a century before the economy collapses. If they kept the money sound this would not happen but they don't like to have their hands tied by fiscal constraints, i.e., not enough money. The welfare/warfare state develops out of a free hand to create money.

The point is that less money or, no growth in the money supply matching economic growth, will result in deflation.

Essentially, you are saying that the "correction" necessary for stability in prices and wages is to keep the money supply or currency at the same growth rate as any economic growth. And that is exactly what governments attempt to do today. All I am saying is that the "correction" will occur naturally with a drop in prices and wages. No one likes a drop in wages though, that's for sure. So the idea is deflation must be avoided. Governments also experience revenue drops...aggghhh...the sky is falling.

"There must be no deflation...no deflation... no deflation..."

So the result you desire is price and wage stability. I agree that economic growth will slow. A decrease in the money supply or if the economy outpaces the money supply is a natural restraint on growth. But the transactional medium is stable. It, in fact, can now buy two oranges when before it could only buy one. If you are adding to the money supply you are not restraining economic growth and eventually the economy overheats, badly managed businesses pop-up, malinvestment occurs and a bust is the result. This is the boom/bust cycle that is our lot in the current system. Or, for that matter, a fractional reserve system of any kind. Even if it is banks and not government that is creating excess notes to reserves.

History tells us the inevitable end of government control of the money supply. We have gone through the degrading period and the fiat paper period and have started the electronic debit/credit period (a first). Now, we are witnessing the instability of western governments and a volatile currency market.

What do you think will occur next?

As I suspected, based entirely upon income taxes. Taxes as a whole have increased over time. Governments in Canada have introduced a GST, Obama is talking about a VAT as well, increased all sorts of other taxes, penalties and fees over that time. A little more research is necessary to determine if taxes have overall gone down. The only study I know of is the Fraser institutes Tax Freedom Day which only goes back a few decades. From my earlier research on this, if memory serves, I think tax freedom day has moved about a month in the period of time they have been calculating it. It hovers around mid to end June these last few years. Europe is a whole nother story. Americans have traditionally been less socialistic and will vote against increased taxes. Their growth rate in taxation will be slower but it too, has to have increased overall in the last 5 decades. You can't introduce medicare and medicaid and create a Department of Education, Homeland security, etc., without increased funding.

I'd be "paying back three times as much purchasing power"? If it were gold backed currency and I continued making payments in gold backed currency, essentially I would be making my payments in gold and the ounce I used two decades ago to make a payment would be worth about 10 payments today.

No because currency is the medium those transactions are denominated in. When theres deflation that scenario works exactly as I described... If the payment schedule in your contract says ten dollars on a certain date then ten dollars it what you will pay. Regardless of what those dollars are worth.

Currency, if specie, can be a store of wealth. If it is fiat paper of course not. No one told me that though, I wish someone would have told me that when I was 21. Our economic education is definitely lacking for some reason. It's just boring I guess. Wink! Wink! Nudge! Nudge!

You can store wealth in currency its just not smart because theres other safe havens that are likely to appreciate... well managed currency should not appreciate much at all.

Essentially, you are saying that the "correction" necessary for stability in prices and wages is to keep the money supply or currency at the same growth rate as any economic growth. And that is exactly what governments attempt to do today.

No most western governments have inflationary monetary policy. They dont do what I described which is why dollars buy a lot less than what they used to.

But the transactional medium is stable. It, in fact, can now buy two oranges when before it could only buy one.

No... its doubled in value in a relatively short time. Thats the exact meaning of the word volatility. "Stable" means the value doesnt change much. And deflation is just as bad as inflation, in some cases worse.

Both are bad and I explained why. If the purchasing power of currency is not relatively stable and predictable you discourage transactions between individuals. In OrangeLand the payers in every single non-spot transaction in the economy are surrendering twice as much purchasing power as they agreed to. The number of non-spot transactions happening is drastically reduced, and theres no longer any reason to invest money because you get better returns just by leaving it in a bank. Families are no longer able to afford their loands and mortgages. The economy falls into deep recession.

Quickly increasing in value does NOT equal stability.

And now that we have covered that, it should be evident to you that the emperor has no clothes. Gold is NOT more stable even than dollars printed by the United States of Inflation.

Its a MYTH that gold is more stable.

This shows the fluctuation of US dollars in the last 10 years.

http://mykindred.com/cloud/TX/Documents/dollar/usdtl.htm

We've experienced roughly 30% inflation during that period.

This shows the value of gold during that same time.

http://mykindred.com/cloud/TX/Documents/dollar/usdtl.htm

The value of the dollar changed by about thirty percent.

The value of gold changed by about FOUR HUNDRED PERCENT!

If you had signed a long term contract denominated in gold, as the payer... you would be utterly fockin HOSED now, and you sure as hell arent gonna invest money in anything!

History tells us the inevitable end of government control of the money supply. We have gone through the degrading period and the fiat paper period and have started the electronic debit/credit period (a first). Now, we are witnessing the instability of western governments and a volatile currency market.

No what history shows is the end of the gold standard, and the most vibrant period of human development in history started as soon as it did. Its true though that many countries have monetary policies that may cause them a lot of trouble in the long term.

What do you think will occur next?

Edited October 29, 2010 by dre

[Pliny]

Holy fuck dude... would you calm down? Out of meds?

Im sorry I forgot to get back to you, but why not IM me or something instead of clogging up the thread with this junk... which I didnt read and couldnt see anyways...

Guess you didn't see that ad. It was funny. But really who should calm down?

I don't IM or PM anyone on this forum. I keep to myself and that way I can "reke my own rede" as it were, keep my own counsel, and nothing I say is not seen by everyone else who cares to contribute to threads that I contribute to.

I know lefties like to talk amongst themselves and devise strategies, etc. I like to remain and act as an individual. Just one of my moral quirks.

[Pliny]

No because currency is the medium those transactions are denominated in. When theres deflation that scenario works exactly as I described... If the payment schedule in your contract says ten dollars on a certain date then ten dollars it what you will pay. Regardless of what those dollars are worth.

If one is going to speak in terms of a gold backed currency then one has to divorce himself from the idea that the paper note is the "money". It isn't. The "money" is the "weight" of gold that a dollar represents.

If the payment schedule in my contract says ten dollars of gold it is the weight determined to be a dollar at the time, say it is one ounce. The paper note or currency promises me one ounce of gold in weight, not one dollar of gold in value, value is subjective and an ounce is an ounce.

You can store wealth in currency its just not smart because theres other safe havens that are likely to appreciate... well managed currency should not appreciate much at all.

Currency today is inflated yearly by governments and is not commodity backed so it generally never appreciates and generally depreciates. So I agree it is not smart to store wealth in currency. Currency should only be held in amounts to meet the liquidity necessary to the individual's needs.

Pliny:Essentially, you are saying that the "correction" necessary for stability in prices and wages is to keep the money supply or currency at the same growth rate as any economic growth. And that is exactly what governments attempt to do today.

No most western governments have inflationary monetary policy. They dont do what I described which is why dollars buy a lot less than what they used to.

You described keeping the growth of the money supply equal to the growth of the economy. Is that correct? Perhaps you have the idea of achieving zero inflation in wages and prices and zero deflation in wages and prices? How would you achieve that? In order to keep prices from deflating you have to add money. When you add money you are inflating the currency in order to prevent a drop in prices and wages or deflationary symptoms. Inflating the currency prevents deflation but creates an increase in the general level of price and wages by devaluing the currency, i.e., making the currency more abundant. That is adding money to the economy and is inflationary, and is what governments do today. You are not proposing anything different.

Wages and prices in a free market will essentially never remain constant and never, for any other reason than a change in the quantity of currency or money, rise in the aggregate. Inflation and deflation are about the aggregate, a rise or fall in the general price level of the economy as a whole. In a free market there is rarely a rise in the general price and wage level, only if "money" is added to the economy. There would be in a free market a general fall in wages and prices, that is; deflation, meaning no money is added and the quantity is stable.

No... its doubled in value in a relatively short time. Thats the exact meaning of the word volatility. "Stable" means the value doesnt change much. And deflation is just as bad as inflation, in some cases worse.

[/quote}

Stable means value is not lost over time, a currency is considered stable if it does not lose value. If it maintains it's value or increases it's value it is considered stable. Volatility means value is variable up or down over time.

Both are bad and I explained why. If the purchasing power of currency is not relatively stable and predictable you discourage transactions between individuals.

To a degree, if a currency is volatile people are encouraged to find stability and trade it for other assets. If it is stable or increasing in value they will feel secure in saving it.

In OrangeLand the payers in every single non-spot transaction in the economy are surrendering twice as much purchasing power as they agreed to. The number of non-spot transactions happening is drastically reduced, and theres no longer any reason to invest money because you get better returns just by leaving it in a bank. Families are no longer able to afford their loands and mortgages. The economy falls into deep recession.

High inflation. Money is being added to the economy in large quantities.

Quickly increasing in value does NOT equal stability.

No. But a stable increase is a stable increase.

And now that we have covered that, it should be evident to you that the emperor has no clothes. Gold is NOT more stable even than dollars printed by the United States of Inflation.

It has never fallen to a value of zero whereas all fiat paper currencies eventually do.

Its a MYTH that gold is more stable.

it is not a myth that it has never in any economy fallen to a value of zero.

This shows the fluctuation of US dollars in the last 10 years.

http://mykindred.com/cloud/TX/Documents/dollar/usdtl.htm

We've experienced roughly 30% inflation during that period.

This shows the value of gold during that same time.

http://mykindred.com/cloud/TX/Documents/dollar/usdtl.htm

The value of the dollar changed by about thirty percent.

The value of gold changed by about FOUR HUNDRED PERCENT!

If you had signed a long term contract denominated in gold, as the payer... you would be utterly fockin HOSED now, and you sure as hell arent gonna invest money in anything!

If I were making payments in the value of gold and not the weight of gold, yes. But no one has ever signed a contract to make payment in the value of gold only the amount or weight. Value is subjective.

No what history shows is the end of the gold standard, and the most vibrant period of human development in history started as soon as it did.

The Romans went to a paper currency and the Empire was history shortly after. France went off theirs and the revolution followed. Zimbabwe has a paper currency and everyone is a billionaire - is that what you mean by vibrant period of development?

Certainly once restraints on spending are removed by an influx of large quantities of money the economy is vibrant - it is called a boom and then there is a bust. There may be a series of booms and busts. Then there is war and then there is welfare and then there is infaltion and then there is collapse.

Its true though that many countries have monetary policies that may cause them a lot of trouble in the long term.

One of them is going off the gold standard. But basically if all countries are on a gold standard there will be stability if one country goes off they will have an advantage in that they will be able to increase spending because they can essentially create money or a "boom" but eventually they will inflate it to zero.

Who is giving you advice on this?

Edited October 30, 2010 by Pliny

[dre]

If one is going to speak in terms of a gold backed currency then one has to divorce himself from the idea that the paper note is the "money". It isn't. The "money" is the "weight" of gold that a dollar represents.

If the payment schedule in my contract says ten dollars of gold it is the weight determined to be a dollar at the time, say it is one ounce. The paper note or currency promises me one ounce of gold in weight, not one dollar of gold in value, value is subjective and an ounce is an ounce.

Currency today is inflated yearly by governments and is not commodity backed so it generally never appreciates and generally depreciates. So I agree it is not smart to store wealth in currency. Currency should only be held in amounts to meet the liquidity necessary to the individual's needs.

You described keeping the growth of the money supply equal to the growth of the economy. Is that correct? Perhaps you have the idea of achieving zero inflation in wages and prices and zero deflation in wages and prices? How would you achieve that? In order to keep prices from deflating you have to add money. When you add money you are inflating the currency in order to prevent a drop in prices and wages or deflationary symptoms. Inflating the currency prevents deflation but creates an increase in the general level of price and wages by devaluing the currency, i.e., making the currency more abundant. That is adding money to the economy and is inflationary, and is what governments do today. You are not proposing anything different.

Wages and prices in a free market will essentially never remain constant and never, for any other reason than a change in the quantity of currency or money, rise in the aggregate. Inflation and deflation are about the aggregate, a rise or fall in the general price level of the economy as a whole. In a free market there is rarely a rise in the general price and wage level, only if "money" is added to the economy. There would be in a free market a general fall in wages and prices, that is; deflation, meaning no money is added and the quantity is stable.

High inflation. Money is being added to the economy in large quantities.

No. But a stable increase is a stable increase.

It has never fallen to a value of zero whereas all fiat paper currencies eventually do.

it is not a myth that it has never in any economy fallen to a value of zero.

If I were making payments in the value of gold and not the weight of gold, yes. But no one has ever signed a contract to make payment in the value of gold only the amount or weight. Value is subjective.

The Romans went to a paper currency and the Empire was history shortly after. France went off theirs and the revolution followed. Zimbabwe has a paper currency and everyone is a billionaire - is that what you mean by vibrant period of development?

Certainly once restraints on spending are removed by an influx of large quantities of money the economy is vibrant - it is called a boom and then there is a bust. There may be a series of booms and busts. Then there is war and then there is welfare and then there is infaltion and then there is collapse.

One of them is going off the gold standard. But basically if all countries are on a gold standard there will be stability if one country goes off they will have an advantage in that they will be able to increase spending because they can essentially create money or a "boom" but eventually they will inflate it to zero.

Who is giving you advice on this?

If one is going to speak in terms of a gold backed currency then one has to divorce himself from the idea that the paper note is the "money". It isn't. The "money" is the "weight" of gold that a dollar represents.

If the payment schedule in my contract says ten dollars of gold it is the weight determined to be a dollar at the time, say it is one ounce. The paper note or currency promises me one ounce of gold in weight, not one dollar of gold in value, value is subjective and an ounce is an ounce.

Thats not an argument against any point I made. The gold standard is a system where the economic unit of account is a fixed weight of gold. If you denominate transactions in those units you will get the exact effect that I described when the value of gold increases.

You described keeping the growth of the money supply equal to the growth of the economy. Is that correct? Perhaps you have the idea of achieving zero inflation in wages and prices and zero deflation in wages and prices? How would you achieve that? In order to keep prices from deflating you have to add money. When you add money you are inflating the currency in order to prevent a drop in prices and wages or deflationary symptoms. Inflating the currency prevents deflation but creates an increase in the general level of price and wages by devaluing the currency, i.e., making the currency more abundant. That is adding money to the economy and is inflationary, and is what governments do today. You are not proposing anything different.

How would you achieve that?

By growing the money supply at the same rate as the economy grows. If theres 10 oranges in the market place, and ten dollars in the money supply an orange will cost a buck. If the market place grows to 100 oranges, and you grow the money supply to 100 dollars, an orange will STILL cost a buck.

In order to keep prices from deflating you have to add money.

That statement is just objectively false. If the total ammount of goods and services in the market place (the size of the economy) does not change then you DO NOT have to ad money to "keep prices from inflating".

That is adding money to the economy and is inflationary, and is what governments do today. You are not proposing anything different.

No. You need to start back with inflation 101. Increasing the size of the money supply is NOT necessarily inflationary. Its not the size of the money supply in absolute terms thats relevant to inflation or deflation its the size of the money supply relative to the total ammount of goods and services in the marketplace.

What governments do today is not at all what Im suggesting. They have inflationary monetary policy and they basically try to fix inflation at 3%, in order to allow them to keep defecit financing stuff.

There would be in a free market a general fall in wages and prices, that is; deflation, meaning no money is added and the quantity is stable.

If your economic unit of account was gold you would have massive currency instability. A nearly 400% swing in just the last 10 years. Anything besides spot transactions would be extremely unlikey, and people would not invest in others.

Who is giving you advice on this?

You can get the same advice from virtually any article or book on inflation and deflation. Economists describe inflation as "Too many dollars chasing too few goods.". Its not the absolute size of the money supply that matters. Increasing the size of the money supply only causes inflation if the ammount of goods and services havent increased as well.

The Orange Land example I used is used in macro economics text books.

Edited October 30, 2010 by dre

[Pliny]

Thats not an argument against any point I made. The gold standard is a system where the economic unit of account is a fixed weight of gold. If you denominate transactions in those units you will get the exact effect that I described when the value of gold increases.

Well, I must have missed something.

What does this statement mean:

dre:And its not that deflation "results" in too few dollars chasing too many goods... Thats the LITERAL DEFINITION of what inflation IS. It happens when the economy grows faster than the money supply.

By growing the money supply at the same rate as the economy grows. If theres 10 oranges in the market place, and ten dollars in the money supply an orange will cost a buck. If the market place grows to 100 oranges, and you grow the money supply to 100 dollars, an orange will STILL cost a buck.

All other factors being equal that is correct. Inflating the money supply at that rate will indeed keep wages and prices the same. However, in a real economy, the number of people will have changed, the methods of growing oranges may have changed, preferences in variety of oranges may have changed, etc.

Government Economists do attempt to do exactly what you describe. They calculate all these factors in and determine by how much they should inflate the money supply. That keeps wages and prices level. They factor in a little "harmless" wage and price increase by adding a bit more "money" than the predicted growth of the economy. This does devalue the dollar somewhat over time but the alternative would be a drop in the prices and wages and is not desirable.

The fact that their little harmless inflation of wages and prices makes us all millionaires on paper and paupers in reality over time seems to be forgotten.

In order to keep prices from deflating you have to add money.

That statement is just objectively false. If the total ammount of goods and services in the market place (the size of the economy) does not change then you DO NOT have to ad money to "keep prices from inflating".

Your statement is true. In order for mine to be true I have to make a clarification:

Considering an economy is, over the long term generally growing, then "in order to keep prices from deflating you have to add money to the economy".

No. You need to start back with inflation 101. Increasing the size of the money supply is NOT necessarily inflationary. Its not the size of the money supply in absolute terms thats relevant to inflation or deflation its the size of the money supply relative to the total ammount of goods and services in the marketplace.

What governments do today is not at all what Im suggesting. They have inflationary monetary policy and they basically try to fix inflation at 3%, in order to allow them to keep defecit financing stuff.

Good. I think I am making some head way.

So you are proposing they eliminate the 3% inflation?

If your economic unit of account was gold you would have massive currency instability. A nearly 400% swing in just the last 10 years. Anything besides spot transactions would be extremely unlikey, and people would not invest in others.

Well, how does an economic unit of account in gold result in massive currency instability? Wouldn't it be currency instability that then results in people seeking stability in other assets, gold being one?

A "swing"? Is it just a bubble?

You can get the same advice from virtually any article or book on inflation and deflation. Economists describe inflation as "Too many dollars chasing too few goods.". Its not the absolute size of the money supply that matters. Increasing the size of the money supply only causes inflation if the amount of goods and services havent increased as well.

The Orange Land example I used is used in macro economics text books.

I think I understand more clearly now. I need to be a little more precise in my statements. When I speak of inflation and deflation I generally mean just the increase or decrease respectively in the money supply and discount the rest of the definition, that being their effects on the general price level.

Inflating the money supply in Orange Land to keep up with a growth in the supply of oranges (the economy) will keep, all other things equal, the prices of oranges level. The real argument is whether or not prices and wages should be kept stable artificially by some agency or should it just be allowed to be dictated by the market or as you say the fortunes of the mining industry.

Edited October 31, 2010 by Pliny

[dre]

Well, I must have missed something.

All other factors being equal that is correct. Inflating the money supply at that rate will indeed keep wages and prices the same. However, in a real economy, the number of people will have changed, the methods of growing oranges may have changed, preferences in variety of oranges may have changed, etc.

Government Economists do attempt to do exactly what you describe. They calculate all these factors in and determine by how much they should inflate the money supply. That keeps wages and prices level. They factor in a little "harmless" wage and price increase by adding a bit more "money" than the predicted growth of the economy. This does devalue the dollar somewhat over time but the alternative would be a drop in the prices and wages and is not desirable.

The fact that their little harmless inflation of wages and prices makes us all millionaires on paper and paupers in reality over time seems to be forgotten.

Your statement is true. In order for mine to be true I have to make a clarification:

Considering an economy is, over the long term generally growing, then "in order to keep prices from deflating you have to add money to the economy".

Good. I think I am making some head way.

So you are proposing they eliminate the 3% inflation?

Well, how does an economic unit of account in gold result in massive currency instability? Wouldn't it be currency instability that then results in people seeking stability in other assets, gold being one?

A "swing"? Is it just a bubble?

I think I understand more clearly now. I need to be a little more precise in my statements. When I speak of inflation and deflation I generally mean just the increase or decrease respectively in the money supply and discount the rest of the definition, that being their effects on the general price level.

Inflating the money supply in Orange Land to keep up with a growth in the supply of oranges (the economy) will keep, all other things equal, the prices of oranges level. The real argument is whether or not prices and wages should be kept stable artificially by some agency or should it just be allowed to be dictated by the market or as you say the fortunes of the mining industry.

So you are proposing they eliminate the 3% inflation?

I guess it depends. If the government takes in enough in taxes to fund its own operation then that would seem to make sense. Mostly though Im just pointing out that its not necessarily our monetary framework thats broken, its our monetary policy.

However, in a real economy, the number of people will have changed, the methods of growing oranges may have changed, preferences in variety of oranges may have changed, etc.

Absolutely. The orangeland example supposes a closed economy with only two commodities... oranges and government backed currency, and it assumes that the method of producing oranges is static in terms of what goes into each one. In a real economy like you say all kinds of things can effect prices. Its a gross oversimplification of how an economy works, which is kinda the point of it.

The real argument is whether or not prices and wages should be kept stable artificially by some agency or should it just be allowed to be dictated by the market or as you say the fortunes of the mining industry

I think it depends... paper money and and inflationary economic policy promotes investment and transactions and growth. But as youve pointed out it requires humans to manage it using theories that even economics cant completely agree on, and it makes it too easy to defecit finance. Backing currency with an arbitrary commodity poses its own set of problems though and doesnt necessarily fix all of that stuff.

Also whether dollars are backed by the economy or a commodity, I think the real question is what happens to the fractional reserve system. You could argue that system puts a lot more magic money into the system than our monetary policy. Some advocates of the gold standard want to keep it, and some dont.

If you return to the gold standard without abolishing the fractured reserve, then the price of gold would skyrocket. The total ammount of gold ever mined is about 140 thousand metric tons. At a price of 1000 dollars per ounce the total value of all the gold ever mined is about $4.5 trillion. But this is NOWHERE NEAR the ammount of currency in circulation, so the value of gold would be greatly increased. That would make it less usefull for things like jewelry or electronics, etc.

But perhaps the biggest danger of gold backed currency, or any other system where the exchange rate is fixed, is the danger of speculative attacks. Which is basically when investors buy up so much of a commodity that they drive up prices and profit from selling at a high price than they go in for. Speculative attacks on fixed exchange rate currencies cause massive economic turmoil and can trigger depressions. The Argentinian and East Asian financial crisis are a good example of this. So is black wednesday... http://en.wikipedia.org/wiki/Black_Wednesday

[maple_leafs182]

Government Economists do attempt to do exactly what you describe. They calculate all these factors in and determine by how much they should inflate the money supply. That keeps wages and prices level. They factor in a little "harmless" wage and price increase by adding a bit more "money" than the predicted growth of the economy. This does devalue the dollar somewhat over time but the alternative would be a drop in the prices and wages and is not desirable.

That is a very dangerous game to play.

What is so bad about a drop in wages if prices drop too?

I think it depends... paper money and and inflationary economic policy promotes investment and transactions and growth. But as youve pointed out it requires humans to manage it using theories that even economics cant completely agree on, and it makes it too easy to defecit finance. Backing currency with an arbitrary commodity poses its own set of problems though and doesnt necessarily fix all of that stuff.

A gold standard is a way to keep the government in line.

Also whether dollars are backed by the economy or a commodity, I think the real question is what happens to the fractional reserve system. You could argue that system puts a lot more magic money into the system than our monetary policy. Some advocates of the gold standard want to keep it, and some dont.

There we go, fractional reserve banking is a big part of the problem. Banks should not be allowed to create wealth out of nothing and then charge interest on it. under this system, banks grow too large, they start gaining too much power and influence over the economy, then they start rob the citizens of their property.

[dre]

That is a very dangerous game to play.

What is so bad about a drop in wages if prices drop too?

A gold standard is a way to keep the government in line.

There we go, fractional reserve banking is a big part of the problem. Banks should not be allowed to create wealth out of nothing and then charge interest on it. under this system, banks grow too large, they start gaining too much power and influence over the economy, then they start rob the citizens of their property.

What is so bad about a drop in wages if prices drop too?

If those things happen because currency is not stable then less transactions will happen and youll get less economic growth or a recession. Your currency becomes useless as a unit of exchange for anything beyond spot trasactions. Long term contracts wont be signed, and economic activity is stifled because lenders and borrowers have uncertainty as to the value of debt.

A gold standard is a way to keep the government in line.

It sure did a shitty job of it. In fact thats the reason the gold standard was finally abandoned. The US had completely bankrupted itself and had nowhere near enough gold to settle all its debts. It was finished.

Thats what I feel a lot of gold standard advocates are missing. Its not like people got together and said "hmmmm! lets try a different financial system and see if it works better!". The new system emerged because the old one COLLAPSED when the biggest economy in the system (the US) became unsolvent.

When the US announced in 1972 that it would no longer honor convertability it was in every way a declaration of bankruptcy, and it gave the US the exact same kind of protection from creditors that a company gets when it files a Chapter 11.

[bush_cheney2004]

....When the US announced in 1972 that it would no longer honor convertability it was in every way a declaration of bankruptcy, and it gave the US the exact same kind of protection from creditors that a company gets when it files a Chapter 11.

Nope...not even close. Chapter 11 provisions of the US Backruptcy Code are not applicable to government debt, and the United States was never "unsolvent" [sic].

[maple_leafs182]

The problem with having debt as money is there will always be higher debt levels then dollars in circulation because of the interest. Inflation is necessary in order to pay off the interest of the debt but that only leads to more debt which will then need more inflation which leads to more debt...

Very rarely do wages keep up with inflation and in that case savers and the working class get robbed of wealth.

The positive thing with having gold or silver as money is it is debt free.

[bush_cheney2004]

....Very rarely do wages keep up with inflation and in that case savers and the working class get robbed of wealth.

The positive thing with having gold or silver as money is it is debt free.

The same thing can happen with precious metals....including silver. I give you....the Hunt Brothers:

http://www.buyandhold.com/bh/en/education/history/2000/hunt_bros.html

I don't think you were even born yet.

Edited November 1, 2010 by bush_cheney2004

[dre]

Nope...not even close. Chapter 11 provisions of the US Backruptcy Code are not applicable to government debt, and the United States was never "unsolvent" [sic].

I never said chapter 11 provisions apply to government debt. Did you even read before you replied?

I said the US got the same kind of protection from creditors by suspending convertability.

Insolvency: the lack of cash flow to pay current and future business debts

Thats EXACTLY what the US was. Its creditors were starting to trade their US paper back in for gold, but they didnt have enough gold to allow the conversion of all that paper... a text-book bankruptcy.

[bush_cheney2004]

I never said chapter 11 provisions apply to government debt. Did you even read before you replied?

I said the US got the same kind of protection from creditors by suspending convertability.

Go back and learn more about Bretton Woods.

Insolvency: the lack of cash flow to pay current and future business debts

Don't you mean "unsolvency"....either way you are mistaken.

Thats EXACTLY what the US was. Its creditors were starting to trade their US paper back in for gold, but they didnt have enough gold to allow the conversion of all that paper... a text-book bankruptcy.

...Britain did the exact same thing in 1914 for WWI....doesn't mean it was "unsolvent". Bankruptcy occurs when sufficient investment capital cannot be found under mounting debt...your analogy is broke dick....since US paper is still being snapped up.

Edited November 1, 2010 by bush_cheney2004

[Pliny]

I guess it depends. If the government takes in enough in taxes to fund its own operation then that would seem to make sense. Mostly though Im just pointing out that its not necessarily our monetary framework thats broken, its our monetary policy.

The monetary policy would be part of that framework. The framework has given us the boom bust cycle and is designed to give us about 3% inflation in wages and prices. These are both negatives.

The advantage is supposed to be wages and government revenues are stable. While that creates an atmosphere for growth because people can make future commitments and so can government, what happens is a move toward credit for purchases, future development and government spending rather than purchases, development and government spending coming out of savings in the economy. So the growth is less sustainable as people and governments sink further and further into debt, and governments solution to that is to stimulate the economy and bailout failing corporations by adding more currency.

Eventually, the debt level becomes too much and the whole economy collapses.

I think it depends... paper money and and inflationary economic policy promotes investment and transactions and growth. But as youve pointed out it requires humans to manage it using theories that even economics cant completely agree on, and it makes it too easy to defecit finance. Backing currency with an arbitrary commodity poses its own set of problems though and doesnt necessarily fix all of that stuff.

Yes it does promote growth but the problem with that growth is that it's corrections in the market while helping good businesses also support bad management, poor business practices, production with no demand, inefficiencies and mal-investment. It winds up taking over more and more of the economy in order to prop it up.

Also whether dollars are backed by the economy or a commodity, I think the real question is what happens to the fractional reserve system. You could argue that system puts a lot more magic money into the system than our monetary policy. Some advocates of the gold standard want to keep it, and some dont.

Fractional reserve banking has been institutionalized with the advent of the central bank. It was a practice of private banks and was responsible for almost all bank failures prior to establishment of a central banking system.

If you return to the gold standard without abolishing the fractured reserve, then the price of gold would skyrocket. The total ammount of gold ever mined is about 140 thousand metric tons. At a price of 1000 dollars per ounce the total value of all the gold ever mined is about $4.5 trillion. But this is NOWHERE NEAR the ammount of currency in circulation, so the value of gold would be greatly increased. That would make it less usefull for things like jewelry or electronics, etc.

If you returned to the gold standard AND abolished fractional reserve banking, the price of gold would indeed skyrocket.

But perhaps the biggest danger of gold backed currency, or any other system where the exchange rate is fixed, is the danger of speculative attacks. Which is basically when investors buy up so much of a commodity that they drive up prices and profit from selling at a high price than they go in for. Speculative attacks on fixed exchange rate currencies cause massive economic turmoil and can trigger depressions. The Argentinian and East Asian financial crisis are a good example of this. So is black wednesday... http://en.wikipedia.org/wiki/Black_Wednesday

There was no gold standard during black Wednesday, the Argentinian or East Asian crisis so if what you say is true then not being on a gold standard is no protection against these speculative attacks on fixed exchange currencies, if in fact, it is a problem under a gold standard in the first place.

It is a mistake to think that because gold has a single price that currencies will be fixed. The value of currencies on an international market, on a gold standard, will still depend upon the policies of the national governments. They will still devalue their "currency" by printing more or increase it's value by printing less.

Edited November 2, 2010 by Pliny

[Pliny]

What is so bad about a drop in wages if prices drop too?

Government revenues drop.

A gold standard is a way to keep the government in line.

Yes.

There we go, fractional reserve banking is a big part of the problem. Banks should not be allowed to create wealth out of nothing and then charge interest on it. under this system, banks grow too large, they start gaining too much power and influence over the economy, then they start rob the citizens of their property.

Yes.

[Pliny]

If those things happen because currency is not stable then less transactions will happen and youll get less economic growth or a recession. Your currency becomes useless as a unit of exchange for anything beyond spot trasactions. Long term contracts wont be signed, and economic activity is stifled because lenders and borrowers have uncertainty as to the value of debt.

This is describing a period of correction in a fractional reserve banking system where an economy is affected by the amount of currency or credit issued. It isn't what occurs in a gold based economy with sound banking practices.

Generally, corrections under a gold standard do not affect a whole economy they only affect what needs correcting. So recessions of the general economy would not occur. Banks operating in the 1800's used fractional reserve banking practices and when they issued too much currency or notes against their reserves they got into trouble and when they failed the whole economy was affected because their currencies, the bank notes they issued were worthless. The bigger the bank the bigger the effect on the economy when it failed. The gold standard was not the problem. Basically, bankers got together with government and established the central banking system. This allowed them to keep fractional reserve banking as a policy. Had they not institutionalized the practice, they would have been just warehouses and lost the ability to issue credit on reserves and make profits on deposits.

It sure did a shitty job of it. In fact thats the reason the gold standard was finally abandoned. The US had completely bankrupted itself and had nowhere near enough gold to settle all its debts. It was finished.

Thats what I feel a lot of gold standard advocates are missing. Its not like people got together and said "hmmmm! lets try a different financial system and see if it works better!". The new system emerged because the old one COLLAPSED when the biggest economy in the system (the US) became unsolvent.

No. Governments debased the "money" (Gold) , fixed it's price, inflated the currency, and then siad the old system had failed us leading them to replace it with fiat paper currency and the new system. The gold standard was abandoned because it tied the governments hands on spending. Better to be able to print the money you need than to curtail spending.

When the US announced in 1972 that it would no longer honor convertability it was in every way a declaration of bankruptcy, and it gave the US the exact same kind of protection from creditors that a company gets when it files a Chapter 11.

Did bankruptcy occur? No. The US currency became the standard and replaced gold entirely. Essentially, you are correct. The US was no longer willing to deplete it's gold reserves but it was not bankrupt. It was still the most productive nation in the world. World leaders decided to make the US dollar the standard. The alternative was to allow a devaluation of the dollar and eat their losses in that devaluation.

Edited November 2, 2010 by Pliny

[Pliny]

The same thing can happen with precious metals....including silver. I give you....the Hunt Brothers:

http://www.buyandhold.com/bh/en/education/history/2000/hunt_bros.html

I don't think you were even born yet.

Carter created so much uncertainty in the economy that people were fleeing from the US currency. A bubble in gold and silver occurred through manipulative speculation for which the Hunt Bros. paid handsomely. Others may have lost money depending upon when they bought.

It isn't too much different than what is happening today. People looking for safety in their store of wealth. However, today I think the drive is more of a concern for the global economy than it was back then. I think some of the rising price may be speculation and perhaps George Soros wants to make some money.

[maple_leafs182]

I hope you guys have been buying silver like I advised you to.

With QE2 the Federal Reserver will be pumping $100,000,000,000 into the economy a month for the next 6 months.

The dollar will continue to fall driving up commodities, last I saw silver was up $1.50 today.

The dollar is collapsing.

[dre]

Go back and learn more about Bretton Woods.

Don't you mean "unsolvency"....either way you are mistaken.

...Britain did the exact same thing in 1914 for WWI....doesn't mean it was "unsolvent". Bankruptcy occurs when sufficient investment capital cannot be found under mounting debt...your analogy is broke dick....since US paper is still being snapped up.

Go back and learn more about Bretton Woods.

Its you that needs to learn more about BW AND about the protection from creditors the US got by suspending convertability. Its a really simple concept so not sure why youre having a hard time understanding it.

Under Bretton Woods the US dollar was pegged to gold within 5% in either direction and you had to allow convertability. Once convertability was gone, the paper held by creditors was no longer representive of gold, but instead these certificates became "America Certificates"... that the US government could control the value of using inflationary monetary policy.

Don't you mean "unsolvency"....either way you are mistaken.

...Britain did the exact same thing in 1914 for WWI....doesn't mean it was "unsolvent". Bankruptcy occurs when sufficient investment capital cannot be found under mounting debt...your analogy is broke dick....since US paper is still being snapped up.

I already posted the real definition of bankruptcy... and thats exactly the position the US was in. They were unable honor their obligations to creditors within the confines of the agreed apon framework.

[dre]

This is describing a period of correction in a fractional reserve banking system where an economy is affected by the amount of currency or credit issued. It isn't what occurs in a gold based economy with sound banking practices.

Generally, corrections under a gold standard do not affect a whole economy they only affect what needs correcting. So recessions of the general economy would not occur. Banks operating in the 1800's used fractional reserve banking practices and when they issued too much currency or notes against their reserves they got into trouble and when they failed the whole economy was affected because their currencies, the bank notes they issued were worthless. The bigger the bank the bigger the effect on the economy when it failed. The gold standard was not the problem. Basically, bankers got together with government and established the central banking system. This allowed them to keep fractional reserve banking as a policy. Had they not institutionalized the practice, they would have been just warehouses and lost the ability to issue credit on reserves and make profits on deposits.

No. Governments debased the "money" (Gold) , fixed it's price, inflated the currency, and then siad the old system had failed us leading them to replace it with fiat paper currency and the new system. The gold standard was abandoned because it tied the governments hands on spending. Better to be able to print the money you need than to curtail spending.

Did bankruptcy occur? No. The US currency became the standard and replaced gold entirely. Essentially, you are correct. The US was no longer willing to deplete it's gold reserves but it was not bankrupt. It was still the most productive nation in the world. World leaders decided to make the US dollar the standard. The alternative was to allow a devaluation of the dollar and eat their losses in that devaluation.

Did bankruptcy occur? No. The US currency became the standard and replaced gold entirely. Essentially, you are correct. The US was no longer willing to deplete it's gold reserves but it was not bankrupt. It was still the most productive nation in the world. World leaders decided to make the US dollar the standard. The alternative was to allow a devaluation of the dollar and eat their losses in that devaluation.

Suspending convertability was in EVERY WAY an act of bankruptcy. The US owed an ammount of gold to its creditors that it could never hope to pay!!! It wasnt a matter of the US being "unwilling"... they simply did not have enough gold to honor their obligations to creditors.

If my business doesnt have enough cash to fund its existing operations or maintain its debt it is BANKRUPT.

Picture this... I owe you 20 ounces of gold. But I flat out dont have it. So instead I unilaterally declare that instead of paying you the gold we had agreed to, Im going to give you "Dre Certificates" instead (and Im going continually reduce the value of these certificates so that you never really get paid). Thats a text book bankruptcy position. Do you not understand why? Any normal company doesnt get to change the UNITS that denominate its debt. The fact is that the US was unable to satisfy its financial obligations under the current framework, and declaring bankruptcy stopped its debtors from collecting in gold as they had been promised.

[bush_cheney2004]

If my business doesnt have enough cash to fund its existing operations or maintain its debt it is BANKRUPT.

Then just obtain more capital...which is what the US continues to do. So do many businesses. It's not complicated.

Gold was not owed any more than silver was owed for issued certificates.

[dre]

Then just obtain more capital...which is what the US continues to do. So do many businesses. It's not complicated.

Gold was not owed any more than silver was owed for issued certificates.

Yes it WAS. Read the agreement... countries had to peg their currencies to gold (within 5 percent) and allow convertability. GOLD WAS EXACTLY WHAT WAS OWED, and when the US was unable to honor its debts in gold and suspended convertability it was declaring bankruptcy in every sense of the word.

[bush_cheney2004]

Yes it WAS. Read the agreement... countries had to peg their currencies to gold (within 5 percent) and allow convertability. GOLD WAS EXACTLY WHAT WAS OWED, and when the US was unable to honor its debts in gold and suspended convertability it was declaring bankruptcy in every sense of the word.

No it wasn't...it was just abandoning BW and punishing West Germany for currency manipulation. The US is not bankrupt then or now despite your pleadings and wishful thinking. If the US was bankrupt, how did it go on to dominate the IMF? Why didn't the US default like Russia?

[maple_leafs182]

No it wasn't...it was just abandoning BW and punishing West Germany for currency manipulation. The US is not bankrupt then or now despite your pleadings and wishful thinking. If the US was bankrupt, how did it go on to dominate the IMF? Why didn't the US default like Russia?

Your country has to artificially pump in $100 billion a month in order to keep the economy afloat. Goldman Sachs says they may need to pump in $2 trillion this year in order to keep it going. You really don't see anything wrong with your economy.

Your Government along with the Federal Reserve have screwed you along with every other citizen in your country over. The standard of living will fall for Americans as the cost of living rises. The middle class is dying while Wall Street's profits soar.

Wall Street set to pay out record $144 billion

Gerald Celente pointed out that that would rank #49 in GDP of the world's countries.

Do you really not see what is going on.

[bush_cheney2004]

Your country has to artificially pump in $100 billion a month in order to keep the economy afloat. Goldman Sachs says they may need to pump in $2 trillion this year in order to keep it going. You really don't see anything wrong with your economy.

No more than FDR's plans for recovery from the Great Depression. Don't confuse the scale of the problem with root cause and remedial actions. Most of the TARP funds have already been repaid, and has been deemed a success.

Your Government along with the Federal Reserve have screwed you along with every other citizen in your country over. The standard of living will fall for Americans as the cost of living rises. The middle class is dying while Wall Street's profits soar.

That's OK by me....I have never had more cash and comfort. Why do Canadians worry about the American standard of living....I have a good guess (wink wink)!

Do you really not see what is going on.

Using your logic, France, UK, and Japan should be broke by now and eating raw potatoes or rice...they aren't.

Edited November 6, 2010 by bush_cheney2004