Alan Greenspan: Champion of the Gold Standard.

[dre]

The point of the gold standard is to limit government spending.

When governments digitally create too much money it debases the currency and robs the savers of their wealth.

Central banks are extremely dangerous, they hold more power then governments, they can make or break economies. Ben Bernake is one of the most powerful person in the world.

There is a reason why America had dismantled a few central banks prior to the Federal Reserve.

Right... but Im still hoping someone can explain how youre supposed to control inflation/deflation on the gold standard.

[dre]

The question is based on the premise that the government should be managing such things to begin with. Likely, that is not a premise that is particularly prevalent among supporters of returning to a gold standard.

So do they have an plan to control inflation/deflation? Or do they just not understand macro economics?

[Bob]

The gold standard is an utterly ridiculous thing. You see, gold has no more inherent value than paper money.

Are you serious?

[Bob]

Here's an interesting video on related subjects, it's a lecture from Eliot Spitzer. There's also some Q&A at the end.

Here's another interesting and related video with Joseph Stiglitz.

Edited January 24, 2011 by Bob

[Guest TrueMetis]

How?

There is no gold to be found in third word countries? All the gold there is has already been mined? Well of course not so if a big claim is found somewhere it could radically alter the price of gold, and therefore how much money is worth.

Edited January 24, 2011 by TrueMetis

[Bonam]

So do they have an plan to control inflation/deflation? Or do they just not understand macro economics?

Presumably, the position of a free market purist would be that the market should determine inflation/deflation naturally, with no government interference in economic matters.

[maple_leafs182]

Right... but Im still hoping someone can explain how youre supposed to control inflation/deflation on the gold standard.

I would argue that inflation and deflation are symptoms of bad economic policy.

I don't think inflation is a big problem with a gold standard, it is a lot harder to find new gold to add to the overall supply then press a couple of buttons on a computer and digitally create money.

Deflation might be a problem but as wages fall, prices will fall.

Honestly, I would let the market choose what money is, it doesn't have to be gold but historically people have chosen gold and silver.

[dre]

I would argue that inflation and deflation are symptoms of bad economic policy.

I don't think inflation is a big problem with a gold standard, it is a lot harder to find new gold to add to the overall supply then press a couple of buttons on a computer and digitally create money.

Deflation might be a problem but as wages fall, prices will fall.

Honestly, I would let the market choose what money is, it doesn't have to be gold but historically people have chosen gold and silver.

Deflation might be a problem but as wages fall, prices will fall.

Huh? Deflation would mean increasing wages not falling wages. And you would have MASSIVE deflation on the gold standard if it was implemented today. Your gold backed currency would be a completely useless medium for anything but spot transactions and you would heavily discourage economic activity.

[dre]

Presumably, the position of a free market purist would be that the market should determine inflation/deflation naturally, with no government interference in economic matters.

But thats ludicrous. A person could only take that position if they didnt know what deflation and inflation are. When the economy grows without the money supply growing you get deflation. So if you cant adjust the size of the money supply you cant control it.

Imagine if you borrowed gold backed dollars from the bank in 1995 on a 20 year amortization rate? You would be surrendering more than three times the purchases power you had agreed to plus interest. Long term contracts of any sort just wouldnt happen. The only safe transactions in the market place would be spot transactions.

[maple_leafs182]

Huh? Deflation would mean increasing wages not falling wages. And you would have MASSIVE deflation on the gold standard if it was implemented today. Your gold backed currency would be a completely useless medium for anything but spot transactions and you would heavily discourage economic activity.

Why would deflation lead to an increase in wages.

Deflation is a contraction of the money supply compared to the amount of goods it is chasing, where is the money coming from to increase wages.

I agree with it leading to deflation and ya it would discourage economic activity because we have built up an economy out of borrowing cheap money. If that ended doing that, we would slip into a recession or depression.

[dre]

Why would deflation lead to an increase in wages.

Deflation is a contraction of the money supply compared to the amount of goods it is chasing, where is the money coming from to increase wages.

I agree with it leading to deflation and ya it would discourage economic activity because we have built up an economy out of borrowing cheap money. If that ended doing that, we would slip into a recession or depression.

Why would deflation lead to an increase in wages.

Because as the size of the money supply decreases in relation to the ammount of goods and services the purchasing power of units of currency goes up. When you make a deal for services from an employee that deal is based on the purchasing power of currency at the time. If theres deflation will be surrendering more purchasing power to that worker than you agreed to. His wage has gone up. Which is why, as I said it would discourage any time of non spot transaction.

[Bonam]

Because as the size of the money supply decreases in relation to the ammount of goods and services the purchasing power of units of currency goes up. When you make a deal for services from an employee that deal is based on the purchasing power of currency at the time. If theres deflation will be surrendering more purchasing power to that worker than you agreed to. His wage has gone up. Which is why, as I said it would discourage any time of non spot transaction.

It would be easy enough to write a contract where the wage is indexed to the inflation/deflation on a monthly or yearly basis.

[Pliny]

ML182 said:Why would deflation lead to an increase in wages.

Because as the size of the money supply decreases in relation to the ammount of goods and services the purchasing power of units of currency goes up.

I have had this discussion with you before. Never did quite understand your point of view.

But your reply here says something.

I don't see how you explain wages go up because the purchasing power of units of currency goes up. They would have to take a necessary cut in wages. Is that an impossiblity or unimaginable? I know Hoover tried to make it an impossiblity out of the concern for the labour front.

Deflation means prices drop. Labour is a good so it's price must drop - that means wages go down.

Inflation is an increase in the money supply (Inflate) with the result of an increase in the general price level.

Deflation is a decrease in the money supply (deflate) with a resulting decrease in the general price level.

In a period of deflation if wages are artificially maintained and not allowed to drop, the result is high unemployment.

Some people thought that after the housing crash we went into a period of deflation. Not true because the "general price" of goods and services

did not drop. The price of the housing market and related goods and services dropped. Capital goods also tended to drop but consumer goods didn't. By definition, the general price level did not drop so it is not a period of deflation.

Edited January 25, 2011 by Pliny

[Pliny]

Because as the size of the money supply decreases in relation to the ammount of goods and services the purchasing power of units of currency goes up. When you make a deal for services from an employee that deal is based on the purchasing power of currency at the time. If theres deflation will be surrendering more purchasing power to that worker than you agreed to. His wage has gone up. Which is why, as I said it would discourage any time of non spot transaction.

As Bonam said the terms of infaltion and deflation could be wirtten into any contract. but there would be only a slight amount of deflation unless the somehow the money supply was increased. The predictability would be fairly good. The governemnt plan of price stability through inflation often runs away and creates booms and busts in the economy.

[maple_leafs182]

Some people thought that after the housing crash we went into a period of deflation. Not true because the "general price" of goods and services

did not drop. The price of the housing market and related goods and services dropped. Capital goods also tended to drop but consumer goods didn't. By definition, the general price level did not drop so it is not a period of deflation.

I think people saw deflation because all the defaults on mortgages shrunk the overall money supply.

[dre]

As Bonam said the terms of infaltion and deflation could be wirtten into any contract. but there would be only a slight amount of deflation unless the somehow the money supply was increased. The predictability would be fairly good. The governemnt plan of price stability through inflation often runs away and creates booms and busts in the economy.

As Bonam said the terms of infaltion and deflation could be wirtten into any contract.

Why on earth would you want to do that? The whole point of currency is that its relatively stable so that it can be used as a transaction medium easily.

but there would be only a slight amount of deflation unless the somehow the money supply was increased.

No... thats backwards. You would get deflation if the money supply SHRANK in relation to the economy. On the gold standard you would get deflation any time there was economic growth.

The predictability would be fairly good.

Why do you say that? Gold has tripled in price in the last 15 years. Imagine if you had signed a mortgage with gold backed currency as the unit of account? Youd be hosed.

The governemnt plan of price stability through inflation often runs away and creates booms and busts in the economy.

That generally happens when they IGNORE the plan like Mr Greenspan did. Its a result of poor monestary policy. But even with all that the dollar has historically been more predictable and stable than gold. It looks value, but relatively consistantly and incrementally at about 3% per year. And while there has been booms and busts we have also seen a period of unprecidented economic growth and increase in standard of living under the fractured reserve system.

[dre]

ame='dre' date='24 January 2011 - 08:43 PM' timestamp='1295930631' post='618937']

I have had this discussion with you before. Never did quite understand your point of view.

But your reply here says something.

I don't see how you explain wages go up because the purchasing power of units of currency goes up. They would have to take a necessary cut in wages. Is that an impossiblity or unimaginable? I know Hoover tried to make it an impossiblity out of the concern for the labour front.

Deflation means prices drop. Labour is a good so it's price must drop - that means wages go down.

Inflation is an increase in the money supply (Inflate) with the result of an increase in the general price level.

Deflation is a decrease in the money supply (deflate) with a resulting decrease in the general price level.

In a period of deflation if wages are artificially maintained and not allowed to drop, the result is high unemployment.

Some people thought that after the housing crash we went into a period of deflation. Not true because the "general price" of goods and services

did not drop. The price of the housing market and related goods and services dropped. Capital goods also tended to drop but consumer goods didn't. By definition, the general price level did not drop so it is not a period of deflation.

I don't see how you explain wages go up because the purchasing power of units of currency goes up. They would have to take a necessary cut in wages. Is that an impossiblity or unimaginable? I know Hoover tried to make it an impossiblity out of the concern for the labour front.

If you agree to pay an employee 10 units per hour for a period of three years based on the current wealth/value/purchasing power of those units, and the value of those units increases by a factor of three during the duration of that contract, then wages did not go down, and you surrendered more purchasing power than you agreed to. Wages MAY go down when you sign the NEXT contract with that employee. In such an environment you simply wouldnt SIGN those contracts in the first place.

On the gold standard you would be using a volatile commodity as the unit of economic account. You will stifle the economy, and limit the ammount of transactions between individuals, and you will discourage investment.

Thats the ENTIRE POINT of currency. Its supposed to be a stable and predictable medium of exchange.

Edited January 26, 2011 by dre

[August1991]

Greenspan was the one with irrational exuberance. He ignored rate management policy, and if you look at various things he was saying at the time, it was because he believed that computerization, and an unprecidented time of peace provided a "once in a hundred years opportunity" and that the rules didnt apply. We know for a fact that intelligent rate policy would have mitigated the housing bubble, we just know exactly how much. Greenspan was also the guy that counciled Americans to take teaser rate mortgages, and variable rate mortgages, and these products turned out to be very damaging to the economy and to American families.

You are assigning words and ideas to Greenspan that he never said or espoused.

Dre, in 2008, a housing/financial bubble collapsed in the US and elsewhere. After the collapse of a bubble, many people want to find a culprit. You've decided that it's Greenspan. Other people blame Wall Street, Goldman Sachs.

And Pliny blames Barney Franks and Fannie Mae:

Blatantly obvious to whom? I remember a few politicians with concerns but by 2006 all concerns were pooh-poohed by a newly formed democrat majority in Congress by the likes of Barney Franks, Chris Dodd and Nasty Pelosi.

....

Mortgages sold in the States were bundled as derivatives and bought up by both Wall Street and Fannie and Freddie. Fannie and Freddie were eager to buy them to promote the "Home for every American" policy encapsulated in the CRA. Wall St. knew they were high risk and further bundled them up and sold them to Fannie and Freddie and other investors willing to take a high return risk that Wall Street knew would eventually end in a bust. The government pushed it as far as it would go.

This is all in hindsight. People need to blame someone for their own exuberance.

The fact of the matter is that many Americans (and others), simultaneously, got involved in a "get rich quick scheme". It has happened before and it will happen again. I don't think there is anything anyone can do to prevent it. Why?

Well, we can possibly prevent panics (where people believe something will fall to no value at all) by providing some basic value. But we can't prevent bubbles (where people believe that something will make them very rich) because there is no limit to wealth.

In simple terms, the people of Iceland, America, Ireland and Spain are responsible for their own folly. No one wants to say that now but it's the truth. In the 1600s when people in Amsterdam traded a house for a mere tulip bulb, it was not the fault of Alan Greenspan, Barney Frank, Goldman Sachs or Fannie Mae.

How many times have we woken up the next morning and wondered: "What was I thinking?"

You need to dig into what inflation, and deflation really are in order to answer this question. Fixing currency to a commodity will severely hamper the economy and economic growth.

I tend to agree.

How do you maintain stable pricing indexes if you cant control the size of the money supply? If you dont do that then your currency becomes useless as a transactional medium.

The central bank can control high-powered money or the monetary base. Unfortunately, alot of private commercial paper is used for myriad transactions and this paper, while dependent on the monetary base, is not directly tied to the base. The central bank can influence the quantity of commercial paper (M1 and so on) through nominal interest rates and according changes to the monetary base.

Of course, if everyone wants cash, what is a good central bank to do? Refuse them?

Goldspan was a proponent of the gold standard in his earlier years and I remember even reading a dissertation of his on why he supported it.

I think Goldspan favoured the gold standard in the same sense that Friedman favoured a monetary rule. (Call it the Taylor Rule for lack of a better term.)

Greenspan generally thought that messing around with the money supply was not a good idea.

Paul Volcker's and his time at the Fed are now known as the Great Moderation.

Edited January 26, 2011 by August1991

[dre]

You are assigning words and ideas to Greenspan that he never said or espoused.

Dre, in 2008, a housing/financial bubble collapsed in the US and elsewhere. After the collapse of a bubble, many people want to find a culprit. You've decided that it's Greenspan. Other people blame Wall Street, Goldman Sachs.

And Pliny blames Barney Franks and Fannie Mae:

This is all in hindsight. People need to blame someone for their own exuberance.

The fact of the matter is that many Americans (and others), simultaneously, got involved in a "get rich quick scheme". It has happened before and it will happen again. I don't think there is anything anyone can do to prevent it. Why?

Well, we can possibly prevent panics (where people believe something will fall to no value at all) by providing some basic value. But we can't prevent bubbles (where people believe that something will make them very rich) because there is no limit to wealth.

In simple terms, the people of Iceland, America, Ireland and Spain are responsible for their own folly. No one wants to say that now but it's the truth. In the 1600s when people in Amsterdam traded a house for a mere tulip bulb, it was not the fault of Alan Greenspan, Barney Frank, Goldman Sachs or Fannie Mae.

How many times have we woken up the next morning and wondered: "What was I thinking?"

I tend to agree.

The central bank can control high-powered money or the monetary base. Unfortunately, alot of private commercial paper is used for myriad transactions and this paper, while dependent on the monetary base, is not directly tied to the base. The central bank can influence the quantity of commercial paper (M1 and so on) through nominal interest rates and according changes to the monetary base.

Of course, if everyone wants cash, what is a good central bank to do? Refuse them?

I think Goldspan favoured the gold standard in the same sense that Friedman favoured a monetary rule. (Call it the Taylor Rule for lack of a better term.)

Greenspan generally thought that messing around with the money supply was not a good idea.

Paul Volcker's and his time at the Fed are now known as the Great Moderation.

You are assigning words and ideas to Greenspan that he never said or espoused.

Dre, in 2008, a housing/financial bubble collapsed in the US and elsewhere. After the collapse of a bubble, many people want to find a culprit. You've decided that it's Greenspan. Other people blame Wall Street, Goldman Sachs.

No I wouldnt say GreenSpan was the only culprit. Clearly there was too much credit out there and rampant speculation. But its the feds job to cool down the economy in that case. Thats exactly what the Taylor Rule you cited calls for. Greenspan ignored it.

Heres a graphic that shows it.

http://static.seekingalpha.com/uploads/2009/4/5/saupload_09_04_03b_taylor_rule.png

Theres lots of blame to go around. US trade policy was a huge factor, as we the huge spike in energy prices prior to the meltdown, and then you have the wallstreet casino and a lack of effective government regulation. I focused on Greenspans role in this topic because I found it ironic that the guy who botched the response by the federal reserve is now blaming the federal reserve.

Edited January 26, 2011 by dre

[Bonam]

Why on earth would you want to do that?

Umm, to address the concern that you yourself brought up?

[August1991]

But its the feds job to cool down the economy in that case.

"Cool down?" In a place like the United States, how do you tell someone that they won't succeed?

We can prevent panics but we can't prevent bubbles. IOW, the Fed can write Puts but it can never write enough Calls.

[dre]

Umm, to address the concern that you yourself brought up?

Yup your theory is sound, but its bad economic policy because it would discourage transactions.

Not having to pro-rate every transaction is the whole point of currency though... its supposed to be the economic unit of account. What youre talking about isnt couldnt even really be described as currency.

Interesting enough some transactions ARE structured that way... in countries with rampant deflation or inflation. Thats what PLAMS are...

A price-level-adjusted mortgage is made for $100,000. Monthly payments in the first year are $400. After the first year, the principal balance is reduced to $98,000. The inflation rate for the year was 10%. The principal balance is adjusted to $107,800 and the payments for the second year are increased to $440 per month.

You can see why they arent popular in the west. Inflation would add more to your pinciple each year than you pay down so the ammount of your mortgage in dollars would increase every year

[August1991]

Interesting enough some transactions ARE structured that way... in countries with rampant deflation or inflation. Thats what PLAMS are...

Rampant deflation?

In countries with rampant inflation, most people nowadays simply switch to another currency. US dollars or euros. It's called dollarization and was once called Gresham's Law.

----

You guys are discussing "menu costs". With inflation/deflation, restaurants must change their menus. This is costly. It is simplistic to imagine that menu prices/contracts can be indexed. For starters, indexed to what? The CPI?

Edited January 26, 2011 by August1991

[dre]

"Cool down?" In a place like the United States, how do you tell someone that they won't succeed?

We can prevent panics but we can't prevent bubbles. IOW, the Fed can write Puts but it can never write enough Calls.

"Cool down?" In a place like the United States, how do you tell someone that they won't succeed?

You manage interest rates using the Taylor Rule or a similar formula. Its actually pretty easy to control a realestate bubble because if you raise the rates a percent or two you can shrink the number of potential buyers in the market place. You can basically adjust the thing like a dial.

Look at this again..

http://static.seekin...taylor_rule.png

If the guideline had been followed then in 2004 interest rates would have been a full 4% higher than they were. This would have had a dramatic effect on the realestate market, would have resulted in less risky deals.

[dre]

Rampant deflation?

In countries with rampant inflation, most people nowadays simply switch to another currency. US dollars or euros. It's called dollarization and was once called Gresham's Law.

----

You guys are discussing "menu costs". With inflation/deflation, restaurants must change their menus. This is costly. It is simplistic to imagine that menu prices can be indexed. For starters, indexed to what? The CPI?

Yes thats exactly my point. Every non-spot transaction in the entire economy would have to be constantly adjusted against a CPI, which is at best a lagging approximation of purchasing power.

Still though... Bonham is right and get marks for answering my question. That IS exactly what you would have to do on the gold standard to protect the participants in every transaction from the constant deflation.

Edited January 26, 2011 by dre