The Economic Ignorance of the Modern Right

[Michael Hardner]

History is just repeating itself. A fiat paper system with government owning the printing press will not last past one generation.

Yet, the latest craze of blaming the so-called fiat system puts the blame on the Nixon administration elected in 1968 more than one generation ago.

A simple bump in taxes and this is all fixed up.

[Pliny]

Yet, the latest craze of blaming the so-called fiat system puts the blame on the Nixon administration elected in 1968 more than one generation ago.

A simple bump in taxes and this is all fixed up.

Is that the latest craze? Wish it were.

A generation is 70 years these days, Michael. Several generations exist within that time frame but a full generation is 70 years or the average lifespan. It's only been 40 years since Nixon ended Bretton-Woods entirely. It's been a hundred years since the Federal Reserve was instituted. It took them 60 years to debase the currency to a completely unbacked fiat paper token system. It will be another approximately 60 years, I'm estimating before the economy collapses. They may try something like a global token system or maybe the remnimbi will become the reserve currency but that would be a stretch. When the tokens you are holding expire, i.e., when the system goes down, you will be holding nothing but a bad debt that you will not be able to collect on.

A simple bump in taxes and this is all fixed up? It is no wonder we are in the economic morass we are in. The public can be snowed so easily.

A simple bump in taxes and more businesses disappear

Edited November 8, 2012 by Pliny

[Michael Hardner]

A generation is 70 years these days, Michael. Several generations exist within that time frame but a full generation is 70 years or the average lifespan.

These days ? What changed ? I thought it was the time to add a level to the family tree... not a full lifetime.

Debt has ebbed and flowed since that time so I wouldn't be so sure to wait for the end of days. If it does happen, I think debt will be a symptom of what wrong not the problem itself.

[dre]

These days ? What changed ? I thought it was the time to add a level to the family tree... not a full lifetime.

Debt has ebbed and flowed since that time so I wouldn't be so sure to wait for the end of days. If it does happen, I think debt will be a symptom of what wrong not the problem itself.

Nothing changed... Pliny just doesnt know what a generation is. Its the average time between when a person is born and when they have children of their own. 30 years or so.

Debt has ebbed and flowed since that time so I wouldn't be so sure to wait for the end of days

I dont think people who forcast the collapse of the fiat debt/money system are necessarily expecting an "end of days" scenario. Money does not create economic activity its just grease. What really creates activity is the desire of one for the goods/services of another, and those needs dont dry up because theres no little bits of paper around. So its not a matter of the "end of days". When this system collapses another system will emerge very quickly, and economic activity will continue. At the most youre talking about damage to the economy that lasts a few years.

Its nothing to be all that frightened of necessarily.

Also... it seems improbably to you ONLY because you have never known anything else... so you have this feeling that it will go on forever and this is the only way things will ever be. But the reality is that this system is only 40 years old, and we have used 3 completely different systems in the last 100 years alone.

The reality is the system has a lot of negative consequences, and could be greatly improved apon. Currently our economic system guarantees that if the economy grows the ammount of debt grows. Almost every single dollar in existance represents a debt. Debt is not the result of fiscally imprudent governments like many believe, it is the byproduct of economic growth. So your statement that "we can just collect more taxes and everything will be ok", is fallacious. That debt is the unescapable result of the systems rules. If you want a system that allows prosperity without create debt, this one by its very nature cannot work.

[August1991]

History is just repeating itself. A fiat paper system with government owning the printing press will not last past one generation.

And would you prefer a monetary system based on the ability to find a rock in the ground?

Aside from wasting people's lives as they run around the world looking for a rock, a gold standard makes random discoveries our monetary policy. If we are to have a monetary policy, surely we (as a civilized society) can do better.

Edited November 9, 2012 by August1991

[Michael Hardner]

Also... it seems improbably to you ONLY because you have never known anything else... so you have this feeling that it will go on forever and this is the only way things will ever be. But the reality is that this system is only 40 years old, and we have used 3 completely different systems in the last 100 years alone.

Why is it 40 years old ? It seems at least hundreds of years old to me...

No, I'm not concerned because I don't think it will happen.

The reality is the system has a lot of negative consequences, and could be greatly improved apon. Currently our economic system guarantees that if the economy grows the ammount of debt grows.

If companies hoard cash, then is that money included as 'part of the economy' ? If so, how ?

If you want a system that allows prosperity without create debt, this one by its very nature cannot work.

You're talking about banks and governments issuing more cash in circulation... I think the last time we went around on this, there was no alternative advanced. Do you have one ?

[dre]

Why is it 40 years old ?

Because about 40 years has elapsed since it was born.

No, I'm not concerned because I don't think it will happen.

Right I explained why you dont think that. After hundreds of consecutive currency schemes collapsing over the last few thousand years, you just happened to be born after we finally got it right and made a system that will last forever Never mind that the system just crashed the global economy and almost everyone in it is accumulating astronomical debt.

You're talking about banks and governments issuing more cash in circulation... I think the last time we went around on this, there was no alternative advanced. Do you have one ?

Yeah I presented a couple of different alternatives, and economists around the world have presented others.

[TimG]

Because about 40 years has elapsed since it was born.

You are talking about the elimination of the gold standard? We had a fiat currency system long before then. The only difference is governments would announcing a change of monetary policy by changing the conversion rate between gold and currency.

Right I explained why you dont think that. After hundreds of consecutive currency schemes collapsing over the last few thousand years, you just happened to be born after we finally got it right and made a system that will last forever

Gee - there are so many things about society today that are completely unique in history that it seems ridiculous to suggest that the economic system must fail because no system has ever succeeded in the past.

[dre]

You are talking about the elimination of the gold standard? We had a fiat currency system long before then. The only difference is governments would announcing a change of monetary policy by changing the conversion rate between gold and currency.

Sorry, this is just not true. Prior to 1971 dollars had value because they were convertable to gold at a fixed rate. After that dollars had value only because of government decree (legal tender laws). Theres a huge difference... its a completely new monetary system.

Edited November 9, 2012 by dre

[Michael Hardner]

Yeah I presented a couple of different alternatives, and economists around the world have presented others.

Sorry - I did miss that I think.

[dre]

Sorry - I did miss that I think.

No you didnt, its just been a while. You and I actually talked each one through a fair bit. Theres a bunch of different ideas out there, everything from the Bancor, to interest free money like the greenback, to self issued currency.

[TimG]

Sorry, this is just not true. Prior to 1971 dollars had value because they were convertable to gold at a fixed rate. After that dollars had value only because of government decree (legal tender laws). Theres a huge difference... its a completely new monetary system.

Learn your history: http://en.wikipedia....i/Gold_standard

Governments faced with the need to fund high levels of expenditure, but with limited sources of tax revenue, suspended convertibility of currency into gold on a number of occasions in the 19th century. The British government suspended convertibility (that is to say, it went off the gold standard) during the Napoleonic wars and the U.S. government during the US Civil War. In both cases, convertibility was resumed after the war.

In order to finance the cost of [WW1], most belligerent countries went off the gold standard during the war, and suffered significant inflation. Because inflation levels varied between states, when they returned to the standard after the war at price they determined themselves (some, for example, chose to enter at pre-war prices), some countries' goods were undervalued and some overvalued.

The gold standard was dropped whenever it was inconvenient which kind of proves it is useless as means of monetary control. Edited November 9, 2012 by TimG

[dre]

Learn your history: http://en.wikipedia....i/Gold_standard

The gold standard was dropped whenever it was inconvenient which kind of proves it is useless as means of monetary control.

I was talking about the BW fixed exchange rate system that existed prior to 1971.

The gold standard was dropped whenever it was inconvenient which kind of proves it is useless as means of monetary control.

Well im not an advocate for the gold standard, but fiat currency has been dropped over and over again as well, so by your reasoning that makes it useless as a means of monetary control as well.

[TimG]

I was talking about the BW fixed exchange rate system that existed prior to 1971.

Now you are making even less sense. fixed currencies make no sense all because trade flows are not fixed. if a nation imports more than it exports its currency must go down and vise versa.

[Pliny]

These days ? What changed ? I thought it was the time to add a level to the family tree... not a full lifetime.

Debt has ebbed and flowed since that time so I wouldn't be so sure to wait for the end of days. If it does happen, I think debt will be a symptom of what wrong not the problem itself.

How long does a generation live? It doesn't exist for only 30 years and disappear. It exists for the average lifespan at the time. The next generation comes into being for the most part in the third or fourth decade of the existing generation.

Debt is indeed a "symptom" of what is wrong but a lot of "economists", with whom I believe you are in agreement, don't believe there is anything wrong with government debt and is not an indication of anything wrong.

Edited November 10, 2012 by Pliny

[Pliny]

Learn your history: http://en.wikipedia....i/Gold_standard

The gold standard was dropped whenever it was inconvenient which kind of proves it is useless as means of monetary control.

Just think what would have occurred if they couldn't have gone off the gold standard? If they couldn't just print currency or deficit finance their budgets. How long did the assignat last, or the Continental or the Greenback. These are the most modern examples of paper currencies that went off a commodity backed standard, or there is the German Mark of the nineteen twenties. I hear it is around a million dollars for a loaf of bread in Zimbabwe.

If money is debased to just being tokens, as it is today, it should be a signal to people they have been robbed. Unfortunately, they see no difference, everything appears to be the same, so it works. What could be wrong? And if economists are pooh-poohing concerns about it and about national debt why should we worry - they are the experts.

[August1991]

Sorry, this is just not true. Prior to 1971 dollars had value because they were convertable to gold at a fixed rate.

That's simply not true. FDR made it illegal for Americans to hold gold.

I have no patience for people who argue for a gold standard, or believe that gold is the best monetary system. If we make gold the basis of our monetary system, we would surrender monetary policy to the vagaries of gold discoveries. 1) If someone found a huge cache of gold under an Antarctic glacier, we would have a huge expansion of the money supply and then inflation. 2) With a gold standard, many people would waste their lives looking for gold deposits under Antarctic glaciers, in ocean floors or even on Mars. How absurd! A Martian would would see Earthlings chasing after a rock. Seeking a cure for cancer is a better use of one's time than looking for a rare mineral.

Just think what would have occurred if they couldn't have gone off the gold standard? If they couldn't just print currency or deficit finance their budgets. How long did the assignat last, or the Continental or the Greenback. These are the most modern examples of paper currencies that went off a commodity backed standard, or there is the German Mark of the nineteen twenties. I hear it is around a million dollars for a loaf of bread in Zimbabwe.

The Canadian dollar has done well, for almost two centuries. And it was never based on anything except a law and a promise.

QE 1 and 2 kept things from failing, or in reality from correcting itself, when prices and wages should have fallen further so all that money is propping up prices. Soon, especially now with QE3 in effect, prices will begin to rise.

Have you looked at rates on 30 year US Treasury bonds? Have you looked at the rates on inflation-protected paper?

Frankly, at this point, I'd be happy to see some inflation.

-----

I agree that the US federal government must get its fiscal house in order. The current budget deficits are not sustainable. But when the US Fed is financing 75% of the deficit or more, sustainability is a moot question. The US is awash in new cash and has been for several years - without, as my OP argued, inflation.

When Steyn and his ilk argue that Obama's re-election is the end of America as we know it, I'd ask Steyn: "Where is the inflation?"

Edited November 11, 2012 by August1991

[August1991]

Debt has ebbed and flowed since that time so I wouldn't be so sure to wait for the end of days. If it does happen, I think debt will be a symptom of what wrong not the problem itself.

1) The US federal government debt has been greater in the past than it is now under Bush Jnr/Obama (if the debt is measured as a percentage of GDP). After the Civil War and after World War II, US federal debt was greater than at present.

2) State debt is not like personal/family debt. A (successful) person, an immigrant or poor person, borrows and then pays down debt and dies rich, leaving a heritage to children. The State never dies. A successful State is composed of perpetually poor people, immigrants - who will become rich. In a successful State, there is always debt.

Edited November 11, 2012 by August1991

[dre]

That's simply not true.

Yes its exactly true.

without, as my OP argued, inflation.

As your OP incorrectly argued.

[Pliny]

You are talking about the elimination of the gold standard? We had a fiat currency system long before then. The only difference is governments would announcing a change of monetary policy by changing the conversion rate between gold and currency.

The gold standard ended entirely in 1971. Gold prior to that was pegged at $35/oz. How could we have a fiat currency system long before the elimination of the gold standard? The US dollar was redeemable for gold or silver until around 1962 when it finally was issued as not redeemable. Americans indeed could not own gold from 1933 until 1976, with exceptions that I won't go into right now, but their currency still stated it was redeemable for gold and it was internationally until 1971. The last bills that were printed that stated they were redeemable for gold or silver was the silver certificates printed in 1962. After that it only said they were "legal tender". Bretton-Woods made them redeemable internationally until 1971.

The assignat in France during the late 1700s , was about the only true fiat currency of what most people think are fiat currencies. The Continental was a paper currency as was Lincoln's Greenback. I'm not certain without looking it up if the Continental was entirely a fiat paper currency but the Greenback was still a promise to pay in real money by the government. The government finally bought them back at a reduced value around 1876, I believe it was Grover Cleveland who redeemed them. Most, because bankers heard the news first, had been bought up by them for even less than the government offer themselves a tidy profit.

Gee - there are so many things about society today that are completely unique in history that it seems ridiculous to suggest that the economic system must fail because no system has ever succeeded in the past.

A fiat paper system has never lasted more than a generation. Modern bankers thought they could do it but they can't and the cracks are showing.

[TimG]

Gold prior to that was pegged at $35/oz. How could we have a fiat currency system long before the elimination of the gold standard?

Because governments would go off the gold standard whenever circumstances warranted. They also changed the exchange rate whenever they wanted. A currency system where the value of currency can be changed at the whim of a government is a fiat currency. The only true gold backed currency system is one where you use real gold coins as a means of exchange. Edited November 15, 2012 by TimG

[Pliny]

I have no patience for people who argue for a gold standard, or believe that gold is the best monetary system. If we make gold the basis of our monetary system, we would surrender monetary policy to the vagaries of gold discoveries. 1) If someone found a huge cache of gold under an Antarctic glacier, we would have a huge expansion of the money supply and then inflation. 2) With a gold standard, many people would waste their lives looking for gold deposits under Antarctic glaciers, in ocean floors or even on Mars. How absurd! A Martian would would see Earthlings chasing after a rock. Seeking a cure for cancer is a better use of one's time than looking for a rare mineral.

Gold may or may not be the best standard but the market should be allowed to decide that. The vagaries of gold only mean adjustments in price levels are made accordingly. A penny candy, if no gold is added to the money system, means the price will go down and you will be able to buy ten peices of candy for a penny. If gold discoveries are made and it is added to the money supply then the price of a penny candy may rise to 10 cents per candy.

The amount of money does not determine whether trade will occur. It is a factor in general price level.

The Canadian dollar has done well, for almost two centuries. And it was never based on anything except a law and a promise.

Untrue. It was redeemable for gold and silver until Bretton-Woods when it was agreed that only the American dollar would be redeemable. Even after that it still sadi on the bills that they were redeemable because yo could cnovert them to US dollars and then redeem that.

Have you looked at rates on 30 year US Treasury bonds? Have you looked at the rates on inflation-protected paper?

Yep. Pretty low.

Frankly, at this point, I'd be happy to see some inflation.

-----

I agree that the US federal government must get its fiscal house in order. The current budget deficits are not sustainable. But when the US Fed is financing 75% of the deficit or more, sustainability is a moot question. The US is awash in new cash and has been for several years - without, as my OP argued, inflation.

When Steyn and his ilk argue that Obama's re-election is the end of America as we know it, I'd ask Steyn: "Where is the inflation?"

Inflation is actually the new cash you say we are awash in. You are asking the question, "Where are the symptoms of inflation if adding money to the system is supposed to raise the general price level?"

Firstly you should see that adding money to the supply will do exactly that - raise the general price level. As dre pointed out the symptoms of inflation, a rising price level, are there. You are expecting an explosion in the general price level and don't see one. Several factors will delay that and as you know a high inflation rate is something the government will attempt to curtail. Basically, the symptom of inflation is being held down by China, among others, and now the Federal Reserve buying up government debt. When they can no longer do that you will see some higher inflation rates.

[Pliny]

Because governments would go off the gold standard whenever circumstances warranted. They also changed the exchange rate whenever they wanted. A currency system where the value of currency can be changed at the whim of a government is a fiat currency. The only true gold backed currency system is one where you use real gold coins as a means of exchange.

It is true they would finance the war or whatever by printing money out of thin air but they didn't go off the gold standard in modern times. They just "suspended" the redeemability for a time. Right now redeemability is not suspended it is gone.

No. A true gold standard currency always includes a promise to pay, making it redeemable. A fiat currency system makes no promise to pay and is not redeemable for anything but maybe a new token. The "fiat" is that it must be accepted as a legal tender. Even Lincoln's Greenback included that promise to pay but wasn't honoured until later.

[TimG]

A fiat currency system makes no promise to pay and is not redeemable for anything but maybe a new token. The "fiat" is that it must be accepted as a legal tender.

A gold backed system is an illusion depends on the fact that most people never ask for the gold. If a lot of people did you would find that the promise would NOT be honoured. This reality is why it was illegal to hold gold. What good is a promise to pay in gold if it is illegal to hold the gold that you would get? Bottom line: there is no effective difference between a formal "fiat" currency system and a system where government makes promises it has no intention of keeping. Edited November 15, 2012 by TimG

[Michael Hardner]

A gold backed system is an illusion depends on the fact that most people never ask for the gold. If a lot of people did you would find that the promise would NOT be honoured. This reality is why it was illegal to hold gold. What good is a promise to pay in gold if it is illegal to hold the gold that you would get? Bottom line: there is no effective difference between a formal "fiat" currency system and a system where government makes promises it has no intention of keeping.

That's a good point.

So much of this reminds me of the 'Free Silver' discussions from the 19th century. The fact that you have people from the left and right supporting this makes you kind of scratch your head and wonder.