Tamerlan IED - He didn't build that.

[Wilber]

If a company wishes to survive in the long term it must act responsibly even if there are costs in the short term.

Vulture capitalists aren't interested in the long term, all they are interested in is "unlocking value" from their acquisitions. Set up a holding company, sell your acquisitions assets, distribute the proceeds to the shareholders of the holding company, flog the carcass of the acquisition and dissolve the holding company. Done all the time.

[Bonam]

Pliny, you should go check out the politics/philosophy/economics sections of the bitcoin forums. You'll be right at home ;p

[kimmy]

No one can create it out of thin air.

If they have friends in Washington they aren't as worried as they should be.

What does a legal tender mean?

I know what legal tender means. I'm asking you to explain your point. What the hell are you even talking about.

I see how you arrive at your point of view. A complete distrust of anyone to act in the interests of someone else.

If a company wishes to survive in the long term it must act responsibly even if there are costs in the short term.

That's demonstrably false, first off. All they need to do is avoid the consequences of acting irresponsibly. There's plenty of examples.

And secondly, as Wilber points out... what makes you think the long term even matters to the people making these decisions?

When there's so much gain to be made by acting short term, why bother thinking long term at all?

Fits your concept of humanity quite well, disgusting isn't it? If that is your concept of humanity do you consider yourself a part of that humanity? Is that how you would act then?

It's not my concept of humanity in general, but it seems to be how the job description of people who excel in business. Maximize profits, increase shareholder value, other issues are of no consequence. That might not be what they are like as human beings, but that is what they are like when they are doing their job.

How would I act? I like to think that if I had my own business, I would run it as ethically as I knew how. I'd want it to be something I could be proud of. I would want it to last. At this point I have to point out that the people who built the businesses we're often talking about are often not the people who are making these decisions. The people who built Sealy Mattresses were probably proud of the company and the product and wanted it to last... the people at Bain had none of these notions... to them it was a collection of assets on some ledgers, and they concluded that laying off people and making poorer-quality products and taking on debts to issue "special dividends" to Bain Capital was the best way to maximize their shareholders' value.

How would I act if I were in a position like Dick Fuld, where I had the opportunity to make a vast amount of money based on the quantity of transactions I made, and suffered no consequences if the quality of those transactions turned out to be shoddy? The shareholders are putting pressure on me to rack up big numbers for them *right* *now*? And I get an enormous sum of money if I do? And the only consequences to me if I do a bad job are that I get fired and keep the obscene amount of money I am making right now? I think I would try to give the shareholders what they wanted. Wouldn't you?

Private industry came up with this system of compensation, I have to point out. You can't blame it on government.

"Let's motivate our executives to really perform by offering great bonuses if they provide great profits!"

"But what if they sacrifice the long-term good of the company in favor of short-term profit so that they can get those bonuses?"

"Good point. Let's reward them for great profits by giving them stocks as well as bonuses! That way, they have an incentive to care about the long term good of the company!"

"But what if they make short-term decisions to get bonuses and stocks and drive up the stock price, then sell their stocks before the consequences of short-term thinking hurt the company?"

"Oh, you're just being silly! That would never happen!"

Yep, that would never happen, right?

What hits the news is a very small part of our activities here. Certainly there are unscrupulous people in the world and many of them today have undeservedly accrued wealth and power to themselves. Your solution seems to be to have the same people who made the rules make more rules for the rest of us.

I don't necessarily want *more* rules, I want *meaningful* rules, and I want *meaningful* punishment for those who break the rules, and I want the rules to be enforced vigorously instead of in the toothless way that they have been enforced them over the past however many years.

If you're HSBC and you can make billions of dollars by breaking the law, and the punishment when you get caught is a fine that you can pay out of the profits you made while breaking the law, that's not a meaningful punishment. That's not an incentive to change your behavior.

If you get caught carrying a small quantity of recreational drugs, you can end up doing hard time. If you get caught laundering money for drug cartels and terrorists, you sleep in your own bed and your shareholders find their dividends cheques are a couple of dollars less this quarter. That's a serious problem.

Wrongdoers in the finance industry know that the feds are scared to actually go to court, and that if they get caught breaking the rules, the punishment is going to be some paltry out-of-court settlement with no admission of guilt.

So, what has occurred is a system has been created that protects the wealthy and powerful. How do we end this cronyism?

Well, that's a darned complicated question. But if you think "Bring Back the Gold Standard!" is the answer, you're terribly naive.

I would suggest we look at how it was created and until we know nothing will change. If you solely interested in punishing the scoundrels, who if pressed will provide a few scapegoats for you and be properly incensed, write a few more rules which incidently make them more powerful, then we are destined to suffer tyranny.

No, I don't think fair laws and vigorous enforcement of laws leads inexorably to tyranny.

The company should have been dismantled in my view.

But that sounds positively tyrannical!

Seriously, though: dismantled by who? The US government? The British government? The government of the Netherlands or the Cayman Islands or wherever they file their taxes or do their banking?

I'm not defending irresponsibility. I'm asking for proper and just consequences, not fines and penalties.

I agree completely.

The world is not void of criminality or injustice. Make a rule to stop and a means will be invented to circumvent it. Allow a person to ruin his life by accepting the consequences of his actions, a ruined life, and others will learn proper behavior. Your complaint is that people whose lives should be ruined are not ruined which is getting closer to identifying the problem.

Well, yeah. I think that if individuals within HSBC who facilitated banking for drug cartels and terrorists were faced with the prospect of doing hard time, they'd have acted differently.

Part of the problem also lies in how we remain humane and compassionate in light of any criminality and injustice that occurs. Can we stand by and watch someone ruin their life?

Most of us live a life of decency where we can maintain respect for ourselves as individuals, and really our humanity is what ameliorates some of the harshness of life. It's only a few that can make life seem like hell for the rest of us.

I suppose the only question I have is: Is your solution of a few more regulations all we need?

Better regulations. Meaningful enforcement. Disentanglement of those who have the money from those who make the rules.

-k

[Pliny]

Vulture capitalists aren't interested in the long term, all they are interested in is "unlocking value" from their acquisitions. Set up a holding company, sell your acquisitions assets, distribute the proceeds to the shareholders of the holding company, flog the carcass of the acquisition and dissolve the holding company. Done all the time.

All facilitated by easy money.

[eyeball]

I've said it before and I'll keep on saying it too, the only way to reduce the criminality and injustice that occurs when power and money are entangled is to stand by and watch them - sort of like Big Brother watching us except the other way around.

We'll never completely eliminate corruption but surely we can at least try to keep up and take more responsibility for it. We treat transparency and accountability with no more resolve than we do pollution and environmental degradation.

[Pliny]

I know what legal tender means. I'm asking you to explain your point. What the hell are you even talking about.

You don't see what easy money does?

That's demonstrably false, first off. All they need to do is avoid the consequences of acting irresponsibly. There's plenty of examples.

And secondly, as Wilber points out... what makes you think the long term even matters to the people making these decisions?

When there's so much gain to be made by acting short term, why bother thinking long term at all?

What's the gain? More money?

The sequence is finance the takeover, pay yourself, claim bankruptcy. Easy money.

It's not my concept of humanity in general, but it seems to be how the job description of people who excel in business. Maximize profits, increase shareholder value, other issues are of no consequence. That might not be what they are like as human beings, but that is what they are like when they are doing their job.

A result of a great education on how to use easy money, perhaps?

How would I act? I like to think that if I had my own business, I would run it as ethically as I knew how. I'd want it to be something I could be proud of. I would want it to last. At this point I have to point out that the people who built the businesses we're often talking about are often not the people who are making these decisions. The people who built Sealy Mattresses were probably proud of the company and the product and wanted it to last... the people at Bain had none of these notions... to them it was a collection of assets on some ledgers, and they concluded that laying off people and making poorer-quality products and taking on debts to issue "special dividends" to Bain Capital was the best way to maximize their shareholders' value.

Sealy was indeed built at a better time. When honour and reputation were more important and the value of a dollar was understood.

I don't necessarily want *more* rules, I want *meaningful* rules, and I want *meaningful* punishment for those who break the rules, and I want the rules to be enforced vigorously instead of in the toothless way that they have been enforced them over the past however many years.

The problem is having too many meaningless rules and, as you mention, meaningless punishments. Rules that grant privilege, squelch competition and reward poor management practices.

If you're HSBC and you can make billions of dollars by breaking the law, and the punishment when you get caught is a fine that you can pay out of the profits you made while breaking the law, that's not a meaningful punishment. That's not an incentive to change your behavior.

Plus getting a bailout.

If you get caught carrying a small quantity of recreational drugs, you can end up doing hard time. If you get caught laundering money for drug cartels and terrorists, you sleep in your own bed and your shareholders find their dividends cheques are a couple of dollars less this quarter. That's a serious problem.

I agree.

Wrongdoers in the finance industry know that the feds are scared to actually go to court, and that if they get caught breaking the rules, the punishment is going to be some paltry out-of-court settlement with no admission of guilt.

And you expect better legislation from the same people?

Well, that's a darned complicated question. But if you think "Bring Back the Gold Standard!" is the answer, you're terribly naive.

You have no idea of the ill-effects of easy "money". You think the problem is all about greed? Greed exists, it's part of human behavior. Only our sense of decency curtails it. Making a law that segregates blacks and whites gives it legality but not decency. Using easy money, tokens essentially, give them to your friends, to buy the wealth of the nation is perhaps legal but not decent.

It seems you want decency, honesty and civility but how cruel to continue this charade.

No, I don't think fair laws and vigorous enforcement of laws leads inexorably to tyranny.

Nor do I. But calling for more laws in the face of the existing unfair laws applied vigorously against decent people trying to improve their lives does lead to tyranny.

But that sounds positively tyrannical!

At the hands of who? Your destiny is determined by yourself.

Seriously, though: dismantled by who? The US government? The British government? The government of the Netherlands or the Cayman Islands or wherever they file their taxes or do their banking?

Dismantled by those who have managed themselves better and are interested in absorbing the carcass. Wouldn't that be better than bailing them out?

Well, yeah. I think that if individuals within HSBC who facilitated banking for drug cartels and terrorists were faced with the prospect of doing hard time, they'd have acted differently.

Yeah. Sure is easy to move those tokens around.

Better regulations. Meaningful enforcement. Disentanglement of those who have the money from those who make the rules.

-k

I agree with better regulations not more. Those that don't follow the regulations should not be allowed to participate.

Disentanglement of those who make the rules from those who make the "money".

I am arguing that a free market does not exist and capitalism has been transmogrified into a fascist form of cronyism. I have not lost sight of that point. You seem to think that this crony capitalism is what a free market and honest money is all about.

[kimmy]

You don't see what easy money does?

What's the gain? More money?

The sequence is finance the takeover, pay yourself, claim bankruptcy. Easy money.

Of course more money. Shareholders want more money, right now. Executives want more money, right now.

All this blathering about "easy money" is off the mark because it would be (and was) the same under the gold standard.

A result of a great education on how to use easy money, perhaps?

A result of giving shareholders what they demand.

Sealy was indeed built at a better time. When honour and reputation were more important and the value of a dollar was understood.

Why would Bain care about Sealy's reputation? Why would Bain care about Bain's reputation, for that matter? Bain, like HSBC and Goldman Sachs, doesn't give a crap what you and me think about them.

The problem is having too many meaningless rules and, as you mention, meaningless punishments. Rules that grant privilege, squelch competition and reward poor management practices.

I don't think "too many meaningless rules" is the problem. I don't think either of us can say that. I don't think either of us is qualified to go through the rules and say "this one is meaningless! that one is meaningless! We'd be better off without them!"

When you say "too many meaningless rules", it makes me think you've swallowed the spiel from people like American Enterprise Institute or frickin' Willard. "Let's scrap these job-killing regulations and get America back to work!" "Let's unshackle the American Entrepreneur and let him create jobs!" Of course, they'd like you to think they're talking about regulations about logging in spotted owl habitat, but the regulations they really want to scrap are ones that hinder their rich friends in looting the economy at the pace they'd really like to.

I agree with you about meaningless punishments. I bet frickin Willard and the AEI don't. I don't recall ever hearing any of those kinds of people complaining that "you know, I think it's time for corporate wrongdoers to really pay."

I also agree with you about rules that grant privilege and squelch competition.

What would be good, though, would be *meaningful* rules. That's another thing you didn't hear frickin Willard or the American Enterprise Institute or any of those kinds of knuckleheads offering. They pay lip service to the value of regulation, basically because they know that they've turned deregulation into a dirty word through their own stupidity. But when it comes down to it, they can't offer a single suggestion as to what regulations they'd like in place of Dodd-Frank, because the truth is that they don't want any at all.

And you expect better legislation from the same people?

Perhaps we need better people if we want better legislation.

You have no idea of the ill-effects of easy "money". You think the problem is all about greed? Greed exists, it's part of human behavior. Only our sense of decency curtails it. Making a law that segregates blacks and whites gives it legality but not decency. Using easy money, tokens essentially, give them to your friends, to buy the wealth of the nation is perhaps legal but not decent.

As I said before, the rich were using their wealth to get their way in politics long before the gold standard was phased out, so trying to blame it on floating currency fails.

Your "Golden Age of Real Capitalism" was full of corruption. You're rambling about something that never even existed.

Nor do I. But calling for more laws in the face of the existing unfair laws applied vigorously against decent people trying to improve their lives does lead to tyranny.

And what specific unfair laws are preventing decent people from improving their lives?

I mean, you might have a point if you're talking about drug prohibition, but I assumed we were talking about economic issues here.

Dismantled by those who have managed themselves better and are interested in absorbing the carcass. Wouldn't that be better than bailing them out?

BP was not bailed out. There was never going to be a carcass for anybody to absorb, because BP was not in financial danger.

Had it been up to the free market, BP's punishment for the ecological and economic devastation they caused would have been light.

Were it not for a tyrannical, bullying government and its pesky, job-killing regulations, it's unlikely that BP would have coughed up the tens of billions of dollars it has paid for clean-up, compensation, and penalties.

-k

[August1991]

Of course more money. Shareholders want more money, right now. Executives want more money, right now.

.....

-k

A quick look at this thread, and finding this post, shows me that you don't understand business (or life), Kimmy.

After its inception in the 1950s, McDonalds did not pay a dividend for 20 years or so. I don't know if Microsoft has ever paid a dividend. I am more certain that Google hasn't.

Kimmy, you're wrong about the short-term thinking of shareholders and executives. Executives and shareholders don't want money "right now" anymore than car buyers want expensive cars "right now".

In negotiating the sticker price, do you not think Kimmy that the buyer of a new Hyundai, or a new BMW, considers in the calculation the resale value of their purchase?

-----

Here's my point: It is wrong to believe that markets/capitalism are short term. On the contrary, prices force people to think about time. People consider the resale value of what they buy.

Edited May 21, 2013 by August1991

[kimmy]

A quick look at this thread, and finding this post, shows me that you don't understand business (or life), Kimmy.

After its inception in the 1950s, McDonalds did not pay a dividend for 20 years or so. I don't know if Microsoft has ever paid a dividend. I am more certain that Google hasn't.

Kimmy, you're wrong about the short-term thinking of shareholders and executives. Executives and shareholders don't want money "right now" anymore than car buyers want expensive cars "right now".

In negotiating the sticker price, do you not think Kimmy that the buyer of a new Hyundai, or a new BMW, considers in the calculation the resale value of their purchase?

-----

Here's my point: It is wrong to believe that markets/capitalism are short term. On the contrary, prices force people to think about time. People consider the resale value of what they buy.

If you think Wall Street makes decisions the same way you think when you're buying a car, then I think that either you're either not paying attention to what the finance industry has been up to, or you run an automotive chop-shop.

-k

[Pliny]

If you think Wall Street makes decisions the same way you think when you're buying a car, then I think that either you're either not paying attention to what the finance industry has been up to, or you run an automotive chop-shop.

-k

Yes, kimmy the finance industry has been up to a lot. Has the actions of the government since the 2008 crash fixed the finance industry now? Are there going to be no more economic bubbles where investors are going to lose their shirt? The answer is NO. Do we just continue this cycle? We are going to because the government will continue with the same fiscal and monetary intervention in the market in its attempt to keep it "stabilized". Isn't that laughable, the primary purpose of its intervention is to stabilize the economy. When a politician wants to look good he can point to the economy and take credit for it. He never wants to look bad so he points to the market to blame it for a slumping economy. And that seems to be your perception.

For the most part, Wall street plays by the rules. Sure some don't and you can expect where ever there is money there will be some shenanigans especially when dealing with money substitutes. The issuing of derivatives from subprime mortgages is equivalent to what the Federal Reserve does in printing its tokens or creating electronic debits and credits on bank ledgers. Eventually, people find out they are worthless and they do nothing but rob what real wealth there is. It is a longer process with government issued fiat currencies but as Voltaire said, "Paper currencies eventually all return to their intrinsic value of zero."

[kimmy]

A gold-backed currency doesn't prevent bubbles. A gold-backed currency doesn't prevent corruption or shenanigans. A gold-backed currency wouldn't have prevented the unregulated derivatives market that was a key ingredient in the 2008 collapse. A gold-backed currency does none of these things, yet you keep talking about it as if it's the answer to all these problems.

I'm also baffled as to your complaint about electronic transactions and "tokens". Are you suggesting someone should only be allowed to make a purchase if they're able to physically go to the store and put a piece of gold in the shopkeeper's hand?

No, the actions of the Obama government since 2008 will not put a stop to financial corruption. That doesn't mean that all such efforts are doomed, it just means that the Obama government has done a poor job of it.

-k

[Argus]

After its inception in the 1950s, McDonalds did not pay a dividend for 20 years or so. I don't know if Microsoft has ever paid a dividend. I am more certain that Google hasn't.

Kimmy, you're wrong about the short-term thinking of shareholders and executives. Executives and shareholders don't want money "right now" anymore than car buyers want expensive cars "right now".

If you're speaking about long term investors like Warren Buffet, you're correct. But the Warren Buffets of the world are few and far between, and don't control the markets. Hedge funds and mutual fund managers do. And their bonuses are dependent upon what their funds do this year. Further, the success of the funds depends on how they do this year. A fund which doesn't perform well for a year starts losing investors. After two or three years it will have shrunk noticeably and continue to shrink. Those which have outperformed the market, on the other hand, will be growing.

Another big influence on the market the high speed traders. These are powerful computer trading systems which analyze stock purchases and movements on a microsecond level, rapidly moving in to make purchases, then sell them again, sometimes within seconds to catch a fraction of a cent profit each time. They do this thousands, tens of thousands, of times a day. They could not care less about long term.

Then there are the CEOs of the publicly traded firms. Shareholders are not happy when their shares don't rise very fast, much less go down. A few quarters of that and you have a very unhappy bunch of shareholders. Then the CEOs job is on the line, not to mention his bonus.

Should I mention all the short sellers? What about all the day traders?

Wall Street today is not Wall Street of the fifties. For the most part, it's NOW that matters.

Edited May 26, 2013 by Argus

[Pliny]

A gold-backed currency doesn't prevent bubbles.

It does if it is not created on a fractional reserve basis, that's the big bugaboo in a commodity backed currency. I can try and explain it to you but it won't be as elegantly as someone else may do.

A gold-backed currency doesn't prevent corruption or shenanigans.

Not entirely but a currency not tied to a commodity with a one hundred per cent backing does not promote cronyism, bank cartels and monopolies, a privileged class that can pick winners and losers. What it does do is make it obvious who the criminals are instead of protecting them.

A gold-backed currency wouldn't have prevented the unregulated derivatives market that was a key ingredient in the 2008 collapse.

Yes it would have because the bubble would not have been able to occur. There simply would not have been enough credit created to allow it to happen.

A gold-backed currency does none of these things, yet you keep talking about it as if it's the answer to all these problems.

It does do all of those things if it is kept honest and not created on the basis of a fractional reserve. Really, the biggest problem with paper money is it can be created out of thin air by whoever owns the right to do so, ultimately the culprit is a fractional reserve banking system. All of the above things can only occur under such a system. A fiat currency backed by a commodity one hundred per cent would prevent all of the above.

I'm also baffled as to your complaint about electronic transactions and "tokens". Are you suggesting someone should only be allowed to make a purchase if they're able to physically go to the store and put a piece of gold in the shopkeeper's hand?

Economic basics explain my view. I make bread I trade my bread for shoes. "Money" facilitates trade. It allows me to set my time preferences for trading and aids with the ease of the transaction as people are comfortable accepting "money", or money substitutes based upon a commodity I can claim any time. As I posted earlier from an article gold is not necessary to a transaction, paper substitutes, are entirely acceptable.

David Stockman's book: "The Great Deformation: The destruction of Capitalism in America

On money and how a currency is kept honest:

"Self-evidently, bank notes and checkbook money had long been a more convenient means of payment than gold coins, but the function of gold was financial discipline, not hand-to-hand circulation. Redeemability of bank notes and deposits gave the people an ultimate check on the monetary depredations of the state and its central banking branch. Indeed, the public’s freedom to dump its everyday money in favor of gold coins and bullion was what kept official currency and bank money honest."

I am King so I say that you will accept the papers I give you as money. The paper is not worth anything and provides no claim on anything except by my decree. All citizens must accept it or it isn't "fair". I make as many papers as I want and can therefore exchange nothing for real production. I can also provide my friends with papers that can claim real production.

I start to need more so soon there are lots of these papers floating around and people would prefer not to take the papers unless there are way more than what one would judge the value of the produced good. Inflation, in other words.

Then the price of things starts to get too high and more and more people can't afford to buy them. Then the people demand a minimum wage, guaranteed amounts of papers for their production, and controls on the price levels, in amounts of paper,to guarantee they can afford to buy the basics to live on. Then producing and exchanging your goods doesn't give you any return. So you have to sell them in other markets or stop producing. Then there are shortages of goods and services. Then people start putting paper money into things that they think will give them the best return on their money. Housing would be good, people want houses so houses start to get built, with all the paper money flooding into the market people are busy and happy for awhile. But pretty soon there are more houses than there are people to buy them, a bubble that now busts. There are all these empty houses now that have lost most of their inflated value. No one wants them. An example of mal-investment in production. Al this printed "Money" has been invested in things that are a poor use of resources. The "Money" which has no real value has been able to purchase resources basically for nothing and has used those resources unnecessarily. Money then looks for a good place to go and finds it somewhere else creating the next bubble. I am King though and I am getting a bit worried because the people seem to be getting poorer and poorer. I Can get any amount of papers I want so I am not worried but the people, even though I raise their minimum wage and keep prices low, seem to be experiencing a scarcity of goods or goods that are being produced do not seem to be what they want.

No, the actions of the Obama government since 2008 will not put a stop to financial corruption. That doesn't mean that all such efforts are doomed, it just means that the Obama government has done a poor job of it.

-k

FDR did a poor job of it, Johnson did a poor job of it, Nixon did a poor job of it, Carter, Reagan, Bush, Clinton, W, all did a poor job of it. The only thing that remained constant was the central banking system. The currency was increasingly debased over that period of time through fractional reserve banking resulting in inflation and its eventual separation from the gold standard until it became entirely a fiat paper currency.

Corruption will always occur to some degree but a fiat currency coupled with other market interventions obfuscates what is really going on. The role of the central banks and financial and monetary policy, gives privilege to certain individuals who can protect themselves, save their buddies, destroy their enemies, make some politicians look good when they are bad and some look bad who are good. They certainly cannot do as they claim and stabilize an economy because government is the only agency that cannot sustain itself without economic growth. Businesses can downsize if necessary and re-group to sustain itself. Governments cannot easily do so and will avoid any shrinkage in the size of its budget, usually by inflation, deficit financing or increased taxation, or any downsizing in the scope of its activities, duties or responsibilities. It simply can't as it has promised to provide certain entitlements to its citizens that a fiat currency makes possible in the first place and at which point society has already slipped into the vortex. There are several ways out but some would be very destructive.

A free market, honest money and the sanctity of person and property are the only safeguards against the tyranny of the State and the only means to better standards of living for all.

Edited May 27, 2013 by Pliny

[Pliny]

Wall Street today is not Wall Street of the fifties.

Perhaps the debasement of the currency over that period has contributed to the change? It seems more volatile, certainly as mutual funds comprised of public pension "money" moves around and paper billionaires are made from shorting currencies.

[kimmy]

It does if it is not created on a fractional reserve basis, that's the big bugaboo in a commodity backed currency. I can try and explain it to you but it won't be as elegantly as someone else may do.

Banks can't create money out of thin air in a fractional reserve system. The money supply is controlled by the government by adding or removing cash from circulation, which (using the reserve ratio as a multiplier) determines how much banks can have out on loan.

Not entirely but a currency not tied to a commodity with a one hundred per cent backing does not promote cronyism, bank cartels and monopolies, a privileged class that can pick winners and losers. What it does do is make it obvious who the criminals are instead of protecting them.

"cronyism, bank cartels and monopolies, a privileged class that can pick winners and losers" are all things that go back to the dark ages and beyond. Your ideas here are just wishful thinking.

Yes it would have because the bubble would not have been able to occur. There simply would not have been enough credit created to allow it to happen.

All you need to have a bubble is for enough people to greatly overestimate the future value of a commodity.

It does do all of those things if it is kept honest and not created on the basis of a fractional reserve. Really, the biggest problem with paper money is it can be created out of thin air by whoever owns the right to do so, ultimately the culprit is a fractional reserve banking system. All of the above things can only occur under such a system. A fiat currency backed by a commodity one hundred per cent would prevent all of the above.

Economic basics explain my view. I make bread I trade my bread for shoes. "Money" facilitates trade. It allows me to set my time preferences for trading and aids with the ease of the transaction as people are comfortable accepting "money", or money substitutes based upon a commodity I can claim any time. As I posted earlier from an article gold is not necessary to a transaction, paper substitutes, are entirely acceptable.

"Self-evidently, bank notes and checkbook money had long been a more convenient means of payment than gold coins, but the function of gold was financial discipline, not hand-to-hand circulation. Redeemability of bank notes and deposits gave the people an ultimate check on the monetary depredations of the state and its central banking branch. Indeed, the public’s freedom to dump its everyday money in favor of gold coins and bullion was what kept official currency and bank money honest."

People are still free to dump their every day money in favor of gold, diamonds, Deutschemarks, real estate, Bitcoins, or any other commodity they think is secure.

I am King so I say that you will accept the papers I give you as money. The paper is not worth anything and provides no claim on anything except by my decree. All citizens must accept it or it isn't "fair". I make as many papers as I want and can therefore exchange nothing for real production. I can also provide my friends with papers that can claim real production.

I start to need more so soon there are lots of these papers floating around and people would prefer not to take the papers unless there are way more than what one would judge the value of the produced good. Inflation, in other words.

What inflation?

Then the price of things starts to get too high and more and more people can't afford to buy them. Then the people demand a minimum wage, guaranteed amounts of papers for their production, and controls on the price levels, in amounts of paper,to guarantee they can afford to buy the basics to live on. Then producing and exchanging your goods doesn't give you any return. So you have to sell them in other markets or stop producing. Then there are shortages of goods and services.

What inflation? What shortages? Who has decided to stop selling goods in the US?

Then people start putting paper money into things that they think will give them the best return on their money.

People have always done this. It's discussed in the Bible. It's nothing new.

Unless you're a leprechaun (you aren't, are you? I have wondered about this) keeping gold in a vault or a mattress or a pot does you no good.

Housing would be good, people want houses so houses start to get built, with all the paper money flooding into the market people are busy and happy for awhile. But pretty soon there are more houses than there are people to buy them, a bubble that now busts. There are all these empty houses now that have lost most of their inflated value. No one wants them. An example of mal-investment in production. Al this printed "Money" has been invested in things that are a poor use of resources. The "Money" which has no real value has been able to purchase resources basically for nothing and has used those resources unnecessarily. Money then looks for a good place to go and finds it somewhere else creating the next bubble. I am King though and I am getting a bit worried because the people seem to be getting poorer and poorer. I Can get any amount of papers I want so I am not worried but the people, even though I raise their minimum wage and keep prices low, seem to be experiencing a scarcity of goods or goods that are being produced do not seem to be what they want.

None of this is dependent on paper money to make it work.

As long as the right to buy and sell property exists, speculation will exist. If there's a chance that something will be worth more in the future than today, somebody will speculate on it, whether they have fiat currency or real gold. If there's a chance to create profit by spending money building houses or widgets or anything else and selling them for more than they cost to make, somebody is going to build houses or widgets. Real gold doesn't change that.

Corruption will always occur to some degree but a fiat currency coupled with other market interventions obfuscates what is really going on. The role of the central banks and financial and monetary policy, gives privilege to certain individuals who can protect themselves, save their buddies, destroy their enemies, make some politicians look good when they are bad and some look bad who are good. They certainly cannot do as they claim and stabilize an economy because government is the only agency that cannot sustain itself without economic growth. Businesses can downsize if necessary and re-group to sustain itself. Governments cannot easily do so and will avoid any shrinkage in the size of its budget, usually by inflation, deficit financing or increased taxation, or any downsizing in the scope of its activities, duties or responsibilities. It simply can't as it has promised to provide certain entitlements to its citizens that a fiat currency makes possible in the first place and at which point society has already slipped into the vortex. There are several ways out but some would be very destructive.

A free market, honest money and the sanctity of person and property are the only safeguards against the tyranny of the State and the only means to better standards of living for all.

And all this is just paranoid anti-government ranting.

-k

[Pliny]

Banks can't create money out of thin air in a fractional reserve system. The money supply is controlled by the government by adding or removing cash from circulation, which (using the reserve ratio as a multiplier) determines how much banks can have out on loan.

Ok So you don't know how it works.

And all this is just paranoid anti-government ranting.

- k

Whatever. I'm done

[Bonam]

People are still free to dump their every day money in favor of gold, diamonds, Deutschemarks, real estate, Bitcoins, or any other commodity they think is secure.

-k

Bitcoins have been by far the most rapidly appreciating/growing asset class I hold. Kinda wish I'd thrown more at them. I've gotten ~110x return so far...

[Wilber]

The gold standard didn't prevent greed generated bubbles. The 16th century Tulip Mania and 17th century South Seas bubble wiped out thousands.

[Pliny]

The gold standard didn't prevent greed generated bubbles. The 16th century Tulip Mania and 17th century South Seas bubble wiped out thousands.

One of the first bubbles that ever occurred. Indeed gold and silver were the money and the currency. There was a reason for that so it is not entirely impossible. How many other examples can you cite? I would guess pretty much none. You certainly won't see one or two every decade as we are currently experiencing.

[Pliny]

Bitcoins have been by far the most rapidly appreciating/growing asset class I hold. Kinda wish I'd thrown more at them. I've gotten ~110x return so far...

A classic example of a non-understanding of money. These little games with currency are a great illustration of the chicanery that occurs with tokens.

Yes, you can increase your "investment", some will make a lot of money but eventually it all crumbles and the late-come losers will whine and new regulations will be drawn up by the monopolists.

[kimmy]

Ok So you don't know how it works.

Yes, that's how it works. Banks create money by lending, but the amount of money they can create is limited by the reserve ratio. If the reserve ratio is 2%, bank loans inflate the money supply by 50x. But the central bank retains control of the money supply by controlling how much actual cash is in the system. If the reserve ratio is 2% and the central bank has $60 billion of currency in circulation, the money supply will be around $3 trillion. If the central bank reduces the currency supply to $58 billion, then the money supply shrinks to $2.9 trillion, because the consumer banks have to reduce the amount of money they have on loan so that they get under the reserve ratio.

You're so wrapped up in this idea that governments can just create money and give it to their friends... did it ever occur to you to stop and wonder why there's such a thing as government debt and government deficits if it worked the way you think it does?

One of the first bubbles that ever occurred. Indeed gold and silver were the money and the currency. There was a reason for that so it is not entirely impossible. How many other examples can you cite? I would guess pretty much none. You certainly won't see one or two every decade as we are currently experiencing.

Switching to a gold-backed currency doesn't eliminate the reason why bubbles occur, which is that people over-estimate the future value of some investment.

Why are bubbles becoming more frequent? Perhaps because the number of people with money to invest has vastly increased over the past couple of centuries, and even over the past few decades.

-k

[cybercoma]

Damn, Pliny. You should apologize to kimmy. It's pretty obvious she knows exactly what she's talking about and you're being insulting for no reason.

[Pliny]

Damn, Pliny. You should apologize to kimmy. It's pretty obvious she knows exactly what she's talking about and you're being insulting for no reason.

Apparently all I am saying is paranoid anti-government ranting and I am being insulting?

kimmy said this;

"Banks can't create money out of thin air in a fractional reserve system."

Then she said this:

"Banks create money by lending,...

Do they or do they not?

Are they creating "money" out of thin air? As the term is used colloquially, yes, they are.

It isn't clear by what she says whether they do or not. I have said they do, she says they don't and then comes back and explains to me how they do it after she has said they don't.

But in truth we should be speaking in proper terms and understand that what is being created is not "money" in a true sense of the term. What is being created is tokens and credit which leaves plenty of room for abuse by those granted the opportunity to do so. And that is essentially the totality of my argument.

kimmy expresses the view of many economists and most people today so I will leave her with that.

[kimmy]

Apparently all I am saying is paranoid anti-government ranting and I am being insulting?

kimmy said this;

"Banks can't create money out of thin air in a fractional reserve system."

Then she said this:

"Banks create money by lending,...

Do they or do they not?

Are they creating "money" out of thin air? As the term is used colloquially, yes, they are.

The amount of money they create is a known, controlled quantity, determined by the amount of reserves they hold.

You seem to be under the false impression that banks can create money at will. They can't. When they hit the limit set by the reserve ratio, they can't lend anymore money. Banks always operate very close to the reserve ratio, so they can't just go out and create more money.

So yes, banks create money, but no, they can't create as much as they want to or whenever they feel like it.

It isn't clear by what she says whether they do or not. I have said they do, she says they don't and then comes back and explains to me how they do it after she has said they don't.

But in truth we should be speaking in proper terms and understand that what is being created is not "money" in a true sense of the term. What is being created is tokens and credit which leaves plenty of room for abuse by those granted the opportunity to do so. And that is essentially the totality of my argument.

kimmy expresses the view of many economists and most people today so I will leave her with that.

It's not "the view of many economists", it's the facts about how a fractional reserve banking system works.

-k

[Pliny]

The amount of money they create is a known, controlled quantity, determined by the amount of reserves they hold.

You seem to be under the false impression that banks can create money at will. They can't. When they hit the limit set by the reserve ratio, they can't lend anymore money. Banks always operate very close to the reserve ratio, so they can't just go out and create more money.

So yes, banks create money, but no, they can't create as much as they want to or whenever they feel like it.

I suppose that's why Canada and the US have no national debt.

The US central bank is not injecting 80 billion dollars through quantitative easing at all. It isn't because they can it is because they have to, circumstances dictate it.

Banks do indeed follow the dictates of the central bank. It is the most heavily regulated industry.

All the central bank is doing is stabilizing the economy, right? There is absolutely no abuse of the system at all. No privileges to some corporations over others. It is entirely a fair system with no biases or prejudices. There is no such thing as a bail out. Subsidies are distributed equally. And banks will give you a loan even if you are ugly or their best friend is your biggest competitor.

It's not "the view of many economists", it's the facts about how a fractional reserve banking system works.

-k

I know quite well how a fractional reserve banking system works.

The view of many economists is that it is a fine system and that intervention in the market is necessary.

Please do make an attempt to understand me, kimmy.

Edited June 7, 2013 by Pliny