It would encourage individuals saving in low or no interest bank accounts - or in their mattresses.
Banks would be dissuaded from making “risky” loans to new business enterprises. Deflationary environments massively favor those who already have stockpiled capital, and make it more difficult to fund paradigm-challenging ideas.
To the extent you’ve decided to have a national currency run by the national government, you’ve already decided to have some sort of planning. The best planning, according to Freedman, was to pick a slightly inflationary increase in the money supply. The best way to get that is to have the independent, apolitical Fed in charge of the money supply.
If you look at countries with pegged currencies, which supposedly constrain their governments in the same way that a gold peg would constrain ours, the results have not been very pretty in a lot of cases - because with no apparent flexibility, those governments have found other ways to achieve their ends, usually resulting in massive inflation.
[quote]BostonBarrister wrote:
To the extent you’ve decided to have a national currency run by the national government, you’ve already decided to have some sort of planning. The best planning, according to Freedman, was to pick a slightly inflationary increase in the money supply. The best way to get that is to have the independent, apolitical Fed in charge of the money supply.
If you look at countries with pegged currencies, which supposedly constrain their governments in the same way that a gold peg would constrain ours, the results have not been very pretty in a lot of cases - because with no apparent flexibility, those governments have found other ways to achieve their ends, usually resulting in massive inflation.[/quote]
The only thing the government need do is fix the ratio of paper to gold as per the authority of the constitution. This, however, doesn’t actually require government intervention. If we can determine weights and measures in the free market then money standards can be set by the banking industry with no problem, also.
Engineers manage their own standards. I think banks can do the same with money.
I know there are legitimate barter organizations out there. Not sure what the difference between the Liberty Dollar version is, though I assume it was to similar to actual currency. But I would look at it more like a certified check, since it represents a supply of metal.
As far as the savings rate, America actually has a very high savings rate, if you don’t take the faulty government data at face value. They only include money that goes into savings accounts. If it goes into you 401K, a mutual fund, real estate, or even bonds, it does not count. (Not even sure they include money market mutual funds.) Intelligent investors really do not want their money in savings accounts.
Generally it is also recommended that people do not invest in gold, but if a person was interested in gold to invest in gold mining stocks. A rise in price will benefit you, while if gold drops, the stock still produces an income. Gold does not.
I cannot see us changing back to a gold backed dollar. Just the announcement would cause gold to jump, and then America would have to buy all the gold necessary, and at a high. Once the purchase was made, demand would stabilize, and gold would plummet. Meaning the dollar would plunge.
This also kind of ignores the fact that banks also make money. At least on paper. (Or more accurately digitally.) If what I read is accurate, and still true, a bank is allowed to lend $10 for every $1 they take in. So if they take in $1 million, they can loan out $10 million. That means potentially 9 out of every 10 dollars would still not be backed by gold.
Too often when people think of the uber-wealthy, like a billionaire, they assume they have a checking account with $1,000,000,000 written in their checkbook. But as I stated before, the intelligent investor generally avoids cash. Most of their wealth is locked up in investments. By doing this it is less important what happens to the dollar, because these people do not have dollars. (Although it will influence the American to foreign stock ratio they own, if they own stocks.)
The government does not want a gold backed dollar, because then they do not control its value. Right now they can decide to increase its value, or decrease its value. This gives them more power over the economy. A strong dollar means we can buy more in the world market, and a weak dollar means other countries are more likely to buy American goods, while Americans are less likely to buy foreign goods.
It seems to make sense to back a dollar with gold because a dollar is simply decreed to have value. The problem nobody seems to realize is that the same is true of gold. It only has value because we say it does.
What happens if somebody finds a super massive vein of gold? Or what if people figure out how to make it out of lead. (Actually this has been done through nuclear transmutation. Once was accidentally done in 1972 in the former USSR.) We have already succeeded in making diamonds normally worth $10,000 for just $5. Although the only reason diamonds are worth what they are is because of the tight control over the supply.
[quote]BostonBarrister wrote:
orion wrote:
How does deflation increase the cost of a loss?
BostonBarrister wrote:
The money you lose today would be worth more tomorrow. So not only do you lose the money you’re risking, but the built-in gain of purchasing power from deflation.
It could also reverse the current understanding of the time value of money - in general, people value a dollar today higher than a dollar tomorrow due both to inflation and to the enjoyment of consumption.
Deflation would also increase the cost of consumption today - not a good thing for economic growth.
orion wrote:
But that would also mean that deflation encourages saving.
That saving would lead to a faster rise in investment goods and therefore production and wealth.
Shifting money from consuming to investing does also have advantages.
Other countries have a much higher saving rate than the US and they do fine economically.
It would encourage individuals saving in low or no interest bank accounts - or in their mattresses.
Banks would be dissuaded from making “risky” loans to new business enterprises. Deflationary environments massively favor those who already have stockpiled capital, and make it more difficult to fund paradigm-challenging ideas.[/quote]
Inflationiary environments also “massively favor those who allready have stockpiled capital”.
The inflation rate is part of the interest rate which does of ocurse only help those with invested money while those on fixed incomes are the last to be hit by inflation and therefore lose like in a giant pyramid scheme.
Now it could be possible that most people were more risk averse were there not inflation, but how do you know that this is not the “right” economic decision?
One of the main points against a fiat currency is the inadequacy of central planning and yet you make it sound as if that was a good thing.
If enough people decide not to invest and hide their money under a mattress instead of carrying it to a bank they will have their perfectly legitimate reasons.
You practically claim that the constant boom/bust cycles due to overinvesting caused by inflation and the following violent market corrections are an alternative that is somehow better.
Not to mention that that usually leads to bail outs via inflation that again take from the poor and give to the rich.
[quote]The Mage wrote:
It seems to make sense to back a dollar with gold because a dollar is simply decreed to have value. The problem nobody seems to realize is that the same is true of gold. It only has value because we say it does.
[/quote]
Not entirely true because gold has industrial purposes, but pro arguendo so what?
The point is that we as opposed to them say it does. Since we think it has value for 6000 years now I think we are pretty save.
The ultimate goal would be competing commodity monies though.
[quote]
What happens if somebody finds a super massive vein of gold? Or what if people figure out how to make it out of lead. (Actually this has been done through nuclear transmutation. Once was accidentally done in 1972 in the former USSR.) We have already succeeded in making diamonds normally worth $10,000 for just $5. Although the only reason diamonds are worth what they are is because of the tight control over the supply.[/quote]
What happens if people find a mountain of gold? They still have to take years of great costs and hard labour to het iot out of the ground.
The Fed has devalued the $ by more than 90 since the 50 by adding zeros in a computer.
Show me a vein of gold that could do that to an economy.
To your last point, hence the competing commodity monies.
[quote]orion wrote:
Not entirely true because gold has industrial purposes, but pro arguendo so what?[/quote]
So did silver. In fact Kodak was the single largest user of silver in developing film. Until the wonderful Hunt brothers decided to use their inherited wealth to corner the silver market. The price of silver went up, and Kodak decided to figure out a way to process film without silver.
Suddenly the largest user of silver no longer needed it. Guess how that impacted the price.
At one time aluminum was more precious then gold. Then we discovered through new mining techniques how easy it is to get out of the ground.
You mean safe? Don’t forget all the money created by the banks. Again even if the government backed the dollar with gold, or anything else, still it would only cover 10% simply because banks are allowed to loan out more then they actually have.
Also from 2002 to now the price of gold has risen from less then $300 to over $800. Your money would be worth a lot if it was backed by gold, right? Problem is gold will be dropping back to $300 eventually. Would you like to see that day, and its effect on your money?
Similar events happened in the past. 1976 the price of gold was just above $100, and proceeded to rise to over $800 in 1980. 1892 it was back to $300.
[quote]The ultimate goal would be competing commodity monies though.
What happens if people find a mountain of gold? They still have to take years of great costs and hard labour to het iot out of the ground.
The Fed has devalued the $ by more than 90 since the 50 by adding zeros in a computer.
Show me a vein of gold that could do that to an economy.[/quote]
In the 80’s, it was mentioned that if all the gold ever extracted from the Earth was made into a cube, it would fit on a football field. What if we found 2 veins with this much gold? If it was compressed into such a small area something like that could easily have avoided detection. Just the news of a finding would cause the markets to react. Plus while it would take time and money, everything is already in place to do this. They could be in full operation within a surprisingly short period of time.
Although it should be mentioned that there is a connection to price, and a resulting increase in supply. Something I learned about commodities years ago. The people producing these commodities know what they are doing. When the price of a commodity rises, they go find more and extract more. They are less inclined to do this when prices are low.
[quote]The Mage wrote:
When the price of a commodity rises, they go find more and extract more. They are less inclined to do this when prices are low.
[/quote]
This is exactly why we should have competing standards. High prices always raise demand but supply can only be increased so much before prices are brought down. The productive forces will stabilize the price of gold.
"However, analysts said news that ministers from Opec would meet next month to discuss the impact of a falling dollar and the merits of revaluing their currencies had ensured the dollar begun the week on a weak footing.
Friction among oil-producing Gulf states, which peg their currencies to the dollar, were heightened last weak as the United Arab Emirates said it had come to a �??crossroads�?? over dollar weakness and was considering ditching the dirham�??s dollar peg in favour of a basket of currencies.
Expectations of a shift in Gulf states currency regimes were heightened on Monday as reports suggested that Saudi Arabia, which so far has rejected any change in the riyal�??s dollar peg, might allow a one-off appreciation in its currency, but keep its peg to the dollar.
The speculation sent the Saudi riyal up to a high of SR3.7075 against the dollar, its highest level since Saudi currency was pegged to the dollar at SR3.75 in 1986."
You know, while I’m all for a gold standard, when the time comes that the dollar fails and you NEED gold, I’ll have something far more valuable than gold: bullets, guns, and dry food.
mike
[quote]Mikeyali wrote:
You know, while I’m all for a gold standard, when the time comes that the dollar fails and you NEED gold, I’ll have something far more valuable than gold: bullets, guns, and dry food.
mike[/quote]
These will be far handier than gold in the case of economic collapse.
If you have gold under your mattress someone will steal it. If you let someone else store your gold, good luck getting it back when the world goes to shit.
[quote]Zap Branigan wrote:
Mikeyali wrote:
You know, while I’m all for a gold standard, when the time comes that the dollar fails and you NEED gold, I’ll have something far more valuable than gold: bullets, guns, and dry food.
mike
These will be far handier than gold in the case of economic collapse.
If you have gold under your mattress someone will steal it. If you let someone else store your gold, good luck getting it back when the world goes to shit.[/quote]
True. Silver is far better to hold in person. Mike might trade a can of food or a stick of jerky for a silver dollar.
I hope the world doesn’t fall apart. In 1933, we still had inflating the currency available as a means to restore order. Spending lots of money, esp in war, can revive an economy. This option won’t be available next time. I suspect we’ll have to adopt some sort of military dictatorship similar to Nazi Germany,with a secret police to intimidate the populace into cooperation.
Fiat money always leads to destruction, one way or another. And it probably is too late to stop the destructive process unleashed here. Here comes the New World Order.
[quote]Headhunter wrote:
Zap Branigan wrote:
Mikeyali wrote:
You know, while I’m all for a gold standard, when the time comes that the dollar fails and you NEED gold, I’ll have something far more valuable than gold: bullets, guns, and dry food.
mike
These will be far handier than gold in the case of economic collapse.
If you have gold under your mattress someone will steal it. If you let someone else store your gold, good luck getting it back when the world goes to shit.
True. Silver is far better to hold in person. Mike might trade a can of food or a stick of jerky for a silver dollar.
I hope the world doesn’t fall apart. In 1933, we still had inflating the currency available as a means to restore order. Spending lots of money, esp in war, can revive an economy. This option won’t be available next time. I suspect we’ll have to adopt some sort of military dictatorship similar to Nazi Germany,with a secret police to intimidate the populace into cooperation.
Fiat money always leads to destruction, one way or another. And it probably is too late to stop the destructive process unleashed here. Here comes the New World Order.
[/quote]
I’m actually glad you mentioned that. I really haven’t piped up much into this thread because I’m somewhat ignorant upon the intricacies that you guys are arguing, so I figured I’d be better served by reading than posting. Though I’m still in college, I’ve started to make a point of buying an ounce of silver with every paycheck.
If I had actually bought gold coins and we find ourselves in a world needing to use gold then isn’t it going to be too valuable? Wouldn’t its purchasing power be too high to buy some food or ammo or shelter for a few nights? It just seems that a few silver coins would be better so as to not overspend on items.
mike
When an economy fails, gold becomes worthless, and barter takes over.
Now if we have dollars backed up by gold, and America fails, (as some people in this forum hope,) will you get gold? No, those gold backed dollars will become worthless pieces of paper, and all the gold will be hauled away.
Instead of backing it, just peg it to the price of gold. The effects would be exactly the same. Just backing it with gold gives the impression that it suddenly has value.
[quote]orion wrote:
Inflationiary environments also “massively favor those who allready have stockpiled capital”.
The inflation rate is part of the interest rate which does of ocurse only help those with invested money while those on fixed incomes are the last to be hit by inflation and therefore lose like in a giant pyramid scheme. [/quote]
No - inflationary environments favor those who invest and can get a rate of return approximating or beating inflation. Or those who can generate income, whose wages the marketplace will adjust for inflation (hyperinflation is of course more problematic - but no more so (and actually less so) than hyperdeflation). It would disfavor fixed income/pensioners - of course, it’s really not feasible to spend 20-30 years not generating income, as modern pensioners apparently feel entitled to do…
But my point has never been that large-scale inflation is a good thing. The point is that a small amount of inflation is a good thing (Milton Friedman said 3%, and I think that’s still the consensus view); and that deflation is more harmful economically than inflation on a point-for-point comparative basis (i.e., 3% deflation vs. 3% inflation).
[quote]orion wrote:
Now it could be possible that most people were more risk averse were there not inflation, but how do you know that this is not the “right” economic decision?
One of the main points against a fiat currency is the inadequacy of central planning and yet you make it sound as if that was a good thing.
If enough people decide not to invest and hide their money under a mattress instead of carrying it to a bank they will have their perfectly legitimate reasons. [/quote]
It’s wrong from a societal perspective because it disincentivizes investment, entrepreneurialism and risk taking, which is the mother of innovation.
Money in a mattress doesn’t lead to further economic activity - and certainly not to innovation.
A fiat currency pursuant to which the central bank actually follows monetarist prescriptions is about the least worrisome form of “central planning” I can imagine - it imposes strictures on the money supply, while preserving flexibility to account for and help assuage market issues.
[quote]orion wrote:
You practically claim that the constant boom/bust cycles due to overinvesting caused by inflation and the following violent market corrections are an alternative that is somehow better.
Not to mention that that usually leads to bail outs via inflation that again take from the poor and give to the rich.
[/quote]
There is a reason other than random correlation that economic cycles have smoothed considerably since Friedman’s monetarist ideas gained widespread acceptance among developed, Western central bankers. The U.S., off of a gold standard, hasn’t had a really painful recession since Volcker induced one to kill stagflation. And even with less perfect central bankers, from the end of the Depression through Volcker our economic cycles were less volatile than they were before - even though we were on a gold standard before the end of the Depression. The Roaring 20s (bubble) and the Great Depression were on a gold standard. So was the panic of 1907, and the various panics of the 19th century (just the ones unrelated to war: 1808, 1818, 1837, 1857, 1873, 1893 - and note these caused depressions lasting years - even the majority of the decade immediately subsequent).
BB, any amount of inflation is bad for the poor and people on a fixed income who do not make their money from investments. This is the majority of the country.
Why should the government be responsible to stimulate entrepreneurship? If there is risk involved don’t you think the signals should remain undistorted? Why can’t banks set their own rates based on their own solvency? Don’t you think that artificially low rates only incentivize bad investment? The bubble has to pop eventually.
I also think you are only looking at incentive from the producers vantage point. Productions requires consumption. Low prices stimulates consumption which further stimulates demand. High prices and interest rates stimulate saving which lowers interest rates and prices naturally which results to stimulate investment. Banks can figure their own interest rates out.
I disagree that the money supply matters because it always flows at a rate commensurate with a sound pricing structure.
[quote]orion wrote:
Zap Branigan wrote:
LIFTICVSMAXIMVS wrote:
…
Please define deflation and why you think it is a bad thing.
Today your house is worth $ 200,000. Next year it is worth $ 150,000. Five years from now it is worth $ 100,000. You would be a fool to keep paying $ 200,000 mortgage for a $ 100,000 house.
People are doing that right now.
It is called “paying interest”.
It is the exact same thing.
[/quote]
Well, with inflation, it is the creditor who gets the shaft, because he gets paid back in yesterday’s dollars.
Here is CNBCs coverage of the “Liberty Dollar” with Von Nothaus interview:
“We’ve never misrepresented the product…”
[quote]Headhunter wrote:
These will be far handier than gold in the case of economic collapse.
If you have gold under your mattress someone will steal it. If you let someone else store your gold, good luck getting it back when the world goes to shit.
True. Silver is far better to hold in person. Mike might trade a can of food or a stick of jerky for a silver dollar.
I hope the world doesn’t fall apart. In 1933, we still had inflating the currency available as a means to restore order. Spending lots of money, esp in war, can revive an economy. This option won’t be available next time. I suspect we’ll have to adopt some sort of military dictatorship similar to Nazi Germany,with a secret police to intimidate the populace into cooperation.
Fiat money always leads to destruction, one way or another. And it probably is too late to stop the destructive process unleashed here. Here comes the New World Order.
[/quote]
Back away from the widow ledge. There will almost certainly be problems with the dollar’s fall, but you’re taking it pretty far…
Again, read this speech by Bernanke on the Depression, its causes and what made it worse:
http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm
or this article if you can get behind the gate:
[quote]Nominal Prospect wrote:
Well, with inflation, it is the creditor who gets the shaft, because he gets paid back in yesterday’s dollars.[/quote]
Yes, but they’re pretty good at controlling for that risk - particularly since there hasn’t been any deflation since the Great Depression. Pretty much the only fixed-rate loans available are mortgages - and even then only if you’re willing to pay a small premium when you sign up (which you should…).