Are we headed for a crack-up boom?

[laughing dog]

Printing money raises prices.

That is not necessarily true. The deflationary experience of Japan is recent proof that your claim is not unilaterally true.

 

[Togo]

But why blame monetary expansion by governments? An asset price bubble causes all the effect mentioned, including expansion, and is more likely to be caused by an increase in the spending power of the very rich, rather than an increase in money supply generally, since they're the ones, overwhelmingly, who buy the assets that are inflating. The main asset that's inflating is the housing market, it's doing so primarily at the top end, either from luxury houses or for rental units as an investment, and it's done so as a haven for excess cash at a time when bond and equity returns are modest, principally due to low interest rates.

So the solution seems easy - close the inequality gap, remove the excess cash which is being funnelled away from the real economy and into a series of asset bubbles, and use it to stimulate growth amongst the most active parts of the economy - small businesses and SMEs.

 

[ksen]

Ludwig Von Mises

stopped reading here

 

[SimpleDon]

Ludwig Von Mises, the famous Austrian School economist described what he called a "crack-up" boom. We all know that when governments expand the money supply it creates inflation. This is not hotly debated among economists. There are limits to how much and how long governments can intervene to expand credit and money creation without suffering serious consequences. ...

<snip>​

You are a constant source of frustration to me. I have in the past tried to explain the sources of your confusion on these subjects. The evidence is all around you and it is obvious, but you chose to ignore it, presumably so that you can continue to embarrass yourself making posts like this one.

You are seemingly unphased by the numerous failed predictions of run away inflation that you and others have made since 2008 because the Fed is "pumping up the money supply" and that the dollar is going to collapse because of a loss in confidence because of the high government debt. The constant failure of any of these things doesn't seem to put the smallest dent in the unbelievable surety of the correctness of the economics that you used to arrive at such a record of repeated failure.

You claim to be not a libertarian and yet here you are quoting the libertarians' economists of choice, the Austrians. No one becomes a proponent of Austrian economics because of that school of economics success at describing the economy that we have today. As you insist on repeatedly proving they are complete failures at this. People become Austrians because they feel that the fantasy economy that the Austrians put forth is somehow a more desirable one than the real economy that has evolved over thousands of years of trial and error. This is in spite of the fact that they can't explain either how their fantasy economy would work, how it could come into existence or how it would be better than the economy that we already have. It is by any measure therefore inferior to the other 19th century, anarchist, fantasy economic theory, Marxism. And spoiler alert, Marxism was an utter disaster when adherents tried to implement it.

I can help you understand the economy that we have today, where it came from and why it is the way that it is. (Another spoiler alert, it is the way that it is because of the collective force of the choices freely made by the various economic actors, not because the evil government has imposed itself on the economy.) But I need some small indication that you see some of the many flaws in Austrian economics and that you are willing to face truths that will sink your highly developed preconceived biases. It should be obvious to you by now that the world doesn't work the way that you wish that it did. Are you willing to act on that?

 

[boneyard bill]

I think BB was asleep in 2008 when the global economy imploded and if weren't for substantial international Government involvement and cooperation, the global economy would still be in ashes.

Wrong, wrong, wrong. If the government hadn't intervened, a few Wall Street Banks would have gone under and maybe a few foreign banks as well. It would have been bad for a while, but the whole thing would be over by now, and we would have solvent banks in Wall Street and in Europe. As it the banks are in worse shape than ever and even deeper in debt. So are the European banks. We refused to clean house when it was a relatively small task. Now we're faced a far more serious global meltdown. And for what? A "recovery" that wasn't even a real recovery but a mere hiccup boom.

 

[boneyard bill]

But why blame monetary expansion by governments? An asset price bubble causes all the effect mentioned, including expansion, and is more likely to be caused by an increase in the spending power of the very rich, rather than an increase in money supply generally, since they're the ones, overwhelmingly, who buy the assets that are inflating. The main asset that's inflating is the housing market, it's doing so primarily at the top end, either from luxury houses or for rental units as an investment, and it's done so as a haven for excess cash at a time when bond and equity returns are modest, principally due to low interest rates.

So the solution seems easy - close the inequality gap, remove the excess cash which is being funnelled away from the real economy and into a series of asset bubbles, and use it to stimulate growth amongst the most active parts of the economy - small businesses and SMEs.

The rich don't create money. They can't expand the total supply. What they spend on real estate cannot be spent somewhere else. That failure to spend would cause price declines elsewhere. Money is created when banks lend. Bank lending policies are primarily the result of governmental policies. It wasn't always that way. Governments used to stay out of it for the most part.

- - - Updated - - -

Ludwig Von Mises

stopped reading here

A frank admission of close-mindedness.

 

[fromderinside]

The rich don't create money. They can't expand the total supply. What they spend on real estate cannot be spent somewhere else. That failure to spend would cause price declines elsewhere. Money is created when banks lend. Bank lending policies are primarily the result of governmental policies. It wasn't always that way. Governments used to stay out of it for the most part.

- - - Updated - - -

Ludwig Von Mises

stopped reading here

A frank admission of close-mindedness.

I believe he wrote that because he knows the effects of MIC and strong "Support our Troops" sentiment on sustaining whatever the government wants to print. EU probably won't be as successful for two reasons. First the members are not unified with common policy except currency and second they are a bunch of pacifist pusillanimous pussyfooters. Hell even Russia, with no economy at all, still maintains its ruble in measurable proportions to western currencies only because Europe and the US are not willing to confront them directly.

I hate that we spend a measurable proportion of our federal budget on defense except when I can make claims like the above that hold.

Claim over. I hate that we spend so much money supporting a ridiculous, democracy destroying, MIC.

 

[boneyard bill]

Ludwig Von Mises, the famous Austrian School economist described what he called a "crack-up" boom. We all know that when governments expand the money supply it creates inflation. This is not hotly debated among economists. There are limits to how much and how long governments can intervene to expand credit and money creation without suffering serious consequences. ...

<snip>​

You are a constant source of frustration to me. I have in the past tried to explain the sources of your confusion on these subjects. The evidence is all around you and it is obvious, but you chose to ignore it, presumably so that you can continue to embarrass yourself making posts like this one.

You are seemingly unphased by the numerous failed predictions of run away inflation that you and others have made since 2008 because the Fed is "pumping up the money supply" and that the dollar is going to collapse because of a loss in confidence because of the high government debt. The constant failure of any of these things doesn't seem to put the smallest dent in the unbelievable surety of the correctness of the economics that you used to arrive at such a record of repeated failure.

You claim to be not a libertarian and yet here you are quoting the libertarians' economists of choice, the Austrians. No one becomes a proponent of Austrian economics because of that school of economics success at describing the economy that we have today. As you insist on repeatedly proving they are complete failures at this. People become Austrians because they feel that the fantasy economy that the Austrians put forth is somehow a more desirable one than the real economy that has evolved over thousands of years of trial and error. This is in spite of the fact that they can't explain either how their fantasy economy would work, how it could come into existence or how it would be better than the economy that we already have. It is by any measure therefore inferior to the other 19th century, anarchist, fantasy economic theory, Marxism. And spoiler alert, Marxism was an utter disaster when adherents tried to implement it.

I can help you understand the economy that we have today, where it came from and why it is the way that it is. (Another spoiler alert, it is the way that it is because of the collective force of the choices freely made by the various economic actors, not because the evil government has imposed itself on the economy.) But I need some small indication that you see some of the many flaws in Austrian economics and that you are willing to face truths that will sink your highly developed preconceived biases. It should be obvious to you by now that the world doesn't work the way that you wish that it did. Are you willing to act on that?

First of all, I do not claim to be a follower of the Austrian School. I accept some of the ideas of the Austrian School because the make a huge amount of sense. (The subjective theory of value for example). Here I have presented Von Mises analysis of a "crack-up boom," but I also acknowledge that it might not happen. Among other things, we can't know how policy makers will react, and that will be crucial.

I also do not claim to be a libertarian.

The Fed IS pumping up the money supply (or, more accurately), the monetary base. But banks are not lending so the money doesn't get into circulation. I am indebted to you for one valuable insight (and only one). That is the article you posted concerning monetary expansion and how it does not really happen according to the usual textbook description. Other than that, I can't recall any correct predictions that you have made. Certainly, if you listened to mainstream views, they have been telling us for years now that a robust recovery is just around the corner.

I have responded to your "there's no inflation" argument many times before, and you have never countered it. There are several reasons why official inflation has been low. 1. As I have already noted, while the Fed has expanded the monetary base by trillions of dollars, much of it remains in excess reserves because the banks are not lending. 2. The official inflation rate is highly suspect. If we measured inflation the same way now as we did in the '70's, the official inflation rate would be in the high single digits. 3. Consumer prices are not the only price increases around. We also have asset price inflation. These are bubbles, and currently we have bubbles in the bond market, the stock market, and real estate. 4. The dollar is the reserve currency. So monetary expansion doesn't just affect the US economy. It spreads overseas, and other countries have complained to the US about our policies causing inflation in their countries, and this often forces them to create recessionary conditions to fight the inflation. This is one of the reasons Obama nearly skipped the last G-20 meeting. He expected, and got, a very cool reception, and encountered a great deal of criticism.

You make your point and then you quit the field. Then you want to act as if you initial point was the final point made. It rarely is. But you simply ignore my responses.

The dollar WILL collapse because of a loss of confidence in due to our unpayable debt, but who can ever predict the timing on something like this? Still, it's clear that these policies cannot continue. We are running deficits of 1 to 2 trillion dollars a year and as the baby boomers continue to retire, it will soon exceed two trillion every year. How long can we sustain that with a $14 trillion GDP? GDP growth isn't coming anywhere near the increase in expenditures. Do the math. At two percent growth, which is typical over the long term for a highly developed economy such as ours, our three trillion dollars in revenue could be expected to grow by about $60 billion per year. That won't begin to cover expenditure growth even if Congress keeps discretionary spending at zero. Indeed, at two percent interest rates for the 10-year Treasury, the increased interest costs of a two trillion deficit would cost $20 billion alone. But there's no way that interest rates are going to stay that low forever. A normal interest rate on the 10-year is about 6%. So when interest rates go up, it's game over.

This isn't "Austrian economics." This is arithmetic. So show me how we get out of this mess? Don't duck these issues and then come back the next and say, "Oh, I already told you what was wrong with thinking". No you haven't. You've only discussed generalities. So please, show me the solution to our current debt and deficit problems. You've said you will help me understand. Please do because I do not have the Austrian biases that you claim.

Austrian economics and libertarian political philosophy are not at all the same thing. Many libertarians are Friedmanites or even Randists (if it can really be said that Ayn Rand had an economic philosophy). Meanwhile, aside from Murray Rothbard, I can't think of a single famous Austrian economist who advocates libertarianism. Von Mises strongly favored military conscription and even wanted to subsidize opera houses. Hayek did not object to "government programs of social insurance" and favored government health and safety regulations.

I do not claim to be an Austrian in part because there is much about their views that I do not understand. It appears that you also do not understand a great deal about Austrian economics but want to claim to be anti-Austrian for that same reason.

 

[boneyard bill]

The rich don't create money. They can't expand the total supply. What they spend on real estate cannot be spent somewhere else. That failure to spend would cause price declines elsewhere. Money is created when banks lend. Bank lending policies are primarily the result of governmental policies. It wasn't always that way. Governments used to stay out of it for the most part.

- - - Updated - - -

Ludwig Von Mises

stopped reading here

A frank admission of close-mindedness.

I believe he wrote that because he knows the effects of MIC and strong "Support our Troops" sentiment on sustaining whatever the government wants to print. EU probably won't be as successful for two reasons. First the members are not unified with common policy except currency and second they are a bunch of pacifist pusillanimous pussyfooters. Hell even Russia, with no economy at all, still maintains its ruble in measurable proportions to western currencies only because Europe and the US are not willing to confront them directly.

I hate that we spend a measurable proportion of our federal budget on defense except when I can make claims like the above that hold.

Claim over. I hate that we spend so much money supporting a ridiculous, democracy destroying, MIC.

Perhaps. But the worst thing for the MIC, and for national defense as well, is to continue on the present policy course which is bankrupting the country. The time isn't far off when we won't be able to pay the troops or, as happened in the Roman Empire, the troops simply refuse to accept their pay in a completely debased currency.

 

[Loren Pechtel]

I think BB was asleep in 2008 when the global economy imploded and if weren't for substantial international Government involvement and cooperation, the global economy would still be in ashes.

Wrong, wrong, wrong. If the government hadn't intervened, a few Wall Street Banks would have gone under and maybe a few foreign banks as well. It would have been bad for a while, but the whole thing would be over by now, and we would have solvent banks in Wall Street and in Europe. As it the banks are in worse shape than ever and even deeper in debt. So are the European banks. We refused to clean house when it was a relatively small task. Now we're faced a far more serious global meltdown. And for what? A "recovery" that wasn't even a real recovery but a mere hiccup boom.

What you are missing is that in going down they would have taken down far more banks. Everything was horribly interlinked.

 

[RVonse]

You make your point and then you quit the field. Then you want to act as if you initial point was the final point made. It rarely is. But you simply ignore my responses.

I would love to hear your response to this myself SimpleDon. What say you SimpleDon?

The dollar WILL collapse because of a loss of confidence in due to our unpayable debt, but who can ever predict the timing on something like this? Still, it's clear that these policies cannot continue. We are running deficits of 1 to 2 trillion dollars a year and as the baby boomers continue to retire, it will soon exceed two trillion every year. How long can we sustain that with a $14 trillion GDP? GDP growth isn't coming anywhere near the increase in expenditures. Do the math. At two percent growth, which is typical over the long term for a highly developed economy such as ours, our three trillion dollars in revenue could be expected to grow by about $60 billion per year. That won't begin to cover expenditure growth even if Congress keeps discretionary spending at zero. Indeed, at two percent interest rates for the 10-year Treasury, the increased interest costs of a two trillion deficit would cost $20 billion alone. But there's no way that interest rates are going to stay that low forever. A normal interest rate on the 10-year is about 6%. So when interest rates go up, it's game over.

This isn't "Austrian economics." This is arithmetic. So show me how we get out of this mess?

There are only 2 solutions I can think of. And neither has anything to do with Austrian economics:

1. Some kind of robot technology that causes productivity to rise exponentially
or
2. Some kind of mass killing such as war or plague of a huge amount of people. Especially killing off the old ones like myself.

But I think I like option 1 a lot better than option 2.

 

[laughing dog]

There are only 2 solutions I can think of. And neither has anything to do with Austrian economics:

1. Some kind of robot technology that causes productivity to rise exponentially
or
2. Some kind of mass killing such as war or plague of a huge amount of people. Especially killing off the old ones like myself.

But I think I like option 1 a lot better than option 2.

You assume that boneyard bill's premises (that the dollar will collapse and that our debts will be unpayable) are true. But they are not.
There is no indication that the US dollar will collapse. Boneyard bill has been predicting this for years and we still are not observably closer to such an outcome.

Nor is the reason to believe that our debts are "unpayable" or that dealing with them will cause such an economic calamity. There is no indication that our economy will not continue to grow (albeit a slower rate) or that we will begin to deal with our finances in a more rational fashion. His forecasts are predicted on assuming utter stupidity and extremely low probability worst case scenarios.

 

[RVonse]

There are only 2 solutions I can think of. And neither has anything to do with Austrian economics:

1. Some kind of robot technology that causes productivity to rise exponentially
or
2. Some kind of mass killing such as war or plague of a huge amount of people. Especially killing off the old ones like myself.

But I think I like option 1 a lot better than option 2.

You assume that boneyard bill's premises (that the dollar will collapse and that our debts will be unpayable) are true. But they are not.
There is no indication that the US dollar will collapse. Boneyard bill has been predicting this for years and we still are not observably closer to such an outcome.

Nor is the reason to believe that our debts are "unpayable" or that dealing with them will cause such an economic calamity. There is no indication that our economy will not continue to grow (albeit a slower rate) or that we will begin to deal with our finances in a more rational fashion. His forecasts are predicted on assuming utter stupidity and extremely low probability worst case scenarios.

But how can interest ever be raised again? If they were to raise interest today it looks like the results would be terrible. How would an optimist like yourself see things playing out so that interest could be raised again?

How can the US manage without the manufacturing jobs it gave to China? It certainly appears the service jobs left behind are so low in pay there is little tax base to support an aging population.

Don't get me wrong, I live in the US and I hope you are right and Boneyard is wrong. But I am having trouble seeing your perspective on this.

 

[laughing dog]

You assume that boneyard bill's premises (that the dollar will collapse and that our debts will be unpayable) are true. But they are not.
There is no indication that the US dollar will collapse. Boneyard bill has been predicting this for years and we still are not observably closer to such an outcome.

Nor is the reason to believe that our debts are "unpayable" or that dealing with them will cause such an economic calamity. There is no indication that our economy will not continue to grow (albeit a slower rate) or that we will begin to deal with our finances in a more rational fashion. His forecasts are predicted on assuming utter stupidity and extremely low probability worst case scenarios.

But how can interest ever be raised again? If they were to raise interest today it looks like the results would be terrible. How would an optimist like yourself see things playing out so that interest could be raised again?

The effects of increases in interest rates depends on the size and speed of the increase, along with other economic conditions. If the economy continues to chug along, interest rates might be able to slowly creep up without causing much economic damage.

How can the US manage without the manufacturing jobs it gave to China? It certainly appears the service jobs left behind are so low in pay there is little tax base to support an aging population.

The world economy is changing. There are plenty of decent and well-paying jobs in different industries. US society does need to adjust its expectations about life styles, gov't support and taxation with the changing demographics.

Don't get me wrong, I live in the US and I hope you are right and Boneyard is wrong. But I am having trouble seeing your perspective on this.

People and societies adapt to a changing environment (weather or economic). BB's entire analysis hinges on complete rigidity on the part of all actors in the face of changing economic conditions - something we have never witnessed. That doesn't mean the future will be bright and wonderful, but I seriously doubt it will be the catastrophe he has been predicting for the many past years here.

 

[SimpleDon]

The gold price has been insanely high for decades. The only thing propping it up is that everyone in the market knows that everyone else in the market is batshit insane.

Gold is useful in small quantities for jewelery, dental prostheses, optical coatings, some electronic components, and decoration (gold leaf). None of these uses could possibly ever soak up the amount of refined gold currently stored in vaults worldwide; that gold is valuable for no reason other than that people have decided to value it. It will never, ever, be used for any purpose; it will sit in vaults until people realise it is inherently valueless, and then it will presumably be stacked up somewhere where people who want some can help themselves.

Of course, that doesn't mean you can get rich by shorting gold; The market can remain irrational for far longer than you can remain solvent.

Printing money raises prices. That includes the price of gold.

I have repeatedly pointed out your error in this. Rising prices cause more money to be created. You are conflating an effect of inflation pressure, more money being created, as being the case of the inflation.

Money creation is endogenous to the economy. Money is created based on the demand in the economy for money.

I am saying that rising home prices means that I have to take out a larger loan to buy a house. You are saying that my desire to take out a larger loan and to have more debt is forcing home prices higher.

 

[SimpleDon]

Printing money raises prices. That includes the price of gold.

No shit, Sherlock.

That doesn't change the fact that the massive oversupply of refined gold in the world today, that cannot conceivably be used in thousands of years, should (if markets were sane) render that particular commodity almost valueless. That it is not selling for pennies a tonne is purely an artefact of human cognitive impairment - literally, insanity.

Sure, if there is inflation, the price of all commodities - including those that are practically valueless - should, all else being equal, rise; but any number multiplied by almost nothing is almost nothing.

If the world had thousands of years supply of refined steel ingots in storage, doing nothing, what do you think that would do to the price of steel, iron, and iron ore? For sure, nobody would be interested in mining more iron ore. But gold mines worldwide are producing over 3,000 tonnes of the stuff each year - to be refined, cast into ingots, and placed into storage, along with the other over 180,000 tonnes that is already there. The owners of the stuff never even go to look at it. That's fucking insane.

People are crazy about gold. It is a very useful commodity. It never oxidizes under standard conditions. It conducts electricity well. It is very malleable. It is pretty.

But it is consistently overvalued as a commodity because of the confusion surrounding its relationship with money. It is a widespread belief that gold is what gave money value for thousands of years because our barter based economy depends on a money that has "real value." That we foolishly severed the connection between gold and our money. That this is what started our inevitable slide to economic Armageddon which will commence any day now and that the only winners will be those smart enough to have a hoard of gold in their safe.

But as Bill proves with nearly every post, widespread beliefs about money and the economy in general are wrong. Gold didn't give money its value through history, backing money with gold gave gold its inflated value because economies invariably needed more money than the gold that they had.

That economies throughout history weren't based on barter. Like today's economy they were were virtually all based on debt and credit. Even the most basic tribal economies were based on a form of credit called "gifting," not on barter. If you gave me something that I needed it came with the implicit obligation that sometime in the future I would give you something of value. Credit and debt, not barter requiring a third commodity like gold to satisfy the "double coincidence of wants" problem. (Except, of course, for foreign trade, with traders who weren't in the trusted circle of the members of your own tribe.)

It is the debt and credit base of money that allowed things like grain, temple goods, cattle, etc. to be the underlying support for money. The Greeks didn't walk a cow to buy something and then to the butcher to make change. Cattle were the bases of a complex price setting system were one cow was worth say three goats or ten sheaves of wheat. Shoes were worth a sheaf of grain. The temple issued credit notes for whatever someone made, say shoes, based on the fixed value that was established. These credit notes were exchanged for whatever was needed, backed by the trust in the temple, not because everyone had cows to exchange. An early form of banking, paper money and a trusted third party guaranteeing it all.

Bill's simplistic Austrian economics can't accept this explanation of the way that money operated in antiquity because their entire economic theory is based on proving that the government isn't required to be involved in the economy. They are not interested in explaining how the economy works, only in spinning a fantasy of how the economy could work without government.

That the ancient economies worked using credit and fixed values for everything, not barter, completely destroys their carefully constructed house of cards fantasy of operating the economy without a trusted third party, that is government. A third party that regulates the economy to guarantee some degree of fairness in the economy.

Show

This is why the Austrians and the Libertarians can't accept but one of the uses of money, as the medium of exchange. They can't admit that modern so-called fiat money has its own value, that it stores value or that it is an unit of account, the measure of value in the economy. Instead they argue that everything has a natural value, one independent of the item's monetary value. That all things that are bad in the economy happens when the government interferes to distort monetary prices that deviate from the so-called natural price. That these distorted prices cause investors to misappropriate their investments. This is of course ridiculous. On every count. It pretty much ignores everything thing that we now know about the economy that we have and the economies of the past. It is an economics that ignores the realities of today's economy and the knowledge we have gained of past economies.

The important investment decisions that are made today aren't made by stock market investors, they have become a small, unimportant sideshow in the economy. The important investment decisions today are made by corporate executives. And they are not dependent only on the prices of their goods to decide whether or not to invest, they have an entire range of tools available to help them, marketing surveys, consumer preference, economic projections, all of which the Austrians and the Libertarians have to deny are useful. Their fantasy depends on the price alone carrying all of the useful information about the investment decision.

 

[SimpleDon]

No shit, Sherlock.

That doesn't change the fact that the massive oversupply of refined gold in the world today, that cannot conceivably be used in thousands of years, should (if markets were sane) render that particular commodity almost valueless. That it is not selling for pennies a tonne is purely an artefact of human cognitive impairment - literally, insanity.

Sure, if there is inflation, the price of all commodities - including those that are practically valueless - should, all else being equal, rise; but any number multiplied by almost nothing is almost nothing.

If the world had thousands of years supply of refined steel ingots in storage, doing nothing, what do you think that would do to the price of steel, iron, and iron ore? For sure, nobody would be interested in mining more iron ore. But gold mines worldwide are producing over 3,000 tonnes of the stuff each year - to be refined, cast into ingots, and placed into storage, along with the other over 180,000 tonnes that is already there. The owners of the stuff never even go to look at it. That's fucking insane.

If it's insane, why are they doing it? China is mining gold at a loss and refusing to sell any of it. Meanwhile, they're buying all the gold they can get their hands on. Russia is also buying gold and so is India.

You left out one important function for gold. It is very useful as a medium of exchange. We have paper dollars! You might exclaim. But paper dollars are very cheap to produce and accounting entries (which is most of what our money is) are even cheaper.

Consider this, when we were on a gold standard, the gold actually served an immediate, practical purpose. It served as a medium of exchange. Even though it mostly never left the vaults, it served as security for the bank notes that people actually used in their transactions.

Fiat money has no security. Consequently people seeking security will turn to gold and silver in direct proportion to their lack of confidence in the prevailing fiat currencies. The high price of gold is a symptom of the declining confidence in the major fiat currencies of world and of the dollar in particular.

And by the way, if you think the price of gold on the COMEX is ridiculously high, keep in mind that you can't actually buy gold at that price. The COMEX price is the price for gold contracts not real, physical gold. Real, physical gold is selling at a 30-50% premium over the COMEX price.

So the price of gold has been dropping, that must mean that confidence in the dollar is increasing?

So-called fiat money* is valuable because of what it can buy. The absolute best argument against the simplistic fantasy economics of Austrians and Libertarians is that our economy is the way that it is because of thousands of years of collective choices made by the various actors in the economy. Our economy is the way that it is because of the very thing that the Austrians say that they want to give the economy, the freedom of choice.

The economy doesn't have a gold standard for money not because the government decided to abandon it. We don't have a gold standard because the market freely chose to get rid of it. Not only wasn't it needed, the value of money is based on what it can buy, nothing else, but because the gold standard was seriously hampering growth in the economy. The only way that you could go back to the gold standard would be to have the government force everyone to use it, ironically, and to live with the constraint on growth that it causes.

The market wants the medium term growth in the money supply to equal the growth in the economy and the net effect of the foreign trade. A trade deficit is money that is effectively leaving the economy, so that the growth in the money supply has to be greater than the growth in the economy to allow for that.

For a gold standard to succeed the economy must be able to accept deflation, money becoming more valuable. But the economy that we have has freely chosen to not accept deflation. To have sticky prices and to have sticky wages. The government didn't force the economy to have sticky anything. It was the free choice of the market, rooted in basic human nature.

Deflation is very, very bad for a capitalistic economy. It means that money becomes more valuable, that holding money can generate greater returns than investing it. This is very bad for the economy. That debtors have to pay back loans with money that is more valuable than the money that they borrowed. This is very, very bad for the economy.

Show

Among the many things that you chose to ignore about the economy is that the macroeconomy has to behave differently than the microeconomy times 330 million or however many individuals and companies we have in the US. And that one of the reasons that this true is that at the macroeconomic level all of these things that we are talking about, money, debt, investments, interest rates, stocks, bonds, derivatives, commodity markets, etc. are all part of the overheads of capitalism. And they all burden the real economy of making products for consumption. And a wise capitalistic economy minimizes their drag on the economy. They are needed as an important part of the mechanism of capitalism but they are not the reason that the economy exists, they don't have to be catered to, to be over rewarded to be forced into doing their small part in the economy. In 1970 the FIRE sector, financial insurance and real estate, claimed 2% of the corporate profits in the US. In 2007, just before the deregulation delusion financial crisis and recession that they largely caused, fully 40% of the corporate profits in the US went to the FIRE sector.

The burden that they impose on the productive economy is more than twice as great as it was in 1911. They have become that much more inefficient than than they were in the times of quill pens and ledger books, productivity losses when the entire rest of the economy posted tremendous gains in productivity.

* governments don't have to force its use, they only have to require that it is used to pay taxes to give it value.

 

[SimpleDon]

Because it works as long as everyone else is equally crazy.

China is mining gold at a loss and refusing to sell any of it. Meanwhile, they're buying all the gold they can get their hands on. Russia is also buying gold and so is India.

So what? Lots of people do insane things.

You left out one important function for gold. It is very useful as a medium of exchange.

No it isn't.

We have paper dollars! You might exclaim. But paper dollars are very cheap to produce and accounting entries (which is most of what our money is) are even cheaper.

Exactly. Cheaper things are good. Expensive things cost more. If you have two ways to do something, the non-insane option is to go with the cheaper.

Consider this, when we were on a gold standard, the gold actually served an immediate, practical purpose.

Indeed it did. And in the neolithic, good quality flints were hugely prized, for good reasons. But we are no longer in the neolithic, nor are we on the gold standard.

It served as a medium of exchange. Even though it mostly never left the vaults, it served as security for the bank notes that people actually used in their transactions.

And instability, deflationary spirals, recessions and all kinds of needless economic harm resulted. Fortunately, we have moved on since then; fractional reserve banking allows money supply to automatically match to demand - when people want to borrow, money is created, instead of having to be diverted from other economic purposes; and when they pay back the loan, that money disappears again, instead of hanging around causing inflation.

There is no way to match the supply of gold to the demand for money. That makes commodity money a truly bad idea.

Fiat money has no security.

Nor does gold. Did you miss the part where I pointed out that there are 180,000 tonnes of refined gold sitting idle around the world? It is worthless as soon as people decide it is - just like fiat money.

Consequently people seeking security will turn to gold and silver in direct proportion to their lack of confidence in the prevailing fiat currencies.

But they don't - they turn to other fiat currencies. The Zimbabweans dropped their dollar for the greenback, not for golden krugerands. There is a reason for this.

The high price of gold is a symptom of the declining confidence in the major fiat currencies of world and of the dollar in particular.

It is a symptom of people's faith in each other's insanity.

And by the way, if you think the price of gold on the COMEX is ridiculously high, keep in mind that you can't actually buy gold at that price. The COMEX price is the price for gold contracts not real, physical gold. Real, physical gold is selling at a 30-50% premium over the COMEX price.

So what? More insanity.

The key difference between gold and fiat money is the fiat money is backed by real nation states, with real economies. Gold is backed by the crazy idea that it is valuable in and of itself, despite being practically useless and in massive oversupply.

I'm not going to respond to each individual point because I don't want to descend into a de-rail. I would only point out that fractional reserve lending was invented when a gold standard prevailed and is not incompatible with a gold standard. But I would also suggest that equating a medium of exchange with supply and demand is rather wrong-headed. You seem to have fallen into that modern neo-Keynesian trap of equating "demand" with money. That makes no sense. Money is a medium of exchange through with supply and demand are expressed.

Of course, if there is a shortage of money, prices will fall. It isn't the money balances the two. It is the price mechanism.

Meanwhile, you are left with the choice of believing that the entire world is insane or that you are wrong.

It is a very small part of the world that believes in Austrian economics. Their sole reason that they exist now is because they provide academic cover for the idea that the government isn't needed in the economy. A wholly ridiculous idea since at no time in history has an economy existed without government, since the first tribal chief was asked to vouch for the trustworthiness of a member of his tribe.

One of the two basic reasons for the development of government is to define and to regulate the economy, the other reason being to provide security from both internal and external threats. It makes no more sense to say that we don't need government regulation of the economy because you just know in your heart that a free market can regulate itself, than it would to say that we don't really need criminal laws because God won't let bad people into heaven and therefore no one will kill or steal. Both a belief in the existence of the self-regulating free market and in a God that will judge everyone on their death depend on an almost childlike faith in something that doesn't and can't exist.

The Keynesian concept of elective demand is that not only must a consumer have the desire to buy something, he must also have the money that is required to buy that thing. And that for about 99% of the population that money has to come from wages, either past wages from savings or future wages from a loan. Desire is only a small part of demand. I fail to see the trap in that.

When there is a shortage of money under the gold standard, the result is deflation, prices going down. But under a so-called fiat money system the shortage of money will result in higher private debt to create the needed money. Too much private debt isn't good either. Google "Ivan Fisher debt deflation" to see why.

Yes, the same economist that was wrong about the quantity theory of money was right about debt deflation. We can't judge him too harshly, he was looking at the failed gold standard in the early 1930's when he worked on the quantity theory of money. Every country that recovered from the Great Depression did so by abandoning the gold standard and no country started to recover from it until they abandoned the gold standard.

The people who can be judged harshly are those who are presented with the evidence of the failure of the gold standard and still try to impose it on the unwilling economy or who look at the disaster of 1980 increasing the interest rates to +20% because the monetarists thought that the quantity of money set prices instead of prices determining the quantity of the money. A person like you for example.

 

[SimpleDon]

Printing money raises prices.

That is not necessarily true. The deflationary experience of Japan is recent proof that your claim is not unilaterally true.

As we learned in 2008 and 2009 it is hardly never true. The problem as we found out was that the Fed could create all of the money that they wanted to, but if no one was loaning money and/or no one was borrowing money, both were true at that time, the money didn't go into the economy. It has to be loaned out. The only other choice was Bernanke's helicopter drop where the Fed would print a lot of money and drop it from a helicopter in order to get it into the economy.

Even the famous QEs didn't do much because they didn't put money into the real economy. The QEs did provide a boost to the stock market and the rest of the paper economy of stocks and bonds. But this money pretty much stayed in the money like paper investments that really don't impact the real economy of producing goods and services that the 99% by and large depend on to sustain them.

 

[SimpleDon]

But why blame monetary expansion by governments? An asset price bubble causes all the effect mentioned, including expansion, and is more likely to be caused by an increase in the spending power of the very rich, rather than an increase in money supply generally, since they're the ones, overwhelmingly, who buy the assets that are inflating. The main asset that's inflating is the housing market, it's doing so primarily at the top end, either from luxury houses or for rental units as an investment, and it's done so as a haven for excess cash at a time when bond and equity returns are modest, principally due to low interest rates.

So the solution seems easy - close the inequality gap, remove the excess cash which is being funnelled away from the real economy and into a series of asset bubbles, and use it to stimulate growth amongst the most active parts of the economy - small businesses and SMEs.

Yes, thank you. Someone else understands it.

Yes, excess money does create asset bubbles, but not because the interest rates are low but because there is so much money trying to find investments that pay a return and end up increasing the prices of the assets that are bought. It is inflation caused by too much money, but only in spots in the economy. The obvious ones are real estate, what happened leading up to 2008 when the housing bubble built up and inevitably popped, But we have also had asset bubbles built in stocks, bonds and commodities as well.

Beyond the obvious asset bubbles there are other problems caused by this money. Investments going into privatizing enterprises that shouldn't be run as for profit businesses, health care is the most obvious, before the ACA privatization was running up health care costs by double digits every year, but also prisons, fighting wars, infrastructure, government services and education to list some more failures of privatization.