patrick.net

Wow. Great explanation.

So the question is would we be in the same situation we are now if our money was backed with gold? I believe the answer is yes, even when we were on the gold standard, people could still borrow money.

I however do not believe governments would be any smaller, if currency based on the gold standard, governments would just seek to obtain more gold, silver, copper, platimun, etc. One estimation of all the gold in the world is 10 billion ounces of gold, if were were to say that $100 equals once ounce of gold, that would give us 1 trillion dollars available backed directly by gold, it's been estimated in 2007, that there is 830 billion dollars in circulation in the United States. This of course would require the United States to have ALL the gold in the world to accomplish this, but than again, currency wasn't only backed by gold, Silver certificates were standard in the 1930's, in fact, I read that silver inventories are actually smaller than gold at the moment, it could be entirely possible that one day Silver will be more valueable then gold. Also roughly 50 million onces of gold are mined each year, with would allow currencies to expand as more gold is available to back currencies. So I do not beleive being on the "Gold" Standard would really change anything all that much, markets would crash, bubbles would brust, fortunes lost, just the value of money would be determined differently. Just as the article pointed out, Spain experienced price inflation because so much gold hit the markets from the new world, that markets couldn't adjust fast enough, prices actually rose 300 percent from the late 1500's to the early 1600's after price declines during the 1400's. For the latter part of the 1500s and on into the 1600s Spain was a debtor nation, spending more abroad than it took in. Goods were far too expensive to export, since so much gold was chasing a fix amount of goods, it was far cheaper to import goods from abroad.

Could the type of inflation we are experiencing have occurred without the presence of fossil fuels?

Its not about gold, or fiat. Its about oil. The most precious, versital, life-giving, wealth-inducing thing this planet has ever seen. Not land, timber, gold, water, nothing comes close to this.

Its not the golden rule its the oil rule. Nixon saw it, that's why he dumped the gold standard and went for the big game. Problem I see, however, is that corporations have up-ended the American government and are now calling the shots, selling out the American citizen at the same time.

OK I read the rest of Oakman's essay and have less to disagree about.

"American wages would likely be able to purchase more than they could today"

Wages are neither here nor there. All that matters is PRODUCTIVITY of goods and services. THAT determines the standard of living.

Wages will get sucked into taxes and rents REGARDLESS of monetary standard.

nah, FX muddies the trade deficit picture.

The failure to seriously address the Chinese game with the yuan since 1995 or so is rather puzzling to me. Dissertations if not Nobel prizes should accompany accurate analysis of the situation.

however when this welfare ends our lifestyle will adjust accordingly.

Rents get cut in half. Life goes on.

The mistake here is that backing money with gold is also fiat money. Money is an artifact of civilization no matter what its based on.

In fact if based on something physical it has its own set of problems. It can artificially restrict the expansion of an economy or cause deflation if e.g. suddenly a new gold source is found or thru war and conquest e.g. as Oakman euphemistically pointed out Spains gold "discoveries" in America. This disrupted the status quo in Europe and led Spain to start numerous wars there.

In any event money is imaginary but its supply must increase as "wealth" increases else the whole shebang wont work. The problem is to keep it all under control. Basing a currency on some arbitrary physical thing restricts its imaginary potential.

As a simple example that even Palin supporters might understand consider a world inhabited by a solo tribe of a 100 people, each has 1 unit of currency (be it seashells or paper notes). Suppose citizen A creates a new bow. This bow has obvious value but it cannot reflected in that civilization easily. Yes you could barter but economically barter is an obviously inefficient system. It would be much better if that civilization injected a seashell into its economy to represent that increase in wealth. As you can see barring misfortunes the tribe would grow in population and consequently objects of wealth. If the economy was not inflated it would mean that automatically people with seashells would have increasing wealth with out doing jack (e.g. 100 seashells vs 200 people).

Of course the above is a gross simplification and I dont want to be yammered over it but I am sure you get my drift. Our current situation is almost unimaginably more complicated than the above. But the question arises as to the true value of money to a civilization. Although it is efficient in terms of exchange for goods and services I think its true value lies precisely in what people complain about the most: fiat money.

As in all things fiat money can be abused but if I may just illustrate by another simple example to the above tribe: suppose that the said tribe has now increased to 1000 members and food supply is becoming questionable, over yonder lies some barren ground which if irrigated could produce more than enough to satisfy demands for 10,000 people. If only a canal could be dug to it. The simplest way would be to create fiat money to pay people to dig it which would then be "payed" for by the resulting wealth. Of course in some Kingdoms or dictatorships you could simply force the people to dig it and in some benign civilizations of intelligence the people might see the wisdom and concur to do it.

In the current situation the civilization is facing meltdown so to avoid that you must double down unless of course you don't care for the civilization. The fiat money is being produced in the same way as above but consequently in the future there may not be the subsequent increase in wealth.

Please forgive me for my simplifications and do not berate me unduly. I am not an economist and there are many more complications in reality e.g. if money is not real where have all the losses gone?

I remain your humble opinionator.

Troy says

OK I read the rest of Oakman’s essay and have less to disagree about.
“American wages would likely be able to purchase more than they could today”
Wages are neither here nor there. All that matters is PRODUCTIVITY of goods and services. THAT determines the standard of living.
Wages will get sucked into taxes and rents REGARDLESS of monetary standard.

Fiat money has always eaten away at productivity. Government typically utilize fiat money to employ non-productive aspects of the economy. They also use it to steal from the productive sector of the economy without raising taxes. It also can create price distortions in certain sectors which results in capital misallocations (like a housing bubble). You are right in saying all that really matters is productivity. What you don't seem to understand is that reckless fiat monetary policies can severely aggravate the productive sectors of the economy.

If no money was printed since 1776 except to replace old money, nobody would have money. You need to increase the money supply in order to accomodate an increasing population. How much has our population increased since 1776?

theoakman says

Throughout the entire 19th century, prices actually declined over the course of 100 years while the standard of living did consistently rise considerably.

Comparing the 19th century to today is fucking retarded. The economy of 18th century was driven by expansion into a continent stuffed full of agricultural potential and mineral wealth almost free for the taking. Anybody with enough capital to acquire an axe could make a living out on the frontier, and the Homestead Act accelerated this by handing out 160 acre homesteads like candy to all takers who could find the government office to file their land patent.

Additionally, the industrial and scientific revolutions resulted in energy moving from muscle power to steam power, a hundred-fold multiplication of wealth-creation. Then at the turn of the 20th century the petroleum economy got moving, again increasing productivity significantly.

The boom bust cycle is still primarily the result of the fractional reserve system while the debasement of the currency has been the result of long term expansionary monetary policy.

Au contraire. There were plenty of Panics in the 19th century, monetary inflation has dampened the system since 1910.

1798, 1819, 1837, 1857, 1873, 1893 were major land panics that came like clockwork.

Comparing the 19th century to today is fucking retarded. The economy of 18th century was driven by expansion into a continent stuffed full of agricultural potential and mineral wealth almost free for the taking. Anybody with enough capital to acquire an axe could make a living out on the frontier, and the Homestead Act accelerated this by handing out 160 acre homesteads like candy to all takers who could find the government office to file their land patent.

Additionally, the industrial and scientific revolutions resulted in energy moving from muscle power to steam power, a hundred-fold multiplication of wealth-creation. Then at the turn of the 20th century the petroleum economy got moving, again increasing productivity significantly.

No, it's not retarded. Prices declined over the period of 100 years. You act as if we haven't made similar productivity gains in the past 100 years. The fact remains, prices declined going from 1800 to 1900, and yes it was a result of productivity gains. That's called a productive and growing economy. The fact is today, from 1900 to 2010, the price of something so simple to produce, like say an apple, has went up in price 100 fold despite the productivity gains we've made. Has this been disastrous? No. But what you are about to find out is that the next 100 fold increase in prices is going to take much much much less than 100 years to materialize and it's going to be disastrous.

Au contraire. There were plenty of Panics in the 19th century, monetary inflation has dampened the system since 1910.
1798, 1819, 1837, 1857, 1873, 1893 were major land panics that came like clockwork.

Au contraire? Those major panics were a result of the fractional reserve system. Do you even know what that is? It doesn't appear so. We didn't avoid land panics via monetary inflation. We did it because Glass-Steagal restricted banks abilities to leverage up. Monetary inflation actually fuels the land speculation. The fastest form of monetary inflation is banks leveraging themselves up

" I worry much more about our long-term ability to provide goods and services than I do about gold, currency, or the price of housing."

^ nice.

also nice:

theoakman says

Au contraire? Those major panics were a result of the fractional reserve system. Do you even know what that is? It doesn’t appear so. We didn’t avoid land panics via monetary inflation. We did it because Glass-Steagal restricted banks abilities to leverage up. Monetary inflation actually fuels the land speculation. The fastest form of monetary inflation is banks leveraging themselves up

It is true that the 19th century busts were caused by bad bank debts, and that monetary inflation pushes money into land speculation since land is non-depreciating asset with quite a singular ability to wring unlimited rents from laborers and capitalists alike.

The problem was bad bank lending, not that banks levered themselves up, though the leverage was contributory to the overall cyce.

Perhaps I'm brainwashed into accepting the good of inflation with the bad.

Troy says

” I worry much more about our long-term ability to provide goods and services than I do about gold, currency, or the price of housing.”
^ nice.
also nice:
theoakman says

Au contraire? Those major panics were a result of the fractional reserve system. Do you even know what that is? It doesn’t appear so. We didn’t avoid land panics via monetary inflation. We did it because Glass-Steagal restricted banks abilities to leverage up. Monetary inflation actually fuels the land speculation. The fastest form of monetary inflation is banks leveraging themselves up

It is true that the 19th century busts were caused by bad bank debts, and that monetary inflation pushes money into land speculation since land is non-depreciating asset with quite a singular ability to wring unlimited rents from laborers and capitalists alike.
The problem was bad bank lending, not that banks levered themselves up, though the leverage was contributory to the overall cyce.
Perhaps I’m brainwashed into accepting the good of inflation with the bad.

When banks leverage up, they increase the money supply which leads to an increase in prices. The increase in the money supply is phony money and fraudulent. The bad loans are almost always based on the fantasy that the price increases were real or permanent. Price increases as a result of money supply expansion through a fractional reserve system are not permanent. They always end in deflation on a gold standard. Gold prevents the fractional reserve system from leveraging up beyond a threshold. The simple fact is, leverage results in more receipts issued than reserves available.

You are putting the cart before the horse. The banks cannot make bad loans on fictional price increases without first generating those fictional price increases by leveraging themselves up.

Andrew Jackson stopped a housing bubble in its tracks by requiring houses be paid for with physical gold rather than bank receipts.

Everyone already knows that cap and trade is a scam. The only ones who are screaming for it are environmentalist whackos and stockholders in energy companies who can't generate energy through a cost effective process.

Do they? Carbon printing is going to get pretty popular.

I agree that what matters most is productivity, which in the end is just human labor.

Somehow, we've gotten a billion Chinese to labor making things for us pretty much for free. Sure, we promised to pay them back with yet more paper dollars, but like people point out here, no big deal, we can just print until they catch on.

I'm afraid that when the smoke all clears, we will see that we did not merely export all our blue-collar jobs, we also exported all our factories. China will have all the factories and manufacturing knowledge, and will will be dependent on them.

And dependency is what economics is all about.

Manufacturing labor will always migrate to where it is cheaper (currently China). Competing on low cost is probably not the best use of our intellectual capital (wasting it on financial engineering via Wall Street doesn't add much value either).

Tariffs is just a transactional cost (giving funds to govt where are then, generally, inefficiently reallocated) that provide short term fixes but don't address the root cause.

Inflation can be planned/invested around. Fractional reserve doesn't cause inflation per se, just goverments that can't say no to printing more paper to fix problems.

We're going to be fine in the long run as long as we (1) save and invest, (2) keep the economy flexible (to avoid falling into silly short-term fixes like tariffs, (3) keep spending contained - both individuals and govt (keep in mind that spending govt money on healthcare would have greater ROI than on guns, wars - and it would be in YOUR best interest).

Banking can easily be fixed by separating lending from investment banking (let Volker rule).

Boom/bust cycles can easily be mitigated (you can never eliminate them because capacity is generally not increased by one unit of demand at a time). A central banker who is wise and independent and isn't scared to raise rates to force the govt to stop spending can mitigate the cycles (i.e. not Greenspan with his Ayn Rand fixation).

Use the above info to invest accordingly - the path to wise investments becomes easier as you understand the above.

Extremes in the above bad behavior cannot be eliminated (not even in China).

I will now go back to sipping cool drinks in the warm sunshine...

Forgot to comment on money...well it's a (1) medium of exchange, a (2) unit of account and a (3) store of value. For 1 and 2, pretty self-explanatory and effective in both of those categories.

As for 3, as a history of inflation proves, it's quite ineffective (due to populist govt's, or even autocratic govts - can't help but to give in to the masses or are corrupt). So, don't use it for that purpose.

For that matter gold isn't much better. Better off with something whose demand won't disappear without a long lead time...WalMart stock, utilities, etc...gives you a chance to liquidate over a long period of time with low transaction costs.

^^^ what he said

lol