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Behind the debate over remaking U.S. financial policy will be a debate over who’s to blame. It’s crucial to get the history right, writes a Nobel-laureate economist, identifying five key mistakes—under Reagan, Clinton, and Bush II—and one national delusion.
There will come a moment when the most urgent threats posed by the credit crisis have eased and the larger task before us will be to chart a direction for the economic steps ahead. This will be a dangerous moment. Behind the debates over future policy is a debate over history-a debate over the causes of our current situation. The battle for the past will determine the battle for the present. So it's crucial to get the history straight.
What were the critical decisions that led to the crisis? Mistakes
were made at every fork in the road-we had what engineers call a
"system failure," when not a single decision but a cascade of decisions
produce a tragic result. Let's look at five key moments.
No. 1: Firing the Chairman
In 1987 the Reagan administration decided to remove Paul Volcker as chairman of the Federal Reserve Board and appoint Alan Greenspan in his place. Volcker had done what central bankers are supposed to do. On his watch, inflation had been brought down from more than 11 percent to under 4 percent. In the world of central banking, that should have earned him a grade of A+++ and assured his re-appointment. But Volcker also understood that financial markets need to be regulated. Reagan wanted someone who did not believe any such thing, and he found him in a devotee of the objectivist philosopher and free-market zealot Ayn Rand.
Greenspan played a double role. The Fed controls the money spigot, and in the early years of this decade, he turned it on full force. But the Fed is also a regulator. If you appoint an anti-regulator as your enforcer, you know what kind of enforcement you'll get. A flood of liquidity combined with the failed levees of regulation proved disastrous.
Greenspan presided over not one but two financial bubbles. After the high-tech bubble popped, in 2000-2001, he helped inflate the housing bubble. The first responsibility of a central bank should be to maintain the stability of the financial system. If banks lend on the basis of artificially high asset prices, the result can be a meltdown-as we are seeing now, and as Greenspan should have known. He had many of the tools he needed to cope with the situation. To deal with the high-tech bubble, he could have increased margin requirements (the amount of cash people need to put down to buy stock). To deflate the housing bubble, he could have curbed predatory lending to low-income households and prohibited other insidious practices (the no-documentation-or "liar"-loans, the interest-only loans, and so on). This would have gone a long way toward protecting us. If he didn't have the tools, he could have gone to Congress and asked for them.
Of course, the current problems with our financial system are not solely the result of bad lending. The banks have made mega-bets with one another through complicated instruments such as derivatives, credit-default swaps, and so forth. With these, one party pays another if certain events happen-for instance, if Bear Stearns goes bankrupt, or if the dollar soars. These instruments were originally created to help manage risk-but they can also be used to gamble. Thus, if you felt confident that the dollar was going to fall, you could make a big bet accordingly, and if the dollar indeed fell, your profits would soar. The problem is that, with this complicated intertwining of bets of great magnitude, no one could be sure of the financial position of anyone else-or even of one's own position. Not surprisingly, the credit markets froze.
Here too Greenspan played a role. When I was chairman of the Council of Economic Advisers, during the Clinton administration, I served on a committee of all the major federal financial regulators, a group that included Greenspan and Treasury Secretary Robert Rubin. Even then, it was clear that derivatives posed a danger. We didn't put it as memorably as Warren Buffett-who saw derivatives as "financial weapons of mass destruction"-but we took his point. And yet, for all the risk, the deregulators in charge of the financial system-at the Fed, at the Securities and Exchange Commission, and elsewhere-decided to do nothing, worried that any action might interfere with "innovation" in the financial system. But innovation, like "change," has no inherent value. It can be bad (the "liar" loans are a good example) as well as good.
No. 2: Tearing Down the Walls
The deregulation philosophy would pay unwelcome dividends for years to come. In November 1999, Congress repealed the Glass-Steagall Act-the culmination of a $300 million lobbying effort by the banking and financial-services industries, and spearheaded in Congress by Senator Phil Gramm. Glass-Steagall had long separated commercial banks (which lend money) and investment banks (which organize the sale of bonds and equities); it had been enacted in the aftermath of the Great Depression and was meant to curb the excesses of that era, including grave conflicts of interest. For instance, without separation, if a company whose shares had been issued by an investment bank, with its strong endorsement, got into trouble, wouldn't its commercial arm, if it had one, feel pressure to lend it money, perhaps unwisely? An ensuing spiral of bad judgment is not hard to foresee. I had opposed repeal of Glass-Steagall. The proponents said, in effect, Trust us: we will create Chinese walls to make sure that the problems of the past do not recur. As an economist, I certainly possessed a healthy degree of trust, trust in the power of economic incentives to bend human behavior toward self-interest-toward short-term self-interest, at any rate, rather than Tocqueville's "self interest rightly understood."
The most important consequence of the repeal of Glass-Steagall was indirect-it lay in the way repeal changed an entire culture. Commercial banks are not supposed to be high-risk ventures; they are supposed to manage other people's money very conservatively. It is with this understanding that the government agrees to pick up the tab should they fail. Investment banks, on the other hand, have traditionally managed rich people's money-people who can take bigger risks in order to get bigger returns. When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top. There was a demand for the kind of high returns that could be obtained only through high leverage and big risktaking.
There were other important steps down the deregulatory path. One was the decision in April 2004 by the Securities and Exchange Commission, at a meeting attended by virtually no one and largely overlooked at the time, to allow big investment banks to increase their debt-to-capital ratio (from 12:1 to 30:1, or higher) so that they could buy more mortgage-backed securities, inflating the housing bubble in the process. In agreeing to this measure, the S.E.C. argued for the virtues of self-regulation: the peculiar notion that banks can effectively police themselves. Self-regulation is preposterous, as even Alan Greenspan now concedes, and as a practical matter it can't, in any case, identify systemic risks-the kinds of risks that arise when, for instance, the models used by each of the banks to manage their portfolios tell all the banks to sell some security all at once.
As we stripped back the old regulations, we did nothing to address the new challenges posed by 21st-century markets. The most important challenge was that posed by derivatives. In 1998 the head of the Commodity Futures Trading Commission, Brooksley Born, had called for such regulation-a concern that took on urgency after the Fed, in that same year, engineered the bailout of Long-Term Capital Management, a hedge fund whose trillion-dollar-plus failure threatened global financial markets. But Secretary of the Treasury Robert Rubin, his deputy, Larry Summers, and Greenspan were adamant-and successful-in their opposition. Nothing was done.
No. 3: Applying the Leeches
Then along came the Bush tax cuts, enacted first on June 7, 2001, with a follow-on installment two years later. The president and his advisers seemed to believe that tax cuts, especially for upper-income Americans and corporations, were a cure-all for any economic disease-the modern-day equivalent of leeches. The tax cuts played a pivotal role in shaping the background conditions of the current crisis. Because they did very little to stimulate the economy, real stimulation was left to the Fed, which took up the task with unprecedented low-interest rates and liquidity. The war in Iraq made matters worse, because it led to soaring oil prices. With America so dependent on oil imports, we had to spend several hundred billion more to purchase oil-money that otherwise would have been spent on American goods. Normally this would have led to an economic slowdown, as it had in the 1970s. But the Fed met the challenge in the most myopic way imaginable. The flood of liquidity made money readily available in mortgage markets, even to those who would normally not be able to borrow. And, yes, this succeeded in forestalling an economic downturn; America's household saving rate plummeted to zero. But it should have been clear that we were living on borrowed money and borrowed time.
The cut in the tax rate on capital gains contributed to the crisis in another way. It was a decision that turned on values: those who speculated (read: gambled) and won were taxed more lightly than wage earners who simply worked hard. But more than that, the decision encouraged leveraging, because interest was tax-deductible. If, for instance, you borrowed a million to buy a home or took a $100,000 home-equity loan to buy stock, the interest would be fully deductible every year. Any capital gains you made were taxed lightly-and at some possibly remote day in the future. The Bush administration was providing an open invitation to excessive borrowing and lending-not that American consumers needed any more encouragement.
No. 4: Faking the Numbers
Meanwhile, on July 30, 2002, in the wake of a series of major scandals-notably the collapse of WorldCom and Enron-Congress passed the Sarbanes-Oxley Act. The scandals had involved every major American accounting firm, most of our banks, and some of our premier companies, and made it clear that we had serious problems with our accounting system. Accounting is a sleep-inducing topic for most people, but if you can't have faith in a company's numbers, then you can't have faith in anything about a company at all. Unfortunately, in the negotiations over what became Sarbanes-Oxley a decision was made not to deal with what many, including the respected former head of the S.E.C. Arthur Levitt, believed to be a fundamental underlying problem: stock options. Stock options have been defended as providing healthy incentives toward good management, but in fact they are "incentive pay" in name only. If a company does well, the C.E.O. gets great rewards in the form of stock options; if a company does poorly, the compensation is almost as substantial but is bestowed in other ways. This is bad enough. But a collateral problem with stock options is that they provide incentives for bad accounting: top management has every incentive to provide distorted information in order to pump up share prices.
The incentive structure of the rating agencies also proved perverse. Agencies such as Moody's and Standard & Poor's are paid by the very people they are supposed to grade. As a result, they've had every reason to give companies high ratings, in a financial version of what college professors know as grade inflation. The rating agencies, like the investment banks that were paying them, believed in financial alchemy-that F-rated toxic mortgages could be converted into products that were safe enough to be held by commercial banks and pension funds. We had seen this same failure of the rating agencies during the East Asia crisis of the 1990s: high ratings facilitated a rush of money into the region, and then a sudden reversal in the ratings brought devastation. But the financial overseers paid no attention.
No. 5: Letting It Bleed
The final turning point came with the passage of a bailout package on October 3, 2008-that is, with the administration's response to the crisis itself. We will be feeling the consequences for years to come. Both the administration and the Fed had long been driven by wishful thinking, hoping that the bad news was just a blip, and that a return to growth was just around the corner. As America's banks faced collapse, the administration veered from one course of action to another. Some institutions (Bear Stearns, A.I.G., Fannie Mae, Freddie Mac) were bailed out. Lehman Brothers was not. Some shareholders got something back. Others did not.
The original proposal by Treasury Secretary Henry Paulson, a three-page document that would have provided $700 billion for the secretary to spend at his sole discretion, without oversight or judicial review, was an act of extraordinary arrogance. He sold the program as necessary to restore confidence. But it didn't address the underlying reasons for the loss of confidence. The banks had made too many bad loans. There were big holes in their balance sheets. No one knew what was truth and what was fiction. The bailout package was like a massive transfusion to a patient suffering from internal bleeding-and nothing was being done about the source of the problem, namely all those foreclosures. Valuable time was wasted as Paulson pushed his own plan, "cash for trash," buying up the bad assets and putting the risk onto American taxpayers. When he finally abandoned it, providing banks with money they needed, he did it in a way that not only cheated America's taxpayers but failed to ensure that the banks would use the money to re-start lending. He even allowed the banks to pour out money to their shareholders as taxpayers were pouring money into the banks.
The other problem not addressed involved the looming weaknesses in the economy. The economy had been sustained by excessive borrowing. That game was up. As consumption contracted, exports kept the economy going, but with the dollar strengthening and Europe and the rest of the world declining, it was hard to see how that could continue. Meanwhile, states faced massive drop-offs in revenues-they would have to cut back on expenditures. Without quick action by government, the economy faced a downturn. And even if banks had lent wisely-which they hadn't-the downturn was sure to mean an increase in bad debts, further weakening the struggling financial sector.
The administration talked about confidence building, but what it delivered was actually a confidence trick. If the administration had really wanted to restore confidence in the financial system, it would have begun by addressing the underlying problems-the flawed incentive structures and the inadequate regulatory system.
Was there any single decision which, had it been reversed, would have changed the course of history? Every decision-including decisions not to do something, as many of our bad economic decisions have been-is a consequence of prior decisions, an interlinked web stretching from the distant past into the future. You'll hear some on the right point to certain actions by the government itself-such as the Community Reinvestment Act, which requires banks to make mortgage money available in low-income neighborhoods. (Defaults on C.R.A. lending were actually much lower than on other lending.) There has been much finger-pointing at Fannie Mae and Freddie Mac, the two huge mortgage lenders, which were originally government-owned. But in fact they came late to the subprime game, and their problem was similar to that of the private sector: their C.E.O.'s had the same perverse incentive to indulge in gambling.
The truth is most of the individual mistakes boil down to just one: a belief that markets are self-adjusting and that the role of government should be minimal. Looking back at that belief during hearings this fall on Capitol Hill, Alan Greenspan said out loud, "I have found a flaw." Congressman Henry Waxman pushed him, responding, "In other words, you found that your view of the world, your ideology, was not right; it was not working." "Absolutely, precisely," Greenspan said. The embrace by America-and much of the rest of the world-of this flawed economic philosophy made it inevitable that we would eventually arrive at the place we are today.
182 Comments so far
Show AllJake,
Your diatribe against the dangers and physical hardship of mining for gold shows the pitfalls of "macro" thinking. Your beef is with slavery (i.e. the hypothetical government planner deciding on how much gold money there should be, and having the power to force others to mine gold in your way of thinking, just like central planners' current power to print up money and force everyone to accept it), not mining gold per se. A free individual mines for gold only when the gold mining endeavor provides better return than other goods and/or services that the individual can deliver. If you think the miner's work is hard, his alternatives are even worse. So why deprive him of the opportunity?
The choice between making goods/services for sale vs. making money itself has been with humanity ever since money was invented. If making widget for sale earns more money than mining for gold, it's a no brainer to make more widgets instead of mining for gold. When gold/silver were money, working harder on panning for gold/silver was a natural course of action when the economy demanded more money; as wages drop and unemployment rise, the opportunity cost for digging/panning for gold/silver drops. In other words, mining for gold/silver was a cure for poverty and hardship. Silver also turn up more when the economy is running well, and more industrial metals are turning out of mines.
In a fiat money system, the right to make money itself becomes monopolized by the elite. The average person is not allowed to create money out of thin air on his own and pass it into circulation. The choice of making money itself morphs into building special crony relationships with government officials who do have the power to create money out of thin air. The society gradually becomes a banana republic because getting a slice of that arbitrarge profit is far more profitable than trying to render real services and goods for other members of the society.
"Your diatribe against the dangers and physical hardship of mining for gold shows the pitfalls of "macro" thinking."
Seems to me it was hardly a diatribe at all and was mentioned more in passing, and that many of those dangers affect the community at large and not just the miners. In any case, given the narrow question of advantages and disadvantages of a gold money standard, those hardships and dangers to the community fall square in the "disadvantage" column.
I'm disappointed that you don't address what I feel are more central concerns about gold, in the face of your position that gold supply would be "stable". That includes the economics associated with finding and producing gold from specific mines, and whether certain countries might be quite lax in their environmental policies in an effort to out compete those countries that put in sensible restrictions. Additional factors I did not mention are the opportunity cost of using gold as money to the exclusion of some other purpose, as well as the focus society would have to have on getting and keeping gold to the exclusion of developing innovative technologies or human capital for example.
"In a fiat money system, the right to make money itself becomes monopolized by the elite."
It's monopolized by *elected* politicians and their appointees, who would not be allowed to act badly with impunity over a long period if it displeased the voters.
"The average person is not allowed to create money out of thin air on his own and pass it into circulation."
Nor were average persons allowed to mint coin or print money backed by bullion. In fact gold bullion ownership was illegal over much of the time that we were on that standard.
"The choice of making money itself morphs into building special crony relationships with government officials who do have the power to create money out of thin air."
"The society gradually becomes a banana republic"
I deny the above are the inevitable result of merely having a fiat system in place, and there is plenty of room for cronyism and corruption when the system is based on metal.
We just aren't getting anywhere here. Could I at least get some satisfaction in getting to you to acknowledge some of the disadvantages of gold money that I've pointed out or any others, and to acknowledge that the problem is to weigh these disadvantages against those of a fiat system?
Your objection to gold mining has nothing to do with whether gold money is better than fiat money. Fiat money system does not reduce gold price to worthlessness and therefore stop gold mining, contrary to many predictions made by Keynesian economicsts back in 1971. Because gold is still valuable under a fiat money system, gold mining activities continue. So all your criticism of gold mining and "opportunity cost" are quite irrelevent. You may as well argue that people should all wear blue uniforms so that technology and human capital can be used for something more productive instead of fashion design. Reference IngSoc in "1984."
Do I think gold is be-all and end-all best form of money? Not at all. IMHO, "gold standard" was only a step towards representation money, then fiat money, as there was never enough gold to monetize the entire world economy. Gold as money however is better than pure fiat money, because there is a natural limit and cost imposed on money creation. What I advocate is letting the market place decide what money should be . . . just like how money emerged before the government tried to impose its rules on money.
[It's monopolized by *elected* politicians and their appointees, who would not be allowed to act badly with impunity over a long period if it displeased the voters.]
Hitler, Stalin, Mao and Kim were all *elected*, some with far greater winning margin than Obama. Political election is not a substitute for liberty and freedom. Not even free and fair elections. Hamas was elected. Akmedenejad was elected. North Korea's Kim can probably win landslide in open election today even if he is on his death bed. The Obama appointees so far clearly illustrate the point that having an election doesn't mean having real choice; more or less the same regulatory appointees would have been appointed by a McCain presidency. Modern societies are organized around specializations. Each individual is very knowledgeable about his/her own life, and hence is capable of making decisions to improve his/her own life. The average voters' knowledge about politics and economics in general is quite limited; the Pulic Choice School actually present the point that because the influence of each individual vote is so small it doesn't pay to get know the intricacies of politics and economics; therefore transfering decision making from individuals to a collective by "voting" is very inefficient.
[ Nor were average persons allowed to mint coin or print money backed by bullion. In fact gold bullion ownership was illegal over much of the time that we were on that standard]
I'm not for any government enforced monetary "standard." Private minting was and is legal; the metal discs that private mints turn out are not legal tender money. I have no problem with that. There shouldn't be a legal tender money at all. Money should be what the two parties engaged in exchange freely settle on. Bullion ownership was always legal in the US before the founding of the Federal Reserve in 1913. For much of the US history, the US Mint was charged with the responsibility of turning lumps of silver bullion to official silver coins free of charge for whoever showed up with a lump of silver. In other words, anyone who found silver could turn that lump into official coins at no cost.
[I deny the above are the inevitable result of merely having a fiat system in place, and there is plenty of room for cronyism and corruption when the system is based on metal.]
Fiat means command, not by free choice. Sure there were cronyism and corruption when money was full body metal; however, the cronyism and corruption back then was result of other political coercions, not money creation power. Cronyism and corruption is the natural result of fiat command. Introducing fiat command into the money system leads to corruption of the entire economic system.
[Could I at least get some satisfaction in getting to you to acknowledge some of the disadvantages of gold money that I've pointed out or any others, and to acknowledge that the problem is to weigh these disadvantages against those of a fiat system]
You can't blame gold money for gold mining. We have had pure fiat money system for decades now, gold mining has not stopped. People mine gold because it is valuable. People who can make more money or having a higher standard of living making something else for sale wouldn't be mining gold. You may like to peg me as a gold bug, but as I pointed out numerous times in this longer series of exchanges, I'm not a gold bug. "Gold-only Standard" (to the exclusion of all others as money, such as silver) is the next worst thing as it is a charade to introduce representation money and eventually fiat money, despite its superiority to pure fiat money itself. What I advocate is letting the people and the market place choose what money or multiple concurrent forms of money various participants would accept, instead of having legal tender laws that introduce coercion. Whenever there is coercion, cronyism and corruption grow up around it like weeds. Pretty simple concept, if you are not so wedded to fiat money.
"Your objection to gold mining "
More like obsession, you should have noticed. :-) I go on gold panning and sluicing trips occasionally, that's why I know some things on it.
"has nothing to do with whether gold money is better than fiat money."
Why wouldn't a cost/benefit comparison to two money systems apply? Why wouldn't the physical drawbacks of the gold mining process not be a "cost"?
"So all your criticism of gold mining and "opportunity cost" are quite irrelevent."
Why? Any gold used directly or indirectly as money cannot be used for anything else. That is an undeniable cost. Same as any other commodity that you would pick.
"You may as well argue that people should all wear blue uniforms so that technology and human capital can be used for something more productive instead of fashion design."
Whether you would have uniforms for everyone or not is a poor analogy for deciding that a certain commodity would be used as money, a fundamental economic consideration for a nation. All previous assumptions about the economy would change where they would now need to focus on acquiring and keeping gold. This fact would also be in the "cost" column.
"Do I think gold is be-all and end-all best form of money? Not at all."
You had stated it would be "excellent" money. Consider that I was only using gold as perhaps your best example of some specific commodity to be used.
"Hitler, Stalin, Mao and Kim were all *elected*, some with far greater winning margin than Obama."
Please, there was little chance of any "regime change" in those examples as we regularly have in the US. In fact Kim has just *designated* a son as his successor in breaking news. If the issue of The Fed and fiat money takes the fancy of the voting public, whether through your evangelism or any other reason, politicians will surely take heed and at least debate it on the floor and on the trail. It is a fringe issue, like it or not.
"I'm not for any government enforced monetary "standard." "
Yes, I understand that, you favor commodity money that arises "naturally". I wonder how that could even work. That might have made sense in smaller and simpler economies.
"Cronyism and corruption is the natural result of fiat command."
I simply don't think you have demonstrated this to be the case. Instead you assume it to be true. I remain unconvinced on this point.
"Your assumption that gold mining would stop in the absence of gold money is quite counter-factual."
I never made any such assumption.
[Why wouldn't the physical drawbacks of the gold mining process not be a "cost"?]
Because gold mining takes place regardless whether gold is official money or not. Money is not a good or service per se in its function as money (despite gold can be used for jewlry and fresh paper money can be used for wiping ass some day, but until then :-). Money is only store of value and medium of exchange. The creation of new money, to the extent that it chips away the store of value of existing money, is cheating: i.e. a way to receive real goods and service without offering real goods and services. This point is well recognized in anti-counterfeiting laws; claiming yourself to be helping expanding money supply is probably not going to get you off the counterfeit charge. Market-chosen commodity money puts a natural physical limit on the extent of cheating. Fiat money systems give that cheating power to a select few.
[Why? Any gold used directly or indirectly as money cannot be used for anything else. That is an undeniable cost. Same as any other commodity that you would pick. ]
Industrial demand for gold is miniscule. That's one of the major charms of gold as money (less affected by the demand of any one particular sector of the economy). The biggest consumer nation of jewlry gold is India, and Indians treat gold jewlry as monetary instruments (store of value).
[. . . for deciding that a certain commodity would be used as money, a fundamental economic consideration for a nation.]
Why? Why should the voluntary exchange between two individuals be "a fundamental economic consideration for a nation" at all? Why should an agreement between the two of us regarding the price of a shovel or a bottle of wine be subject to sudden overnight 20% devaluation if the wisemen in charge of "fundamental economic consideration for a nation" deem it appropriate to do so?
Jake, I'm sorry to say this, but methinks the public education system has bainwashed many of us into soft totalitarianism. This instance, and your ealier assumptions about government's need to plan and control the production of important economic material show just how seductive and pernicious the ideas of placing one's fate in the hands of high priests are.
[ All previous assumptions about the economy would change where they would now need to focus on acquiring and keeping gold.]
Not at all. Not any more than people in our economy would all focus on putting together a superb copy machine that can duplicate fiat money to perfection. Sure, some people do that, and there are legions of bureacrats whose jobs are to counteract that (another cost of fiat money). However, the vast majority of the population focus on what they do best: rendering real goods and real services to earn money, whatever form that money takes shape. A commodity money chosen by the market place, such as gold or silver, would maintain stable value much better than fiat money. That will facilitate economic caculation. Businesses will have to worry less about wild fluctuations in overall consumer appetite; they can focus on making better mouse traps instead of having to worry about government blowing economic bubbles in election cycles. The net result is less wasteful expansions, and less mass lay-off's. If you want to talk about the cost of money systems, the cost of fiat money is far more than the ink and paper; even the big criminal gangs engaged in counterfeiting paper money is relatively small potato compared to the bubbles and busts and periodic economy-wide mass layoffs thanks to the econmic miscaculations induced by the fiat money instability.
[ You had stated it would be "excellent" money. Consider that I was only using gold as perhaps your best example of some specific commodity to be used.]
Yes, gold is an excellent money, for big-ticket transactions. The idea however is not govoernment sanctioning gold as the sole form of money. Money should be a market choice. Historically, gold proved itself to be an excellent form for carrying out high value transactions over long distance. Gold would not be so good a money for buying a bagel, for example.
N1 January 20th, 2009 6:32 pm
"Because gold mining takes place regardless whether gold is official money or not."
Gold mining in fact has a cost *regardless* of the purpose of the gold being mined so this statement doesn't answer the question. All gold ever mined totals a bit less than $4 trillion. I think we can be pretty sure that all previous assumptions in the gold mining field will be turned upside down on the decision to go to a gold standard and the resulting increased demand would lead to increased production and therefore expenses.
"The creation of new money, to the extent that it chips away the store of value of existing money, is cheating: i.e. a way to receive real goods and service without offering real goods and services."
That's called "debt". So fiat money is made possible by debt. Why is that "cheating"?
"Industrial demand for gold is miniscule."
About 11% of production for non jewelry industry:
http://www.gold.org/faq/answer/94/what_percentage_of_gold_is_used_in_jewellery_industry_and_investment
"The biggest consumer nation of jewlry gold is India, and Indians treat gold jewlry as monetary instruments (store of value)."
That's fine for the Indians to the extent it is true, yet cannot be said across the board. The jewelry *industry* represents 70% of production.
"Why should the voluntary exchange between two individuals be "a fundamental economic consideration for a nation" at all? "
In a simple economy on an island somewhere with 50 people or so it should not. Today in the US barter is not illegal, that is, they can swap things for some commodity.
"Why should an agreement between the two of us regarding the price of a shovel be subject to sudden overnight 20% devaluation "
Nothing keeps us from bartering for the shovel except for inconvenience.
"Jake, I'm sorry to say this, but methinks the public education system has bainwashed many of us into soft totalitarianism."
I agree.
"This instance, and your ealier assumptions about government's need to plan and control the production of important economic material"
Once again I've been unclear: I thought this much less about any belief I have in a government need as you state and more to do with your assumptions about how fiat money is necessarily diabolical with corruption the inevitable result.
[Yes, I understand that, you favor commodity money that arises "naturally". I wonder how that could even work. That might have made sense in smaller and simpler economies.]
No need to wonder at all. Commodity money rose naturally long before government issued any money. When government fiat money systems collapse, commodity money always rose again naturally, again numerous times. Sometimes, the government may even try to use its last resources to ban it, but never succeeding in the long run. You may want to read up on the monetary history of the world. The rise of the "troy pound" in Normandy (then part of Neustria), and the rise of lump silver "tael" in Ming China as monetary units were not government initiatives. In fact, the governments' response was trying to ban silver as money as they had fiat money systems. Eventually the governments had to give in, and collect tax in silver.
[ "Cronyism and corruption is the natural result of fiat command."
I simply don't think you have demonstrated this to be the case. Instead you assume it to be true. I remain unconvinced on this point.]
Read carefully, the phrase was "fiat command" not "fiat money." Fiat command as the source of cronyism and corruption should be quite obvious: corruption is simple arbitrarge of political power (i.e. fiat command). If the government passes the fiat command to take your $30,000 car for $10,000 (tax, price cap, what have you), and I'm the officer in charge of taking it from you, then you will have a very strong incentive to pay me some number below $20,000 for me to look the other way and goose someone else. Fiat command is a step function; corruption is simply attempts to linearize that step function.
How does that relate to fiat money? Fiat money is fiat command in the monetary realm, with the power to corrupt the entire economy as money reaches into all corners of the eoconomy.
["Your assumption that gold mining would stop in the absence of gold money is quite counter-factual."
I never made any such assumption.]
Then why insist gold mining as cost of gold money? Gold mining takes place regardless whether gold is money or not. I'm not at all convinced that gold price in terms of other goods would sky rocket if gold is official money; the official demonetization of gold did not make gold price crash back in 1971, either in terms of dollar or in terms of other goods.
"Commodity money rose naturally long before government issued any money."
Yes, back when economies were simple and small. Today we have billions of people and a complex aggregate "world economy". As only one objection, I don't think the idea of "naturally evolving" commodity monies as scaling very well.
"Read carefully, the phrase was "fiat command" not "fiat money." "
Distinction without a difference. What I have read throughout this entire discussion is a constant theme that fiat money necessarily leads to corruption, and you haven't demonstrated it to be so yet assume it to be so.
"Then why insist gold mining as cost of gold money?"
The cost of mining gold has little to do with how the gold is used, and going to a gold standard would turn all assumptions in that industry upside down. I presume greater costs incurred with greater productions from mines due to greater demand.
N1: Thanks for your patience, I am hoping to get a response by the weekend, although I just don't see where this can go at this point.
N1: I very much appreciate your considerable time and your civil manner, but I really don't see where we can go with our disagreement anymore, we have been talking in circles. Neither of us can *prove* our points, given the nature of Economics being a social science.
At this point, I am interested in just one other thing. Given that you are against fiat currency, and that is the only system used anywhere in the world today, and that you seem to think that only disaster looms, what are you *doing*?
Jake,
I'm not sure what you mean by "prove." I have given you plenty examples on how the fiat money system works in real life. Step out of the ideal magic box of how central banking is supposed to work, and look at how it really works. Government officials can't picking out winners to support; the losers pick out government for support instead. You mentioned the benefit of central banking providing a stable currency for trade . . . how do you like the "stability" of gasoline rising from $1/gallon to $4.50/gal in 7 years, then falling to $1.50/gal in 7 months? Some stability, eh? Yet, all this time, if you were counting on the much belittled 90% silver quarter, that little quarter would have bought just about one gallone of gas at all those times ($4.50/ozt in 2000, $20+/ozt in April 2008, $12/ozt now, from an $8 low when gas was $1.50). As you can see, the gasoline price at the pump did not change much at all in terms of that silver quarter . . . the wild price gyration is in the fiat money itself. If you realy look back in time, back in 50's and early 60's, when the 90% silver quarter was still minted, gasoline price was just about 25 cents a gallon! Gasoline price has been very stable all these years. We are just yanked around by the nose because of the fiat money.
Another common mistake that people living under fiat money system for too long make is the concept of "Law." Jake, you are already better than most when you said the 90% silver coin was no longer "real money" regardless what the law says (although you got the concept of what is "real money" backwards, but I know what you meant :-) Because the centralizing power accrued to the government under a fiat money system, many people grow to see "law" as whatever the legislators put into writing. These are in reality but rules and regulations, the effectiveness depends on the reaches of government arms, and how in-synch they are with the "real laws" (see next sentence). There is another set of Law called "natural law," a summary of what free people are naturally inclined to do regardless what the government rules and regulations say. Humanity's natural ability to recognize this set of natural laws and cooperate with each, including coming up with natural currency for exchange in the absence of or despite government rule making, is the foundation of freedom and liberty. The difference between natural law vs. artificial regulation is in predicative power at face value. For example, willingness to exchange at comparable value is in the domain of natural law; e.g. a silver quarter for a gallon of gasoline can be expected until the mining technologies change dramaticly . . . whereas the government might put in a price cap of 25 cents a gallon, doesn't mean you can find any gasoline at that price if the money is fiat. What you end up having under government fiat is "frozen market" because one party is holding out looking for the government to force the other party into terms that is favorable on itself at the expense of the counterparty. That's what "no market" or "frozen market" means even for financial papers. At a price low enough, buyers can always be found. Sellers unwilling to cut price and holding out for government bailout is what causes "frozen market."
As to what I "do" in light of the tough time coming, good question. I'm not in favor of "lone wolf survivalism." Nobody can be an expert at everything. Exchange and collaboration are necessary for prosperity as well as survival. That's why I'm willing to share the ideas of liberty and freedom (in the words of the founding fathers, the rights endowed by our creator) in the hopes that other people with their valuable specialized skills can be prepared and survive the coming turmoil, too. If too many people die while waiting for the government to come to their aid, the eventual surviving community may be hampered by too many lost skills or simply not enough head count to be a viable community, especially if the initial post-collapse response is a Hobbesian all-against-all one before the eventual emergence of a Lockean rational collaboration approach.
"I have given you plenty examples on how the fiat money system works in real life."
Respectfully, and I do appreciate your efforts, I think you have provided incomplete analysis in your examples. See below.
"how do you like the "stability" of gasoline rising from $1/gallon to $4.50/gal in 7 years, then falling to $1.50/gal in 7 months?"
Ignores numerous factors that specifically relate to the supply and demand for oil and gasoline. One example of what I say above. Another, your tying together the creation of the Fed with a constitutional amendment authorizing income taxes is unconvincing. And the cronyism charge.
"if you were counting on the much belittled 90% silver quarter, that little quarter would have bought just about one gallone of gas at all those times "
The above is an example of what you cannot prove: We have no way of knowing because fiat money *was in fact* in place. There is no laboratory to see what "might" have happened otherwise. That is what I meant by "prove" earlier. Such is Economics.
"e.g. a silver quarter for a gallon of gasoline"
What about the limits of the silver supply in the face of *growing* populations and economies, demanding *more* gasoline and all other goods and services? How is the limited supply of silver to keep up? Or in the case of gold, are we safe in letting China and South Africa control that? That's where the gold comes from.
"I'm not in favor of "lone wolf survivalism.""
Well good, that doesn't sound like living to me.
"That's why I'm willing to share the ideas of liberty and freedom (in the words of the founding fathers, the rights endowed by our creator)"
Can you imagine the founding fathers looking at our world today? I take this at face value and assume that your motives are noble.
"Ignores numerous factors that specifically relate to the supply and demand for oil and gasoline."
Really?? Peak oil hit in April of 2008, and now planet earth is gushing oil and we are all drowning in it? What about silver, platinum, pladium, copper, steel, aluminum, uranium, wheat, corn, surgar, rice, etc. etc. that all went through a similar boom and bust in price?
There are always people who are paid and ready to write up some nonsense explanation regarding the particulars. . . just like all those who explained the real estate run up as result of god not creating any more land . . . The fundamental reason behind all those simultaneous price increase was the monetary expansion . . . the massive price decrease in all asset classes is monetary contraction. Thomas Jefferson once said that the more newspaper one reads, the less informed the person becomes; I guess shills are not a new phenomenom.
[We have no way of knowing because fiat money *was in fact* in place. There is no laboratory to see what "might" have happened otherwise. That is what I meant by "prove" earlier. Such is Economics.]
Then it's silly to demand or even talk about "prove" as you define it in the context of economics discussion. On the other hand, having two completely unrelated commodities, such as gasoline and silver, closely track each other in price expressed in a unrelated third commodity (fiat money) for decades, rising and falling in terms of that third commodity more or less in lock steps for decades, is a very strong proof that the first two unrelated commodities are having very stable price behavinor in terms of each other, whereas the third commodity is where instability comes from.
[ What about the limits of the silver supply in the face of *growing* populations and economies, demanding *more* gasoline and all other goods and services? ]
What about growing population? Silver supply has been growing every year, as has gasoline supply. Demand in economics means qualified demand. Someone in the middle of nowhere and has not even a pot to pee in or in any other way connected to the markets of the world, even if born a trillion times, does not result in any economic demand for either silver or gasoline. Developing economies have grown their demand on basic materials in the world market because someone in the developed world have been giving them money. This is not a statement against free trade. There is nothing wrong with people in the developed world exhange goods and services with people in the developing world, so both can be better off. The fiat money system however created a trade system where the developed world (especially the US) offer the rest of the world a scam (fiat money) in exchange for goods and services from the rest of the world. The monetary expansion was what drove up prices for every type of physical commodity around the world. Obviously, it's not good for the rest of the world. It's not good for the vast majority of US citizens either as people engaged in honest trade are driven out of business by scam artists . . . in exactly the same process as honest savers being driven out of the housing market by liar loan borrowers when the government policies lead to a weird price setting where a lie is just as good as honest truth. Lies are cheaper to produce than the truth of holding a real high paying job, just as the fiat money (a lie) is cheaper to produce than honest money earned through rendering services and goods of value to other private participants in the market spending their own earned money.
Yes, over time, hopefully people demand more and more oil as well as other natural resources, all of which have to come out of the ground. That makes gold an excellent money, as it also has to come out of the ground and has very little industrial use hence unlikely to be biased by particular industrial application. Silver is also excellent, because it is primarily a byproduct of industrial mining of zinc, lead, tin, etc.; hence the supply of silver is automaticly in keeping with the supply of many industrial materials.
[Can you imagine the founding fathers looking at our world today?]
They can probably function much better than many of us can today. The Founding Fathers had witnessed fiat money first hand. It would be nothing new to them. Founding fathers can probably discount present cash value for a stream of future income faster than most people can nowadays. Various tools and amenities that we have today only make life easier, and in some instances making intelligence less crucial to survival. For over a thousand years, people had been riding on galloping horse backs while picking out an arrow out of half a dozen different types of arrows designed for different purpose, all in the same quiver on a running horse, while keeping track of their companions and enemies, signalling each other with whisles and hand flags. Methinks it's a lot more challenging than driving an automatic while yapping on the cell phone and eating a donut and shaving or putting on eye shadows all at the same time.
"Peak oil hit in April of 2008, and now planet earth is gushing oil and we are all drowning in it? What about *snip list of commodities* etc. etc. that all went through a similar boom and bust in price?"
Commodities move up and down with the money supply? So why the recent dip in commodities with continued money expansion? What about prices on non-commodities, many of which are much more stable?
What about speculation? Speculation can cause bubbles to grow and then pop. That is just one factor that you don't consider regarding price swings in commodities in general. Regarding oil in particular, it's a major feedstock for a modern economy, it's consumption can even be a rough proxy for GDP. If people think the economy is tanking the price can have little to do with production or consumption, the latter often mistaken for "demand" in the supply/demand equation. Instead people are considering future market conditions, i.e. speculating. Every day oil can make big swings when inventory reports come out or when there is a surge of violent activity in the ME, for some other examples.
"There are always people who are paid and ready to write up some nonsense explanation regarding the particulars. . . just like all those who explained the real estate run up as result of god not creating any more land"
Or that a house is an "investment" and not an *expense*. Yes I know what they write about. And they like to make a big deal of economic stories just like they do with the winter storm story that may or not materialize tonight where I live. These stories can also drive booms and busts.
"The fundamental reason behind all those simultaneous price increase was the monetary expansion"
It's "begging the question", to use this as a premise where it remains something that has to be demonstrated. I don't think you have done that and I am not saying you have to, since it may not be possible either way. But you haven't convinced me that monetary expansion is the sole cause for all of this.
"Thomas Jefferson once said that the more newspaper one reads, the less informed the person becomes; "
I agree with this, especially when it comes to the headlines in the business section. One needs to read some of those sleeper articles perhaps, or just take a walk down the street. I found a small factory in my town recently that knits athletic socks, just by taking a walk. Here in the US where manufacturing is said to not exist anymore. Who knew?
"Then it's silly to demand or even talk about "prove" as you define it in the context of economics discussion."
Agreed, but it's fun to try, admit it. :-) See above. There are no labs. That's why there are many different opinions, and enough that disagree with you not just as vocalized but as demonstrated in marketplace behaviors.
"having two completely unrelated commodities, such as gasoline and silver, closely track each other in price expressed in a unrelated third commodity (fiat money) for decades, *snip* is a very strong proof that the first two unrelated commodities are having very stable price behavinor in terms of each other, whereas the third commodity is where instability comes from."
Request for regression analysis on that data please. :-) Correlation is not causation. You are looking at just one commodity now, it would be closer to your thesis I think to look at *all* commodities. They are *all* in lock step? And again why wouldn't manufactured goods or services be included?
"What about growing population? Silver supply has been growing every year, as has gasoline supply."
I haven't checked but I'll grant it's true. Who controls silver supply? Isn't that pretty *important* consideration before agreeing to let them control the supply of silver money?
"It's not good for the vast majority of US citizens either as people engaged in honest trade are driven out of business by scam artists "
I simply don't accept this characterization. Over the long term cheaters will be exposed for what they are, and no one with sense will patronize them.
"over time, hopefully people demand more and more oil as well as other natural resources, all of which have to come out of the ground. That makes gold an excellent money,"
And puts control of that kind of money in the hands of China, South Africa, or Australia, or anyone who has a stockpile and doesn't wish it to be used as money for some political reason.
"Silver is also excellent, because it is primarily a byproduct of industrial mining of zinc, lead, tin, etc.; hence the supply of silver is automaticly in keeping with the supply of many industrial materials."
Perhaps so. There are old worked out mines in my area BTW, it's locked up in lead sulphide.
*Methinks it's a lot more challenging than driving an automatic while yapping on the cell phone and eating a donut and shaving or putting on eye shadows all at the same time.*
LOL, I am sure. I just thought they would be floored by the population and innovations.
Jake,
Direct printing by the FED is not the only source of money supply in our fiat money system; it's not even the biggest source of money supply. The primary source of money supply in our fiat money fractional reserve system is lending by commercial banks. Whenever you take out a loan from a bank, the bank create the money out of thin air for you! Please google "fractional reserve banking" and see how it works; it's a book-length subject in itself. For the last few months, the world economy has been experiencing monetary contraction despite central bank printing. The debt default was destroying money supply much faster than the FED, or most other central bank (with the exception of Zimbabwe) could create new money. No, I'm not suggesting that the central banks should create new money faster; the central banks have no way of putting money into the economy without creating massive cronyism and further distort the economy.
Money supply contracts whenever debts go bad (see "fractional reserve banking"), at an exponential rate when base money capital stock is destroyed. That's why commodity prices have been going down worldwide. Commodities (including stocks and bonds, as commodity instruments) reflect money supply change much faster than manufactured goods and services for the same reason why commodity foreign currency exchange is a much better guage than the numistic value of particular coins or particular pieces of paper money. Put it in more concrete terms: a GM sedan may still have a $15k price tag, it does not however really command that price as the cars are piling up on the lots. Likewise, the real labor price has gone down dramaticly as the fast rising unemployment shows. Many businessnes and individuals are also encumbered by existing long-term contracts, such as mortgage payment derived from a home price when the dollar was worth much less (hence higher price in dollars back then), long-term rent agreement, and even employment agreement. Those locked-in prices put a limit to how low a business or an individual can hire itself out for. If the business or individual could buy those houses, rents and employment contract at current prices with current, they can in turn offer their services for less in terms of current dollar . . . but they can not reduce their cost factors without filing for bankruptcy or firing employees in order to reset the contracts at a new and lower nominal price. Gasoline at $1.50/gal means a very different value for the dollar, compared to the dollar when gasoline was $4.00/gal. Consumers adjust to the new value of dollar quickly, but businesses can not if the bulk of their expenses are tied up by rental agreements and employment agreements written when the dollar was worth 1/4 gallon of gasoline. Monetary instabiity is the crucial reason behind the current economic hardship, and the previous Great Depression, too.
"Money supply contracts whenever debts go bad "
Thank you for your response. That is only one component of the money supply.
"Commodities (including stocks and bonds, as commodity instruments) reflect money supply change much faster than manufactured goods and services for the same reason why commodity foreign currency exchange is a much better guage than the numistic value of particular coins or particular pieces of paper money."
It would have been helpful for you to have directly stated the reason. :-)
"Put it in more concrete terms: a GM sedan may still have a $15k price tag, it does not however really command that price as the cars are piling up on the lots. "
Still looking for that reason, in this example the price tag is simply irrelevant. What matters is actual sales. I see no analogy to the previous claim of some lag relation of non commodity goods prices compared to commodities prices.
"Many businessnes and individuals are also encumbered by existing long-term contracts,"
Contracts can be renegotiated, this is fairly common.
So, are you making a prediction now of general deflation after some lag period? Any historic examples of that if so?
[That is only one component of the money supply.]
Sure, homo sapiens are just one type of ape . . . just happens to be by far the most numerically dominant type.
[Still looking for that reason, in this example the price tag is simply irrelevant. What matters is actual sales. I see no analogy to the previous claim of some lag relation of non commodity goods prices compared to commodities prices.]
My bad for making assumptions about basic economic knowledge and experience. I should have known that given how badly the subject of economics has been taught over the past few decades, and how far removed the average person's daily life has been from real money and real economic choices, no knowledge should have been assumed. Non-commodities can have drastic drops in volume and changes in sales mix that can temporarily obscure the underlying price drop. Say for example, two years ago, GM had been making two car models, a Cadillac at $40k accounting for 30,000 units, and a Chevy at $20k accounting for 70,000 units, for a combined sale of 100,000 units; now the company has marked down the Caddy to $35k selling 5,000 units with 20,000 units piling up despite production cut, the Chevy has been marked down to $15k and selling 45,000 units, with also 20,000 units piling up in the lots despite production cut. The new combined sales volume is 50,000 units, with 10% as Caddy vs. the earlier 30% ratio. How exactly would you calculate how much price has come down in this example? The real price drop is far more than how much the mfr has cut in price in these examples; the drop in sales volume, the piling up of cars in the lots, and the shift in sales mix reflect the drop in real market clearing price; the inventory piling up and the idling of plants show that the current selling prices are not real market clearing prices. In real life, GM alone makes far more than two models. Other mfrs make even more models. Different mfrs have different tolerance regarding how many cars they can afford to accummulate in dealer lots and the port. Commodities in contrast suffer much less from these factors that tend to confound simple statistical study.
[Contracts can be renegotiated, this is fairly common.]
Not long term contracts such as the mortgage; employment laws, especially minimum wage laws, get in the way of renegotiating wages to the market clearing level. If there were no minimum wage laws, there wouldn't be unemployment; all joblessness would be voluntary joblessnes (i.e. not unemployment).
[So, are you making a prediction now of general deflation after some lag period? Any historic examples of that if so?]
No, I'm not making any prediction. My earlier statement was simply an observation of what has been happening in the last 9 months. Deflation happens after every bubble burst. It happened in 1981, 1929, 1921, etc. etc. all the way back to 1773 when the Brits withdrew money from North American circulation (banning state issue) after the French-Indian War.
"Sure, homo sapiens are just one type of ape . . . just happens to be by far the most numerically dominant type."
Clever. Instead why not just cite a source stating that there is currently a contraction of the money supply?
"Apologies for making assumptions about basic economic knowledge and experience."
Perhaps in the current discussion the root problem is one of clarity in expressing your views? See below please.
"I should have known that given how badly the subject of economics has been taught"
I agree with that, and the idea that not many are interested in the first place. Remember that joke about Economists being folks who are good with numbers but who lack the dynamic and outgoing personalities required of General Ledger Accountants. :-)
"*snip example, including a look at a process called "pricing" which is different from "price", as well containing no specific reference to the commodities input into the car manufacturing process.* How exactly would you calculate how much price has come down in this example?"
Are you expanding the definition of "price" now? Why is price anything but simply the amount agreed to in actual transactions?
"the drop in sales volume,"
That's called "sales volume".
" the piling up of cars in the lots,"
That's called "inventory". A building inventory will have an affect on future market conditions but there are other factors we are not considering. We are left to *predict* rightly or wrongly those future conditions and the prices realized then which is fine for you to do.
If you were trying to make a case about the price relationship of a particular manufactured good and a commodity that is a feed stock at plants producing that good, I think you could have come right to the point. I would have done it something like this: EIA statistics demonstrate that generally, but not always, retail gasoline price variations lag price variations in crude oil by about six weeks. In addition, the level of volatility demonstrated in crude markets is rarely seen to the same degree in retail gasoline price trends. So there is generally a lag and a reduction of volatility between the two markets. Nice and neat. I would also point out the recent 10-15 cent increase in a gallon of gasoline just for the heck of it.
But we are talking about *all* commodities and *all* goods and services across the board. There are regular surveys done concerning these things. Whatever it is going on with commodities, there does not appear to be a general deflation at this time.
"employment laws,"
Many states such as mine are "at will" states, meaning the individual contract can be renegotiated unilaterally by the employer by firing for no reason. This in fact happened to me just last week as part of a cost cutting measure across the entire business BTW. They got rid of ten percent right quick.
[Clever. Instead why not just cite a source stating that there is currently a contraction of the money supply?]
Because not all economic knowledge can be neatly quantified. M1, M2, M3 and MZM all measure various components of money supply, not the "whole picture." Just as GDP numbers that count all the bombs, tanks and aircrafts do not reflect true economic productivity. Sure, one could have cited real CIA documents to show East German GDP was higher than that of West Germany back in the 80's, just before the collapse of Eastern Bloc. It's a good idea not to confuse reality with models of reality. When you see prices of all sorts of assets going up, there is money supply increase (inflation) even if the commodity prices are held steady; conversely, when you see all prices going down simultaneously, that is evidence of monetary contraction, even if your academic indicators are not showing it.
[Are you expanding the definition of "price" now? Why is price anything but simply the amount agreed to in actual transactions?]
I thought we were talking about market clearing price, not just transaction price. The piling up of inventories and idling plants, and the drop in volume clearly show that the current transaction prices are not clearing the inventory through the market place.
Retail gasoline is as close to a commodity good as there is in retail. Retail gasoline doesn't even come in cartons or jugs like milk and orange juice do. Retail gasoline is commodity, especially given that retailer's storage capacity is very limited. Most other retail goods are not like that at all. There is nothing nice or neat about studying most retail goods price :-) Stores can massage inventory to meet quarterly goals. I tend to think store liquidation auction prices as reflective of real market price at the retail end, in a process akin to Ebay and commodities market two-way price setting instead of a one-way and volume control.
[But we are talking about *all* commodities and *all* goods and services across the board. There are regular surveys done concerning these things. Whatever it is going on with commodities, there does not appear to be a general deflation at this time. ]
You have way too much faith in the "regular surveys." If a store previously sells 100 widgets a month at $100 each in months 1 through 6; then a declining 10 widgets less a month at $100 each in month 7 through 12, then the store files for bankruptcy, and all remaining 150 unsold widgets get liquidated at auction for $50 each. What just happened? did the actual underlying market clearing price stay at $100 and then has sudden a step function at year end to $50? That's what your "regular survey" would say. I'm not about predicting, but tracking reality, and your choice of models ("regular surveys") are not tracking reality. The consumers are obviously assigning less value to the widget starting month 7, despite the store's stubborness regarding price.
Sorry to hear about your job loss. You are now an official victim of the fiat money system (well, we all are, to some degree). As an employer, I'm reluctant to cut wages on my employees due to employee morale reasons because most employees do not understand the value of money fluctuates; when money increase in value, their wages can be cut without adversely affecting their purchasing power, a point that is probably usually lost on employees. I have been cutting prices for my clients; otherwise, they would simply patronize some other business. Many business can not survive this kind of margin squeeze. The result is either bankruptcy or mass firing. We are seeing both now. If money were a physical commodity (not fractional reserve representation money in a so-called "standard"), the purchase power value of the employees' pay would adjust automaticly without change in nominal value.
"Because not all economic knowledge can be neatly quantified."
Just an aside, I would be loathe to call this anything more than "information". So you are guessing. There are periodic estimates of total money supply that I see coming from certain firms that provide that service, just nothing recent. I guess those are ostensibly "good" guesses by those firms when available.
"GDP numbers that count all the bombs, tanks and aircrafts do not reflect true economic productivity."
Yes I know. A traditional housewife does not get counted even though her labor saves the need to hire a pro whose labor would be counted.
"It's a good idea not to confuse reality with models of reality."
*Everyone* who plays this game starts out with the regularly published survey data, knowing already of their imperfections. They then make their best guesses about factors not counted in that data, see below.
"I thought we were talking about market clearing price, not just transaction price."
"Market clearing price" is theoretical. No one "talks about" this, while OTOH actual historic price data in various markets is readily available often on a day to day basis. Those playing this game look at that data then apply what they think they know about things like inventory to make a guess at clearing prices or anything else not explicitly reported in the price data.
"Retail gasoline is as close to a commodity good as there is in retail.:"
Agreed, but I was able to help make your case for you in part because of this status. There are issues such as haulage, regulations on formula, inventory in tanks or on tankers, etc., that all apply.
"I tend to think store liquidation auction prices as reflective of real market price at the retail end, in a process akin to eBay and commodities market two-way price setting instead of a one -way and volume control."
I tend to agree, but I would note that having been to such auctions there are only a sprinkling of end user types looking for bargains, it's usually resellers buying. As for eBay it's instructive to note that they charge a fee for more in depth access to completed sales data. Even though we can only guess about inventories people find this historic information useful enough to pay for it.
"You have way too much faith in the "regular surveys." "
I failed to make myself clear, it's not a matter of faith. *Everyone* in the game looks at these surveys and in addition does there best to fill in the blanks, knowing full well the shortcomings of the data.
"It's not about predicting, but tracking reality."
Why isn't it about both? You can't track "reality" in real time, look how they revise GDP numbers for instance, and how they only *know* there is a recession a year after it's onset.
"Sorry to hear about your job loss."
Thanks, it was only a bit unexpected. it may be a blessing because the position was on the low end of my range of skills (IT) but very close to where I live. I do a lot of contract work so I am used to finishing up before having something else lined up. People seem to think IT overall may buck whatever trend of hard times we are all looking at, we'll see.
"You are now an official victim of the fiat money system "
A commodity money system does not prevent layoffs.
Glad we agree that the "macro economic" numbers are highly imprecise. IMHO, the corrective measures that you mentioned that work for steady-state economic times break down badly when the economy turns. For example, the BLS jobs data contains the "birth and death" (of businesses), which has been creating massive number of new jobs on paper in recent quarters. It's probably safe to say that those new jobs never existed.
Many, if not all of the macro econometric quantities are fatally flawed. For example, in arithmatics, a summation (1+1=2)assumes conceptually equivalent items that do not interact; for example, one man and one woman making a new baby is not 1+1=2; two liters of hydrogen and one liter of oxygen is not 2+1=3, the result after combustion is 1 liter of water vapor; a good apple replacing a rotten apple results in one edible apple, not two; a good apple and a wax apple still only constitute one edible apple.
That begs the question, what exactly is GDP caculating in general? As most goods and services in the economy are inputs of other goods and services. What exactly is a warship worth? What exactly is the value of a bomb? What's the value of public works? What's the GDP in some cop on duty shooting a wrong man and getting arrested by other cops? IMHO, they should all be zero whenever there is no ready market for such services. Most government services are either consuming goods and services produced by the private sector or are input factors for private sector output, where hopefully there is market driven price.
Due to the corrective constants that you mentioned, the macro econometric numbers may have some correlation with the real economy during periods of steady-state linear period. Such corrective constants break down entirely when the economy turns. As a consequence, the policy prescriptions from the macro economic model are almost always wrong. A little like: for a family that buys apples for eating and for decoration; a platter full of apples in the middle of the dining table looks good, and usually doesn't matter if half of them are wax apples. However, when disaster strikes and there's food shortage, the family has to live off that platter of apples, the leader of the household under our current macro thinking would insist on buying wax apples because they are cheaper than real apples in order to have a higher gross apple count.
[ A commodity money system does not prevent layoffs.]
It most certainly would reduce the frequency of mass lay-off's. Massive system-wide credit expansion would be much less likely under a real commodity money system. You can't print up gold or silver. Without central bank back-stopping, banks that over-extend leverage will face run much quicker at a much earlier stages than the gigantic bubbles under fiat regimes. It's a little analogous to the check-and-balances in our political system that prevents system-wide mistakes ballooning to the extent and durations that the totalitarian regimes tend to have before their eventual collapse. The very first modern economic bubbble, the Louisiana Land Bubble, was the result of fiat paper money system concocted by John Law.
It's a little funny that I should use the political system analogy in talking about the monetary system. Market-chosen commodity money vs. fiat money is indeed quite analogous to check-and-balances diffused power (not just among "branches" but also state vs. federal, local vs. state, and individual vs. local) vs. centralized totalitarianism. A commodity with multiple sources (and latent sources) gives everyone equal opportunity to monetary expansion, and keeps the system honest. What's ironic is that, by vesting base money creation in mining for commodities, the society gives the poor the power to create new money (others don't go down mines when they have better jobs), instead of concentrating money creation power in the hands of maserati-driving elite. If mass joblessness were ever to occur, more people will be digging for money, instead of fighting the politial battles over who deserves what government largesse.
"IMHO, the corrective measures that you mentioned that work for steady-state economic times break down badly when the economy turns."
Yet that's all we have, people pay attention anyway knowing they are not perfect. The alternative is to take a walk down the street and other similar subjective and anecdotal things.
"For example, the BLS jobs data contains the "birth and death" (of businesses), which has been creating massive number of new jobs on paper in recent quarters. It's probably safe to say that those new jobs never existed."
Just curious where this comes from, I am aware of the "Household Survey" and the "Payroll Survey" and AFAIK they don't try to combine them.
"That begs the question, what exactly is GDP caculating in general?"
It's imperfect, but everyone knows that.
"What exactly is a warship worth? What exactly is the value of a bomb? What's the value of public works?"
You might combine these with the National Asset, a term we do not hear much. And I acknowledge most any physical thing we would call an asset has some facet of liability.
"Such corrective constants break down entirely when the economy turns."
You can only guess this to be true and if correct you can only guess about the "correct" numbers.
"the policy prescriptions from the macro economic model are almost always wrong."
We are back to politicians trying to gain and keep power. They tell us about deficits, but never assets, just for example. They know better.
"What's ironic is that, by vesting base money creation in mining for commodities, the society gives the poor the power to create new money (others don't go down mines when they have better jobs), instead of concentrating money creation power in the hands of maserati-driving elite."
"The poor" are not "creating money" slogging it out at unskilled labor in a gold mine. The mine only exists in the first place because of the extremely risky activity of prospecting, followed by a capital-intensive development phase; both bankrolled by some "elites" somewhere. "The poor" in this case have simply been granted an *opportunity* to trade their unskilled labor *after* these prerequisites are in place.
"If mass joblessness were ever to occur, more people will be digging for money, "
Which was actually true to some degree in the US during the Great Depression: There was an increase in small placer gold mining activity as individuals found that they could "make wages" or almost, and found the activity better than just sitting around. But this only involved a very small number of people.
It's fashioinable to rail against speculation. Speculate to some degree is a fact of life. You speculate whenever you sign up for a job (who is to say, gasoline won't be $50/gal a year from now, and you won't be able to drive to the job?); businesses speculate whenever they signup for a lease (who is to say, gasoline won't be $0.50/gal a year from now, making it impossible for the business to maitain current volume without cutting price in half?). In order to protect against such extreme possibilities, some businesses hedge against risks in the futures market, like Southwest Airline famously did in the oil futures market. That action itself is a form of speculation. Southwest delivered stable profit when aviation gasoline went from $2/gal to $4.50/gal thanks to that speculation. Chances are that the company lost big on the hedge if it used the same hedging strategy when gasoline came back down to where it is today. Nobody has a crystal ball. Speculation, or entrepreneureship is a necessary element of ecomomic life. Whenever you hire anyone before custom order, you are speculating; whenever you order material input before customer order, you are speculating; whenever you take out a lease for your business location before your full year's order is established you are speculating. Most businesses wouldn't exist if not for someone speculating. Even if you refrain from making any of those speculations at all (and magically still has a viable business), you are still speculating that someone else with the ready material, employee, and workshop on hand won't take the order ahead of you and eat your lunch.
The problem with speculation under a fiat money system is that the base unit of economic caculation (money, or dollar in our case) is unstable, and at the whim of the central planners. Instead of providing a stable unit of count, the central bankers try to adjust money supply to benefit the financial industry. The rampant wild speculations that you were talking about was the result of fiat money creation. New money created out thin air (through borrowing by speculators) was what drove up the prices. When the unsustainable asset price run finally collapses, the destruction of credit money plunges the economy into monetary contration. This is where we are now. Instead of punishing the lenders who were really the enablers of those wild speculations, the central bank step in to bail out the irresponsible fractional reserve bankers, at the expense of everyone else.
Without fiat money fractional reserve banking, the wild speculations would have been automaticly checked for lack of new money feeding into the frenzy at a much earlier stage; when price fluctuates to the downside, the gamblers and enablers would be paying for their own misdeeds instead of being bailed out.
The US has one of the world's largest gold mines, in Alaska. Gold also dissolves in iron, so it is routinely found iron and steel plants. Silver is a byproduct of most industrial metal mining. The fear of China, South Africa or Australia controlling world gold supply is quite silly paranoia. China was a nobody in gold production less than a decade ago. Goes to show that if you look around hard enough, gold can be found. In any case, a global competition among the US, Russia, South Afrika, Australia and China for gold production, whoever holding back supply would simply be replaced by the others, would result in a much more table money supply than a committee run by a few wiseman formerly employed by and have future employement tied to a few big banks.
" I simply don't accept this characterization. Over the long term cheaters will be exposed for what they are, and no one with sense will patronize them. "
Then how come you still haven't given up on the fiat central banking wizardry? Creating money out of thin air and lending for interest (supposedly to compensate risk) while being back stopped by the government gun barrel that force everyone else to accept new pieces of bailout money should the risk materializes . . . that is epitomizes cheating, don't you think?
"It's fashioinable to rail against speculation."
Thank you for your response. I guess I was not clear: I was offering speculation as just one alternate explanation for the commodities bubble. Your various observations on speculation are generally very good.
"The problem with speculation under a fiat money system is that the base unit of economic caculation (money, or dollar in our case) is unstable, and at the whim of the central planners."
By comparison, the problem with commodity money is that it's also unstable based on the whims of those who supply that commodity or wish to hoard it. In either case speculators weigh that factor as part of the deals they agree to with each other, and also other independent variables related to the specific market.
"Instead of providing a stable unit of count, the central bankers try to adjust money supply to benefit the financial industry."
Another example of begging the question, i.e. a thesis presented as a premise. Without a money supply adjusted to the size of the real economy, there will be any number of problems. This is ostensibly one of the purposes of adjusting the money supply by The Fed, and not specifically to benefit the financial industry, absent specific evidence to the contrary.
"The rampant wild speculations that you were talking about was the result of fiat money creation."
Wild speculation can occur independently of fiat money, as with the famous tulip market in the Netherlands centuries ago.
"New money created out thin air (through borrowing by speculators) was what drove up the prices."
No, it was due to predictions by traders of future market conditions. This neatly explains both the upside and the down side.
"When the unsustainable asset price run finally collapses, the destruction of credit money plunges the economy into monetary contration. This is where we are now. "
Are you guessing on your claim of current monetary contraction? Predicting? Do you have any links that would support the claim that our money supply overall is contracting just now? Also there is no general deflationary trend today save for commodities (lead has spiked up BTW). Given this fact and the large size of the money supply along with low interest rates how can you say that there is a monetary contraction? Again, your fiat money explanation does not work the down side or on non-commodity goods and services on either side.
"Without fiat money fractional reserve banking, the wild speculations would have been automaticly checked for lack of new money feeding into the frenzy"
There is no certainty regarding the above statement, it's in the hands of those who produce or hoard the commodity.
"The US has one of the world's largest gold mines,"
Yet the US contributes only about 10% to total annual production of late.
"Gold also dissolves in iron, so it is routinely found iron and steel plants."
You've got this a bit mixed up. Gold occurs in nature first and foremost, and does *not* typically show up in any steel plant. In nature, gold will dissolve in iron only deep within the mantle of the earth. Otherwise, it *might* be a byproduct of iron mining where the ore is pyrite or arsenopyrite, in which case the gold is actually present due to the presence of arsenic, not iron. However, smelting these sulfide ores is environmentally hazardous due to the sulfur and arsenic. Most new gold mined comes from huge surface pits of low grade porphyritic ore where the gold is in microscopic native or "free" form. Alternately it occurs in deep mines of higher grade native gold as in South Africa. Very little gold production today is associated with iron mining, at least in areas that have stringent environmental regulations. There is some minor by-product gold from copper mining but on the whole new gold comes from gold mines.
"The fear of China, South Africa or Australia controlling world gold supply is quite silly paranoia."
90% of gold production is from outside the US. That would put the money supply 90% outside of the control of the US. I don't think it's "silly" to point out that as one of the obvious problems of going to a gold standard.
"In any case, a global competition among the US, Russia, South Afrika, Australia and China for gold production, whoever holding back supply would simply be replaced by the others, would result in a much more table money supply than a committee run by a few wiseman formerly employed by and have future employement tied to a few big banks."
There is no reason to think the gold supply would be "stable". Mines have life cycles. They are born via successful prospecting activities (that success being quite rare BTW) , they are developed, they run through a production phase and then they die. The expenses associated with each mine varies with the type of deposit, the type of ore, the shape of the ore body, overburden, reclamation operations, local labor markets, etc. On top of that, those who control productive mines can boost or reduce output as they see fit, for whatever whimsical reason. Why should we expect stability in the supply of gold given these facts? Regarding competition, do you think China will adhere to more stringent environmental mining methods or less?
"Creating money out of thin air"
Is this what it's all about, this phrase? You Ron Paul guys are incredulous that the process works like this. :-)
Why is it instead that we have to engage in dangerous mining activities with the associated cave-ins and poisonings from harsh chemicals in order to expand the money supply to accomodate a growing real economy? Thin air has its advantages in light of those particular points.
"that is epitomizes cheating, don't you think?"
You had used the term "scam artists" and I think at best it was a faulty characterization and in the worst case people will stop patronizing scam artists when they identify them as such.
[By comparison, the problem with commodity money is that it's also unstable based on the whims of those who supply that commodity or wish to hoard it. In either case speculators weigh that factor as part of the deals they agree to with each other, and also other independent variables related to the specific market.]
When the market place is allowed to choose money, whatever commodity that can be easily manipulated would simply cease to be money. Historically gold and silver became money because they were widely available from disparate sources. Whichever miner decide to slow down production would simply have his market share taken up by someone else. Price of all commodities have been very stable in terms gold and silver over the long term, far more stable than commodity prices in any fiat money ever conceived, including the federal reserve notes.
[Without a money supply adjusted to the size of the real economy, there will be any number of problems. This is ostensibly one of the purposes of adjusting the money supply by The Fed, and not specifically to benefit the financial industry, absent specific evidence to the contrary.]
Two issues with these two statements: (1) physical gold and silver do not have to expand at the same rate as economic growth in order to sustain economic growth; the US economy experienced a period of general price deflation from 1865 to 1912, yet economic prosperity and living standards were both improving very rapidly. Price decrease does not automaticly kill businesses; the computer and telecom equipment industries have been facing rapid product price declines in the last five decades, yet both industries have grown rapidly. That's how technology advance and living standard improvement should bring. Money supply growth to prevent that kind of price decline due to technology or trade just transfers the benefit of technology and trade from workers to bankers (through collecting interest on money created out of thin air). (2) Dictatorship and monopoly should be automaticly assumed to be evil; power corrupts and absolute power corrupts automaticly. Otherwise, you may as well advocate for rule by a wise king or a dictator, "absent specific evidence to the contrary." The fiat money central bank is a dictatorship on our money, the device through which we vote with wallets every minute of the day; that's why fiat money creates inefficiency.
[Wild speculation can occur independently of fiat money, as with the famous tulip market in the Netherlands centuries ago.]
Please read up on "tulip mania." Both the bubble and the collapse were results of government policies. The price skyrocketted because the government changed the futures contract to options contract (the right but not the obligation to buy at the strike price); the collapse came when the government restricted money supply (lending collateral qualifications).
[No, it was due to predictions by traders of future market conditions. This neatly explains both the upside and the down side.]
You are forgetting where the money pouring into the futures market in late 2007 and early 2008 came from: the hedge funds borrowing from banks at high leverage.
[Do you have any links that would support the claim that our money supply overall is contracting just now? Also there is no general deflationary trend today save for commodities.]
Trillions of mortgage related financial instruments have been in the process of being destroyed. That is money destruction. How can you say there is no general deflation right now (for the past few months) when prices for everything, from commodity, to houses, to rent, to wages (rising unemployment) have been coming down? Will deflation continue? I wouldn't bet on it. Deflation can switch quickly to hyperinflation in a fiat money system, as it takes resources from productive endeavors and gives it to unproductive/counter-productive endeavors. The obsession on the "flations" is a little like focusing on adjusting harbor water level while ignoring the navigational skills of individual captains. Sure, rising tide lift all boat; done enough times, the captains will focus on developing a crony relationship with the tide adjuster instead of working on their navigation skills. In a system with market chosen money, there is a self-balancing act when people can choose between making goods/service vs. making money, hence the money supply is kept around the right amount; by contrast, in a fiat money system, FED's own cost of making money is near-zero. In the absence of price signals from the market place, economic planners simply do not know how much money the market needs (that's before even considering cronyism that is inherent in having bankers and their hired economists to run central banks).
[However, smelting these sulfide ores is environmentally hazardous due to the sulfur and arsenic]
[90% of gold production is from outside the US. That would put the money supply 90% outside of the control of the US]
These two points have the rebuttal in the same: we do not need to mine gold in much of the US or engage in any of the hazardous activities because your hypothetical paranoid scenario of the rest of the world witholding gold from the US simply doesn't exist. If and when the rest of the world does what you are afraid of, we will simply mine our own gold.
[Mines are born via successful prospecting activities (that success being quite rare BTW) , they are developed, they run through a production phase and then they die. The expenses associated with each mine varies with the type of deposit, the type of ore, the shape of the ore body, overburden, reclamation operations, local labor markets, etc. On top of that, those who control productive mines can boost or reduce output as they see fit, for whatever whimsical reason. Why should we expect stability in the supply of gold given these facts?]
Given that mindset, why should free enterprise be allowed to exist at all? How can you be sure the market will mine just the right amount of steel to satisfy carmaking and other industries that need steel? After all, iron mines go through the same cycle that you illustrated. Comes to think of it, how can the government be left out of the monopoly of the oil business? After all, our economy can't run without oil. The cost of finding oil and setting up a production well today is much much higher than finding and setting up a new gold mine.
The answer to that is quite simple: the market price mechanism responds much faster than government officials can. For example, gas price went to $4+/gal last April, the market responded within weeks in the vehicle sales mix (SUVs vs. small cars). Whereas the government is just now (January 09) giving 5% social security check increase on account of the high gasoline price! Now the gas is $1.60/gal! If you want money supply adjustment to be out of synch with what's best for the economy, having governmnt officials to do it would just be the ticket. If someone actually has the wisdom to take the punch bowl away when the party heats up, and supply liquidiy when the market needs it the most, the person would be making a fortune trading for himself; why become a bureacrat at all? Shorting at market top and long at the bottom are intrinsicly profitable trades.
BTW, silver production is mostly from byproduct of mining lead, zinc and tin.
[ Regarding competition, do you think China will adhere to more stringent environmental mining methods or less? ]
What does that have to do with the answer that I gave to your earlier paranoia? They can't be killing themselves digging up gold and not digging up gold just to spite us all at the same time. If they want to kill themselves digging gold and supply to the rest of the world, it's their problem; if they want to withold gold mining, we will mine our own. I'm surprised you haven't talked about Americans in danger of freezing to death because we dependon China for most of our clothing (tongue firmly in cheek; clothing has the similar kind of high worldwide latent supply standing by if any current leading supplier ever attempts to withold supply).
[Why is it instead that we have to engage in dangerous mining activities with the associated cave-ins and poisonings from harsh chemicals in order to expand the money supply to accomodate a growing real economy? Thin air has its advantages in light of those particular points.]
Which part of "byproduct of mining lead, zinc and tin" (for silver prodution) don't you understand? Fiat money doesn't exactly reduce gold value to zero. People who want to endanger themselves digging for valuables are still doing it. So your diatribe against mining is completely irrelevent. People pursue whatever endeavor that will make them money the easiest. It was discovered more than two hundred years ago that exporting manufactured goods would result in more gold through trade than mining for gold. The problem with creating money out of thin air is the corrupting influence that comes with power. Money supply does not have to grow in order to maintain economic growth; the purchase power of the same amount of money can increase over time and still result in growth, just in like the computer industry. Digging for gold was a bit of cheating to begin with, when someone had access to inflating money supply instead of offering honest service and goods to others for exchange. The physical difficulty of digging gold put a natural limit on how much of that cheating could be done. Giving a small group of people the power to creating money out of thin air drasticly unbalances the economy; it's as if someone had an unlimited supply of gold in his back yard with zero mining cost in a gold-standard economy: other people would gradually quit their real jobs and go hang out or seek employment with that lucky guy. No other employer would be able to compete. The result is an unproductive, unbalanced and crony economy, like ours has gradually morphed into over the last 90 years.
"currency exchange"
Thanks again for your response. As I raised before, what exactly are they doing there besides making bets on the economic and political future of the other country? I wouldn't call this a just another commodity exchange.
"artificially define money as not being a commodity"
Or artificially defining it *as*, a more specific and positive act on the part of those who do it. I see much difference among economists over this point, as with many others points. Again I say it's a minor semantic difference if you choose to call money a commodity *like any other* and I don't.
When I said "now practically a commodity or collectable" I meant also "no longer money" despite what the law may say about it.
""Good money" vs. "bad money""
Or "no longer" money. :-)
"Fiat money creation is essentially a process of legalized mass counterfeiting"
You seem to be barely acknowledging the legal status even though you use the term "legalized", by also using the word "counterfeiting". You are seemingly begging the question around the legitimacy of fiat money without making a resounding point directly.
"When inflation takes place, all participants in the economy do not receive the new money at the same time. It's the government officials and their cronies who receive the money first and therefore reap the benefit of newly counterfeited money before price inflation catches up with the monetary inflation.
Is this the best point against fiat money? What would be your very best example of the above? It would seem you would need to show how individuals took such advantage in their private finances.
[As I raised before, what exactly are they doing there besides making bets on the economic and political future of the other country? I wouldn't call this a just another commodity exchange.]
As I explained before, the bet is not on "economic and political future" but bets on money supply and expected money supply. How else do you explain the massive Yen carry trade with Yen depreciating when Japan was successfully exporting and in a mode of recovery, then sudden massive Yen appreciation when Japanese economy falls back into recession? Currency trade is a type of commodity trade. Sure, you may want to argue that corn futures trade is a bet on weather prospect as a cursory look may indeed show some correlation between the two, but the far more precise conclusion is that corn futures trade is bet on future corn supply and demand; sure, weather plays a part, but there are numerous other factors, some of which are more important than weather. Likewise, future economic and political prospects have influence on currency value, but only to the extent that they have impact on money supply.
[Or artificially defining it *as*, a more specific and positive act on the part of those who do it. I see much difference among economists over this point, as with many others points. Again I say it's a minor semantic difference if you choose to call money a commodity *like any other* and I don't. When I said "now practically a commodity or collectable" I meant also "no longer money" despite what the law may say about it.]
The misunderstanding of what money is is very much behind many mistaken economic policies. Money is a market phenomenom . . . the commodity which is readily accepted by other market participants in exchange for what they have to offer. Money has to be a commodity in order to function as money; otherwise if I insist my $10 FRN is worth two of your $10 FRN despite their idential appearance, substance and legal tender value, and you do vice versa, the notes can not function as money. I don't quite understand what you are trying to say by arguing that money is not a form of commodity. You can argue that fiat money is not physical goods; that's fine, but it certainly is a commodity; i.e. something valued for commonality among all instances of the type instead of the specificity of a particular instance.
[Or "no longer" money. :-)]
That's the whole point of Gresham's Law: when bad money drives out good money under fiat money system, good money will cease to circulate in the market place. However, if you are foolish enough to pay me a one-ounce gold coin as if it were a $50 note for services that I render for you, I will certainly take it. It is still money . . . just rarely used at legal tender face value because few people are dumb enough to part with them at face value. Good money always ceases to circulate when the government insists by fiat law makingthat the bad money has equal monetary value as good money. Your "no longer money" is precisely what Gresham's Law expects for all good money under fiat monetary regime; people decide to retain them because of they are good, and pay other people in turn with bad money.
[Is this the best point against fiat money? What would be your very best example of the above? It would seem you would need to show how individuals took such advantage in their private finances.]
Where do you think the bail-out money for the Wall Street gamblers comes from? Fiat money creation. It is this guarantee of fiat money bailout by the central bank ("buyer of last resort" at the time of its creation, becoming "first resort" nowadays; LOL) that made massive financial gambles by the Wall Street highly profitable all along: the expected bailout immunizes the downside risk as well as counterparty risks. That's why the financial industry has grown explosively in the last few decades, contrasting with the decay of the manufacturing industry. That's also the reason why we have those gigantic bubbles, mostly inflated by the gamblers who have fiat money support behind them as safety net.
Why do you think the lobby industry in DC has grown so much? The government spending enabled by fiat money, literally sucking resources from the rest of the country to DC, and breed corruption in the process.
This actually neatly brings up the original point regarding Greenspan's testimony: what we have been experiencing since 1913 is not a free market. There is indeed a fundamental flaw in Greenspan's intellectual model of a free unregulated market: the currency is not a free market choice. When the big gambles inevitably fail, all the well connected individuals come knocking on the FED's door, Greenspan, like his successors and predecessors, was in no position to refuse. Bailing out gamblers is the reason for the existence of the central banking system. With that in mind, the astute operators on Wall Street lay out the biggest gambles possible, because if the gamble is big enough, the FED will force other people to pay the losses through essentially legalized counterfeiting.
The solution of course is not adding regulations like the former communist nations used to do on top of fiat money; the chislers would simply find loop holes in new regulations, like how SIV's were invented to circumvent regulatory leverage limits. The solution is abolishing fiat money, and let the market participants choose their own preferred money. Then we will have a innovative free market place channelling its energy towards real value creation in the eyes of a people with free choice instead of innovation towards how to exploit the fiat money power to expropriate all producers and savers.
"the bet is not on "economic and political future" but bets on money supply and expected money supply."
Thanks again for your response. How can the one be divorced from the other? Isn't the expected money supply of one currency a consequence of the economic and political considerations in the country issuing that currency?
"Currency trade is a type of commodity trade."
Again, I think it's a semantic argument we are having. There are many fiat currencies issued by various countries, and consequent to that we must have markets for them. Would your argument hold true if there happened to be only one world currency?
"you may want to argue that corn futures trade is a bet on weather prospect as a cursory look may indeed show some correlation between the two, but the far more precise conclusion is that corn futures trade is bet on future corn supply and demand;"
Agreed.
"sure, weather plays a part, but there are numerous other factors,"
Like the "economic and political" factors perhaps. :-)
"Likewise, future economic and political prospects have influence on currency value, but only to the extent that they have impact on money supply."
OK, I am sure we agree on this much now, if you agree with my responses above, and whether it would all hold true if somehow there was a single world currency. That, and the fact that currency is a medium of exchange and store of value, somewhat uniquely so compared to other real commodities. Currency flows in the opposite direction of lumber, coal, goats, chiropractic services etc. Can you at least indicate how currency is unique in this regard compared to those items?
"I don't quite understand what you are trying to say by arguing that money is not a form of commodity."
Because of the unique ways it differs from other commodities as indicated above. Semantics.
"something valued for commonality among all instances of the type"
I agree this is true of money and are required of a commodity but the other factors make it unique.
"when bad money drives out good money under fiat money system, good money will cease to circulate in the market place."
Meaning that "good money" no longer functions as money. Why not start calling it a commodity or collectible instead of some kind of "money"?
"However, if you are foolish enough to pay me a one-ounce gold coin as if it were a $50 note for services that I render for you, I will certainly take it. It is still money . . . "
You are perhaps stuck on the idea that the coin is legally money when it is not under any practical view?
"Good money always ceases to circulate when the government insists by fiat law..."
See, I would call that "bad money" because it doesn't function as money. What's so "good" about Gresham's "good money"?
"makingthat the bad money has equal monetary value as good money."
As a practical matter, obviously not. It's a legalism that doesn't really apply because we all know better.
"Where do you think the bail-out money for the Wall Street gamblers comes from? Fiat money creation."
Specifically in the bill, authorization to raise the debt ceiling by "X" 'illion dollars.
"It is this guarantee of fiat money bailout by the central bank ("buyer of last resort" at the time of its creation, becoming "first resort" nowadays; LOL) that made massive financial gambles by the Wall Street highly profitable all along:"
You seem to be begging the question again, this time that the "expected" bailout was a reasonable expectation. Meanwhile said bailout leaves me, for one, a bit under whelmed in terms of it's effects so far.
"Why do you think the lobby industry in DC has grown so much? The government spending enabled by fiat money, literally sucking resources from the rest of the country to DC, and breed corruption in the process."
I am certain the above could be true, but I would be much more interested in specific historic examples.
"what we have been experiencing since 1913 is not a free market."
A free market simply means that the principals in the agreement enter into said agreement of their own free will.
"the currency is not a free market choice."
AFAIK, barter is still legal, but must be reported. Taxes however must be paid in dollars, not lumber or goats.
"When the big gambles inevitably fail, all the well connected individuals come knocking on the FED's door,"
Respectfully, this point remains as something that you still need to *show* to be true.
"Bailing out gamblers is the reason for the existence of the central banking system."
See my last statement please, again.
"The solution is abolishing fiat money, and let the market participants choose their own preferred money."
And I think this is very interesting without agreeing with the point, we are back to two weeks ago. What would you see happening here, and how would it be different from barter if done on a contract by contract basis?
Central banker decisions on monetary policy vis the money market itself is often a far greater factor than the fundamental soundness of the economic or political stability of the issuing coutry for the currency. Just look at the Yen performance vs. the state of Japanese economy. Anyone think currency performance should reflect the soundness of the economy of that country would be 100% wrong these past few years; Japanese Yen has been inversely correlated to the performance of Japanese economy and its export strength. The riddle can only be solved when one realize that the Yen is traded as a commodity itself, following its own supply and demand.
The world did have a single world currency at times. The world was mostly on silver standard in Greeko-Roman time (until massive debasement of the late Roman Imperial period), and again from around 1400 to 1700/1800. Then global gold standard from mid-19th century to WWI. I'd say, both silver and gold were still commodities during those time periods. If you are talking about a hypothetical single global fiat currency . . . keep in mind, any fiat currency always has a set of shadow currencies ready to replace it: be it coupons, vodka or cigarettes.
The only uniqueness of fiat currency is that the government says something about its value despite its obviously worthlessness without government enforcement. That's about it. Lumber, coal, goats and chiropractic services etc. can all flow in the opposite direction of vodka, cigarette, silver, gold, and when in quanties large enough in terms of shares of publicly traded companies. Both fiat currency and all these other things listed above that can be drafted into use as currency are still commodities: valued for the commonality of the type, not the uniqueness of a particular instance. BTW, since you mentioned goats, the cow was probably the first commonly accepted currency in the world.
[You are perhaps stuck on the idea that the coin is legally money when it is not under any practical view?]
So you are saying, the silver quarters are not money despite the face value, the copper penny is not money despite the face value, the 5-cent nickel is or is not money depending on the price of nickel and copper today, and when the hyperinflation hits and people stuff their $20 paper money notes into the fire place like that infamous photo of German housewife doing it with Weimar fiat money in 1923, the note will also cease to be money. I'd say, they are all being displaced by worse money in circulation.
[See, I would call that "bad money" because it doesn't function as money. What's so "good" about Gresham's "good money"?]
I see, you are falling into the classic modern intellectual trap of fancying oneself being the policy maker, instead of the individual market participant who has to use money. Gresham's "good money" is from the individual's point view: the individual would keep the good stuff, and let go the bad stuff to pay bills. From a policy maker's point view, of course the worthless stuff that you can scrouge up at next to no cost to force someone else part the fruits of their labor would be the best money that you can come up with :-) the word "you" is being used rhetorically, not you Jake personally.
["fiat law making that the bad money has equal monetary value as good money."
As a practical matter, obviously not. It's a legalism that doesn't really apply because we all know better.]
What are you talking about? Fiat law making bad money having the same monetary value as good money in contract enforcement (and tax obligations) is precisely what drives good money out of the market place . . . because people choose to pay in bad money with the same fiat value.
[Specifically in the bill, authorization to raise the debt ceiling by "X" 'illion dollars.]
The FED then creats the money out of thin air lend to the government; that's called fiat money creation.
"Who lowered interest rate in the early 1990's.... *snip* The answer to all those questions is the Federal Reserve."
I was looking for *individuals* who have profited from Fed moves.
"Fiat money creation out of thin air, looting real producers and savers to pay the well-connected insiders of the Wall Street."
Again, thinking in terms of individuals, who would be a good example of "well connected insiders"? Not to mention that it's done by selling bonds to willing buyers, as is done for many other purposes.
"If income tax is eliminated, "
Again, some would argue any number of reasons for doing this anyway.
"the market participants will quickly find a preferred currency, or set of currencies."
Like what, and do you think this currency would emerge over thousands of individual contracts? And how could you transition to this system without pain and the obvious chances for some to take advantage?
"Anyone think currency performance should reflect the soundness of the economy of that country would be 100% wrong these past few years"
It wouldn't, it would reflect *future expectations* concerning the politics and soundness of the economy there.
"The world did have a single world currency at times." *snip* "I'd say, both silver and gold were still commodities during those time periods."
As one would expect of commodity money.
"If you are talking about a hypothetical single global fiat currency"
I was.
"any fiat currency always has a set of shadow currencies ready to replace it: be it coupons, vodka or cigarettes."
As would be the case with a commodity money system, and the condition would most likely be in a situation of "informal economy" i.e. "Black Market".
"The only uniqueness of fiat currency is that the government says something about its value"
Which seems a *huge* uniqueness especially given a track record of the required faith and credit in that government.
"Lumber, coal, goats and chiropractic services etc. can all flow in the opposite direction of vodka, cigarette, silver, gold,"
Sure, but they suffer from lack of durability, compactness, wide distribution, etc. that we look for in a practical currency.
"the cow was probably the first commonly accepted currency in the world."
I would have guessed flint.
"So you are saying, the silver quarters are not money despite the face value, the copper penny is not money despite the face value,"
Exactly. See below.
"when the hyperinflation hits"
If.
"the note will also cease to be money."
Yes it would, but that would be only one of many other problems, most more serious than there being no official money.
I just haven't made myself clear: Silver quarters for example are really no longer money even though the law says they are, because they aren't used as such. They are not circulated as money, they are hoarded in empty milk jars and sometimes traded as collectables, and that's it. They aren't money even though the law says they are and they were minted for that purpose. I would certainly allow for the dead weight loss of the costs associated with the minting of the coins, but other than that, I don't see what is so bad.
"[Specifically in the bill, authorization to raise the debt ceiling by "X" 'illion dollars.]"
"The FED then creats the money out of thin air lend to the government; that's called fiat money creation."
I was just pointing out a mere technicality as I understand it: By raising the debt ceiling they authorize the sale of bonds to willing buyers.
Who benefited? Every single Wall Street executive who received bonuses in the last few years. The fiat money created the bubble that led to the paper wealth that paid for their bonuses in years past; the fiat money bailout money pays for their 2008 bonuses directly. In what other industry can you get paid billions of dollars for incomplete transactions; and paid billions more again when the incomplete transactions finally complete and turn out to be huge losses?
The FED exchanged hundreds of billions of dollars of treasury instruments that it has for worthless CDO papers from banks. There is no willing buyer of any bonds in that transaction. Bernanke simply gave the shop away . . . or was that the purpose of the FED to begin with? When the FED acquired those bonds, there once again were no "willing buyer of bonds"; it's the fiat creation of money by diluting existing money.
Currency emerged long before the government got into the game; free market currencies emerged quickly whenever government failed. The idea that government officials are in a position to protect people from being taken advantage of is a silly one: why don't we have a government that set price on everything in order to eliminate the chance for some to take advantage? The answer is quite simple: in free-market competition, such advantages are arbitrarged away very quickly. It is our current FED monopoly on fiat money creation that is letting a small group of people take advantage of the entire rest of the population . . . and the government gun barrels are preventing the rise of market competition to arbitrarge away such an unjust privilege.
[it would reflect *future expectations* concerning the politics and soundness of the economy there]
Then explain why the Yen is increasing in value while the Nikkei is crashing? (even after pricing both in something else). Why insist on attaching "politics," "soundness of economy" or even "which country has a better prospect for the next technologial breakthrough" when the parameters are as simple as supply vs. demand? and expectations on supply vs. demand. Like I mentioned before, historically, currencies of dead regimes often traded at premium to regimes that ran their printing machine too fast. There was zero prosect to the soundess of the politics or economy of a regime that had already been overthrown. Supply vs. demand, as simple as that. All future politics and economy only matter to the extent that they may affect the supply and demand of currency.
[As would be the case with a commodity money system, and the condition would most likely be in a situation of "informal economy" i.e. "Black Market".]
Why would there be a black market at all (except for banned goods) when the currency is a money based on physical commodity? BTW, a money that has nominal value far in excess of its intrinsic physical commodity value, even if made of physical commodity, is still a fiat money. In other words, a regime that is into clipping coins is running fiat money.
[ Sure, but they suffer from lack of durability, compactness, wide distribution, etc. that we look for in a practical currency.]
Vodka, cigarette, gold and silver were all forms of money at various times despite what you claim to be their demerits. Gold and silver certainly do not suffer from alck of durability, compactness or wide distribution.
[ Silver quarters for example are really no longer money even though the law says they are, because they aren't used as such. They are not circulated as money, they are hoarded in empty milk jars and sometimes traded as collectables, and that's it. They aren't money even though the law says they are and they were minted for that purpose. I would certainly allow for the dead weight loss of the costs associated with the minting of the coins, but other than that, I don't see what is so bad.]
Jake, this is not meant as a personal criticism, but you are showing a fundamental misunderstanding of what money is. What you are saying about the silver quarter is exactly what happens to all good money when they are chased out by bad money under Gresham's Law . . . in a process that is similar to honest savers with high personal standards being chased out of the housing market by lier loan borrowers in a bubble housing market. The loss is not the labor put into making those coins, but the misallocation of resources available to a society. Say, if I were a goldsmith in a gold-standard economy; people give me their gold for desposit, and I give them warehouse receipts; people started signing over those warehouse receipts to each other for payment instead of constantly coming to my warehouse for gold pick-up. then I dawned on me that people usually don't show up to cash out all the warehouse receipts all at once . . . which means I can issue more warehouse receipts than I have gold! With that, I can really live up the good life by writing up fraudulent warehouse receipts whenever I fancy anything. More and more people come work for me as a result because I can pay them with those scripts; I even use the script to befriend government officials. Eventually the towns people figured out that there are more warehouse receipts than there is gold in the warehouse, they all came to redeem the promisory note. The bought-off government officials then step forward and tell them, nope, it's "goldsmith holiday," and they can't get their gold back. That's in a nutshell how our fiat money system gets started and how it works. The loss to the society is not the paper scripts, but injustice asscociated with the resources and labor that the fractional-reserve goldsmith and his friends are able to defraud from the townspeople.
"Who benefited? Every single Wall Street executive who received bonuses in the last few years. The fiat money created the bubble that led to the paper wealth that paid for their bonuses in years past; "
Sorry for not getting back sooner. The fiat money has been around a while now, it's been used for *all* transactions in our society and everywhere else in the world, not just for bonuses for rich bankers who might be "connected".
"the fiat money bailout money pays for their 2008 bonuses directly."
We are talking about any number of *individuals* who may or may not have received bonuses, who may or may not have had them adjusted. I don't know the details on the wording of the bailouts as to how any of these payments are restricted, but I am quite sure that it isn't only bonuses that might are getting paid out with the influx of money, but also salaries for the rank and file, operational expenses, etc. Also, even if your analysis is correct, we are then talking about a somewhat nebulous set of individuals who may be benefiting. This seems to fall short of a case for cronyism.
"The FED exchanged hundreds of billions of dollars of treasury instruments that it has for worthless CDO papers from banks."
It remains to bee seen if that paper proves to be "worthless".
"There is no willing buyer of any bonds in that transaction. Bernanke simply gave the shop away . . . or was that the purpose of the FED to begin with?"
I think it was the purpose in part, the idea being that no one else could.
"The idea that government officials are in a position to protect people from being taken advantage of is a silly one:"
I generally agree.
"why don't we have a government that set price on everything"
On the gold standard, the government certainly set the price in terms of dollars equaling gold.
"Then explain why the Yen is increasing in value while the Nikkei is crashing?"
There could be any number of facets to this problem that you and I aren't considering. I don't pretend to have expertise in this area, but I do know that Efficient Market Theory isn't always 100% engaged, and that markets for anything have irrationality mixed in.
"Why insist on attaching "politics," "soundness of economy" " *snip* "when the parameters are as simple as supply vs. demand?"
Because the fun doesn't start until you are considering the multiple factors that effect supply and demand.
None of this addresses the fact that currency flows in the opposite direction of real goods and services, making it a commodity like no other, if that's what you insist on calling it. Semantics, I don't see where we can go with this.
"Why would there be a black market at all (except for banned goods) when the currency is a money based on physical commodity?"
Only because I can't think of other circumstances leading to using cigarettes of ammunition as currency that would be normal or stable. Y2K.
"Vodka, cigarette, gold and silver were all forms of money at various times despite what you claim to be their demerits."
Acknowledged, the demerits remain though.
"you are showing a fundamental misunderstanding of what money is. What you are saying about the silver quarter is exactly what happens to all good money when they are chased out by bad money under Gresham's Law"
I don't see what I "misunderstand" by recognizing that silver coins aren't money anymore even though they are superficially labeled as such.
". . . in a process that is similar to honest savers with high personal standards being chased out of the housing market by lier loan borrowers in a bubble housing market. "
"The loss is not the labor put into making those coins, but the misallocation of resources available to a society."
Such as where people went into debt to buy houses they could not afford? I can understand the problem of the buyer who only buys a house perhaps a few times a lifetime and may misunderstand some things. It's different for lenders. I confess that I don't understand how lenders got into the position of lending to less qualified borrowers. I don't think they somehow "knew" that a bailout would come.
Your best case against fiat money seems to be cronyism, and you have only suggested an overly general case for that, a scattergun approach that spreads money way beyond connected individuals. I don't see that as cronyism
So, by your logic, because the son of the former President-for-Life of Indonesia ran a car factory that employed thousands of people, their government's funding and bailout of the President's son's car factory wasn't crony-capitalism? because thousands of jobs were on the line? What about he should not have had that many people working for him to begin with? or that there shouldn't be domesticly branded carmaking in Indonesia at all?
Likewise, perhaps those "masters of universe" should not have had that many peons at their disposal to being with? or that none of them should have had bonuses at all while losing so much money, or perhaps even should have found employment somewhere else instead of shuffling toxic financial papers? The demise of the manufacturing in the US is one of the casulties of the fiat money system favoring financial industry over manufacturing.
To think that the bankers do not know that bailout is the ultimate outcome is naive in the extreme. The system was recently tested in 1998 LTCM bailout. The statistic model that the credit swap underwriters used was the same as those used by LTCM. In fact the same smart cookies who ran LTCM into the ground backin 1998 just ran another hedge fund into the ground in 2008. Fundamentally, if the central bank bailout is not the ultimate expected outcome, there is no need for central bank at all! There is no need for legal tender law that establishes central bank if there is no plan to print unlimited amount to bailout an entire class of insiders when needed. The "Greenspam Put" was a well known phenomenom.
Fixing dollar to the specific amount of gold or silver was not price fixing for gold or silver. It was fixing the price of dollar! i.e. defining what a "dollar" was. Yes, it may sound strange to people living under fiat money for too long, but go read the original documents relate to the establishment of the US dollar back circa 1794.
"So, by your logic, because the son of the former President-for-Life of Indonesia ran a car factory"
I would imagine the original appointment as an officer in the company to the exclusion of other more qualified candidates to be cronyism.
"that employed thousands of people, their government's funding and bailout of the President's son's car factory wasn't crony-capitalism? because thousands of jobs were on the line? What about he should not have had that many people working for him to begin with? or that there shouldn't be domesticly branded carmaking in Indonesia at all?"
I don't imagine this company to be publicly traded like most in the US, where shareholders would have a say in whether the individual should be in the position he is in, or whether the business is viable to begin with. In any case, a bailout directed generally at a large company where there may happen to be a few favored individuals does not seem to be cronyism to me.
"To think that the bankers do not know that bailout is the ultimate outcome is naive in the extreme."
Over 25 US banks failed in 2008, along with numerous other financial firms, several quite large.
"Fixing dollar to the specific amount of gold or silver was not price fixing for gold or silver. It was fixing the price of dollar! i.e. defining what a "dollar" was."
Call it what you want, but it was the government doing it and they changed it a few different times, on a whim I guess.
Those companies run by scions of the elite were the largest publicly traded companies in those countries. Shareholders invest in those companies precisely because of the crony favoritism the head of the companies enjoy from the strong arms of the government. The same rationale is a big reason behind why CEO pay has gone sky high relative to the line worker in the US in recent years. When companies live and die by the executives' connection to government officials, the importance of executives far outweigh that of the line workers. Ironic, isn't it? the more government intervention, the less opportutnity to compete away special privileges of the elite, the worse off the line workers get.
BTW, if you get $1B from the government, or from anyone else, what are you going to do with it? You will be buying stuff with it, and hiring people to do things for you, thereby taking resources and human resources away from other endeavors, right? How is being an employer or a manager precludes one from being a crony? Anyone with any significant income has to be an employer . . . what's the point of money if you don't hire people to do things for you? I mean seriously, not hiring anyone at all means that your time is worth less than the time of the lowest income person, hence there's nothing gained from hiring people to do things that you don't have time to do but want done.
Instead of having $10k to hire a part time baby sitter or an assistant to help you with a project in the garage, being given $1B enables you to play with an entire factory production line making inferior products, or a building development in a sea of over-development, or a GPS guided artillery shell that cost $150k each and can take out kids who make $2 a day. It's cronyism every step of the way whenever government keep looting money from the public and giving it to projects that have no viability in the free market place.
[Over 25 US banks failed in 2008, along with numerous other financial firms, several quite large.]
25 is a tiny number compared to how many should have failed without government bailout. For the 2500+ banks and financial institutions that gambled and took home hundreds of billions of bonuses in years past and now have taxpayers to refill the capital void in those institutions, the lesson is quite simple: keep gambling. By keeping those 2500+ badly run banks and financial institutions in place, the government destroys the opportunity for a new crop of better run banks and financial institutions from forming and taking deposits from the failing banks. Honest loan officers who used their judgement properly have to put up with their malfeasant colleagues instead of taking over the market share of those inept.
[Call it what you want, but it was the government doing it and they changed it a few different times, on a whim I guess]
I'm not the one calling anything. They were set out to define dollar and redefine dollar, in their own words, not mine. Yes, all those definitions and redefinitions are fiat law making. That's why I'm not a big fan of any government monetary "standard." Money should be specific metal or metals by weight. e.g. "pound-sterling" meaning a troy pound of 92.5% silver, not a coin.
[The fiat money has been around a while now, it's been used for *all* transactions in our society and everywhere else in the world, not just for bonuses for rich bankers who might be "connected".]
The magic of fiat money is in when the injection takes place, and who gets the first dib. The one who gets the first dib enjoys the full face value, and the one who gets it last suffers the full detriment of monetary debasement. I'm sure you can see the illogic if I try to propose that the government should just give me $1 trillion and let me spend it into the economy and jumpt start it :-) Seriously, how is that any different from any other Keynsian government spending plans?
"Shareholders invest in those companies precisely because of the crony favoritism the head of the companies enjoy from the strong arms of the government."
And they will live and die by such a foolish strategy, and the market sorts that out over the long haul.
"The same rationale is a big reason behind why CEO pay has gone sky high relative to the line worker in the US in recent years."
You are saying investors think high CEO pay is a sign of a good return on his investment? I would say instead that shareholders just don't care because CEO pay doesn't amount to much compared to other costs. Those I know who play in the microcap arena very much look at CEO pay.
"BTW, if you get $1B from the government, or from anyone else, what are you going to do with it?"
First of all I would be careful since it's a *loan*. Part of the answer is to plan on the debt service.
"How is being an employer or a manager precludes one from being a crony?"
Substituting "does" for "is" and "preclude" for "precludes" above. It does not. Cronyism still has to be demonstrated on it's own merits case by case.
"Anyone with any significant income has to be an employer . . . what's the point of money if you don't hire people to do things for you? I mean seriously, not hiring anyone at all means that your time is worth less than the time of the lowest income person, hence there's nothing gained from hiring people to do things that you don't have time to do but want done."
Sorry I don't follow the above. Are you perhaps referring specifically to companies who are sitting on the recent bailout money?
"being given $1B enables you to play with an entire factory production line making inferior products,"
This looks specifically like a critique of the Auto Industry bailout in particular, am I correct? Bailout money even in the form of a loan removes pressure to make something that competes. I agree there.
"25 is a tiny number compared to how many should have failed without government bailout."
"Should" in the above is a red flag meaning "In my opinion" and respectfully it's unsupported.
"For the 2500+ banks and financial institutions that gambled and took home hundreds of billions of bonuses in years past and now have taxpayers to refill the capital void in those institutions, the lesson is quite simple: keep gambling."
Why are you focused on the bonuses? Why are you making assumptions about these bonuses on such a broad basis? How can you judge as a third party whether a given *individual* bonus is earned or fair? What about all the financial services companies that have dissolved? And again, the money may be used for any number of other things.
"They were set out to define dollar and redefine dollar, in their own words, not mine. Yes, all those definitions and redefinitions are fiat law making. That's why I'm not a big fan of any government monetary "standard."
OK then.
[And they will live and die by such a foolish strategy, and the market sorts that out over the long haul.]
Such strategy is highly profitable until the system collapses. The rest of the participants in such a system are the ones suffering all along. Do you think despotism is good because any crony hanging onto despots will eventually have the market sort them out? Government officials intervening to market place to prop up cronies is a form of despotism.
[You are saying investors think high CEO pay is a sign of a good return on his investment? ]
Yes, very good investment indeed. Do Chenney and Raines ring bells? How about Rubin and Paulson? (just to be bipartisan here).
[First of all I would be careful since it's a *loan*. Part of the answer is to plan on the debt service.]
Loan at a rate below market rate is a gift, even according to the tax code. If the same institution has to pay 10-12% to borrow $10 billion or so from free market lenders, such as Warren Buffet and overseas investors, then somehow got trillions of billions of dollars from the FED at 0.25% . . . that is gift! to the tune of hundreds of billions of dollars for each of the year during which the "loans" are on the book.
Also, the other clients of the state, such as Haliburton and Bectel, they get cash not loans from the government whenever the government spends that newly created money.
I'm not focusing on the bonuses. Many of those jobs, companies or segments of industries should never have existed. It really doesn't matter how hard a worker worked on selling subprime loans to people who should not have been qualified for loans. The bonus should have been zero; the salary should have been zero; in other words, the person should have worked for some other jobs. For the damage that eventually wrought to the economy, the financial engineer who came up with those schemes should be put in jail, just like a bridge engineer would have been if his bridge collapsed due to his oversight.
Cronyism is not just about putting any particular individual in a particular corner office and giving him a particular secretary. A far more costly form of cronyism is putting resources into the hands of the group of people who run the company that built that skyscraper to begin with. An even worse form of cronyism is putting resources, both natural and human labor, into an industry that should not have grown so big and take resources from other industries. On this board, it's easy to understand that companies like Haliburton and the military industrial complex typify those cronies that get resources because of favoritism by government officials. The same thing has been happening for the financial industry thanks to the FED. The destruction of manufacturing industry in the US has been the result of fiat money creation. The manufacturing industry simply can not match the pay and benefits of the financial industry when the latter has ironclad gambling profit guarantee from the government. That's why the best minds of this country, arguably the most important human resources, have been going into financial industry in the last couple decades.
[And they will live and die by such a foolish strategy, and the market sorts that out over the long haul.]
"Such strategy is highly profitable until the system collapses."
Thank you for your response. You have to be correct twice to realize a profit, getting in well before said collapse and knowing ahead of time that there will be a collapse and getting out before it. I simply don't accept that the stockholders across the board are employing such a strategy.
"Do you think despotism is good because any crony hanging onto despots will eventually have the market sort them out?"
I never said it was good, I said it gets sorted out eventually.
[You are saying investors think high CEO pay is a sign of a good return on his investment? ]
"Yes, very good investment indeed. Do Chenney and Raines ring bells? How about Rubin and Paulson? (just to be bipartisan here)."
I deny that high CEO pay is used as a measure for future performance of a stock. In the case of small companies I think the exact opposite is true, and for larger companies it becomes insignificant. And besides, I thought we are talking about *all* stockholders not just insiders.
"Loan at a rate below market rate is a gift"
Not the principal. The easier debt service given a lower rate perhaps. You should differentiate. In any event, such loans are not inevitable just because fiat money is the system in play.
"Also, the other clients of the state, such as Haliburton and Bectel, they get cash not loans from the government whenever the government spends that newly created money."
Cash in return for services rendered by those companies. The *state* is a client for those services.
"I'm not focusing on the bonuses."
Sorry, you had made repeated references to bonuses for individuals not named.
"Many of those jobs, companies or segments of industries should never have existed. It really doesn't matter how hard a worker worked on selling subprime loans to people who should not have been qualified for loans. The bonus should have been zero;"
One can make bad loans with commodity money too. Fiat money doesn't cause people to borrow more than they should for a house they can't afford, or for banks to go ahead and lend it.
"Cronyism is not just about putting any particular individual in a particular corner office and giving him a particular secretary."
Actually it is, in the most precise definition. A crony is a person.
"A far more costly form of cronyism is putting resources into the hands of the group of people who run the company that built that skyscraper to begin with."
Even the broadest definitions I have seen would not apply to this example or much less the additional even broader examples you listed. The crony capitalism you referenced before is not cronyism.
[I simply don't accept that the stockholders across the board are employing such a strategy.]
Then you are willfully ignoring reality. Suharto's son's car company was in fact one of the largest publicly traded companies in Indonesia. Chinese "Red Chips" had/have huge market capitalization in Hongkong, Shanghai, and increasingly NYSE and NASDAQ. All the big US bank stocks are currently trading based on hopes of government backstopping, as they are all in effect insolvent based on their own loan portfolios. In fiat money systems, buying stocks is a matter of choosing which slightly less fundamentally worthless paper to park one's wealth :-)
High executive pay is often a consequence of the executive having good connections with government regulators. In many cases, the executive was a former regulator himself or herself. Just to bring the subject to my original point, in the face your repeated attempt to sidetrack the issue.
[Not the principal. The easier debt service given a lower rate perhaps. You should differentiate. In any event, such loans are not inevitable just because fiat money is the system in play.]
Stop think in terms of principal. In a fiat money system, the principal is ultimately worthless, so long as the borrower is given enough time to pay back. The interest rate is all that matters. Giving 0.25% interest to a borrower whose credit (un)worthiness would have to pay 12% in the market is a recurring gift every year; from that number, the regulator can work backwards and find the princpal amount needed. As for "inevitability," the justification for the central bank was "lender of last resort," in other words, being the lender to cronies at rates drasticly below market rate is the very purpose of setting up the central bank.
[Cash in return for services rendered by those companies. The *state* is a client for those services.]
And you don't believe those companies are making a superb profit, one that they can not possibly make if not for the state handing them the money.
[ One can make bad loans with commodity money too. Fiat money doesn't cause people to borrow more than they should for a house they can't afford, or for banks to go ahead and lend it.]
In a commodity money system, there wouldn't be a central bank to do bailouts (it can't print physical commodity). Banks and speculators knowing that they can't count on a bailout would be far more circumspect in lending an making sure they get paid back. With lenders actually at risk for their own lending practices, the borrowers who can't afford would be simply denied loans.
Under the current fiat system, the exact opposite system takes place: the lenders knowing the bailout, actively looked for irresponsible borrowers in order to maximize profit. Think of it this way: if you had an irresponsible brother, and a father who forces you to pay all your brother's debt; after you act responsible and turn down the bank's loan offer, the bank would simply figure out a way to lend to your brother on high interest and count on you to pay it back! Switching the brother in this scenario for spouse, and you will see the reason behind many divorces.
As for going all dictionary on me, please read up on "cronyism" not "crony": Partiality to long-standing friends. Giving billions of dollars of resources to long-standing friends is fundamentally no different, if not worse than, giving jobs to long-standing friends. Jobs are nothing more than means of getting resources.
Thanks for your response. I am really not sure where this can go at this stage, and while I have enjoyed our discussion, you just haven't been able to persuade me to change my view as yet. Nonetheless:
"The bailouts are looting "the economy" and "the public" "
Specifically, they are adding to the National Debt by authorizing an increase of the debt ceiling. I don't know why this equals "looting" to you.
"to help the particular banking institutions. Without the bailout, most fraudulent banking institutions today would be bankrupt; many of the individuals responsible for the fiasco would probably be in jail if not for fear of their lives..."
A good point. But the issues with the bailout are their own thing, and I am like many people who are suspect of it, but it doesn't seem to me you would need this to make an argument for commodity money.
" a robber breaking into your house, breaking a window that will need replacement, take all your valuables, and spend some of the loot in a bar with his buddies all work out to be a plus for "the economy";"
I do know better: The broken window is dead weight loss and the rest is a zero sum wash. But I don't see the case made that fiat money is robbery. As to the bailout we need to look at individuals as you say, *name* them, and explain how they robbed, and not rely on generalities.
"taxes, especially income taxes, result in a market demand for a particular kind of commodity:"
Agreed, along with other factors that result in that overall demand.
"the fiat money."
Or gold when that was the standard.
"Because income tax applies to all transactions, all transactions effectively have three parties: the buyer, the seller, and the tax authority. Assuming the absence of other coercion, the first two parties are not coercing each other, but the third party is coercing either of the first two or both"
Agreed. Many people say taxes are a form of coercion.
"into acquiring a very particular kind of commodity (fiat money) in order to pay taxes."
Or whatever other money is acceptable by law. You are mixing the long established concern by some that taxes themselves are a form of coercion with the argument about money type used. IOW, it doesn't matter what type of money the law requires, the tax authority is a third party in either case.
"That's actually the real reason behind income tax: creating a universal market demand for fiat money. That's why income tax and fiat money usually go hand in hand. In the US, both came into being in 1913."
I'm not sure as to how solid your case is as to the primary purpose of the income tax. I see where there were income taxes imposed in 1861 and 1894. In 1913 the sixteenth amendment was approved by 3/4 of "the several states" as they liked to say. It is not clear to me that the creation of the Federal Reserve and ratification of the sixteenth amendment are directly related.
"Natinal Debt" has no real meaning in a fiat money system. What the concept of "national debt" does is justifying two real actions: (1) interest on national debt, which is future tax collection; i.e. reduction of wealth for future taxpayers; (2) giving the "borrowed" (actually newly created) money to individuals and organizations favored by government officials. When that is done on a continuous basis, the two actions constitute a continuous robbing of the public at large to benefit the individuals and organizations favored by government officials. That is the sum total of the function of "National Debt" in a fiat money system; there is no real value to the debt (in the long run whatever finite number to start with eventually has a value approaching zero) and there is no real obligator despite the "nation" in its name (all nations eventually default). It's the on-going process of transfering money from the pockets of taxpayers to the pockets of favored individuals who receive the "government spending" that is the real function of "National Debt."
"Debt Ceiling" is a joke; it's moved up whenever the government needs to borrow more. Willing lenders are not the ones making the market. The FED sets short-term borrowing cost; Bernanke has made it explicit that the FED is also not squeemish about buying long-term treasury obligations. So in other words, "willing lenders" so long as there are enough fools, but fiat money creation when there aren't.
Massive government bailouts would be quite impossible without fiat money . . . because the government wouldn't be able to have the money to do the bailing. The FED can create digits, it can not create gold, silver or even vodka or cigrette (which is why people quickly entrusted vodka and cigarette despite their demerits as money when central banks cranked up the press to over-drive). Government isn't exactly creating wealth by creating all that money, it's just diluting existing money that producers have already saved up. It's just like the legendary Midas' finger: turning stones into gold does not result in more food or more clothing; it only takes food and clothing out of the hands of other market participants and give them to the friends of Midas. That's what fiat money creation does. That's the whole purpose of FED: enabling the banks and the government to bailout their friends by looting the rest of the population whenever necessary.
The legal-tender money power is a form of taxation that is far more powerful than the ordinary tax power. The House and Senate debated for weeks for the $700 billion bailout . . . whereas the FED created $800 billion for the financial insitutions with a few key strokes. In terms of dollars, the government can be quite easily supported without collecting any income tax at all, with that kind of money creation power. The entire amount of individual income tax collected in the US today is not much more than the interest payment on "National Debt." Income tax is kept in place to create a constant market demand for fiat money.
"Natinal Debt" has no real meaning in a fiat money system."
We may agree on aspects of this. So what do you say of all the politicians on all sides concerned about the National Debt? They rant on and on about the National Debt and how bad it is. Seemingly from your POV they should be ranting about fiat currency.
"What the concept of "national debt" does is justifying two real actions: (1) interest on national debt, which is future tax collection;"
Debt service is only a single line item in the budget among many others.
"(2) giving the "borrowed" (actually newly created) money to individuals and organizations favored by government officials."
i.e. cronyism. I just don't see where you have made a case that this is the primary "purpose" of fiat money, or even that it exists beyond isolated cases.
"there is no real value to the debt"
Right, and there are those who say the total principal never has to be paid off, it can just be rolled over. Principal and interest on specific debt obligations must
""Debt Ceiling" is a joke; it's moved up whenever the government needs to borrow more."
I can see it being a joke for one who does not believe in fiat money. Otherwise you have simply stated how a particular mechanism in the current system works.
"Willing lenders are not the ones making the market."
Agreed, they need the borrower too. *Together* they make the market.
""willing lenders" so long as there are enough fools,"
"but fiat money creation when there aren't."
At least one of us is confused now! I thought the market for Tbills *is* the printing press.
"Massive government bailouts would be quite impossible without fiat money . . ."
Agreed.
"Government isn't exactly creating wealth by creating all that money, "
No, the "Real Economy" is to be distinguished from the "Monetary Economy". The government puts in place a system, with whatever disadvantages it may have, such that we have a hopefully stable currency flowing in the opposite direction of commodities, goods, and services.
"Income tax is kept in place to create a constant market demand for fiat money."
The history of legal events do not seem to make the case that this is the primary reason for the income tax.
Politicians talk about all sorts of imaginary subjects for political purposes; doesn't mean the conceptual object has a real-life substantiation. For example, Nazis spent much time fretting about the purity of their "Aryan race"; doesn't mean "aryan race" actually existed in any scientific sense. Aztec leaders talked about their gods need human blood to keep the sun rising everyday; doesn't mean their god existed. Mao summarised economy down to the tonnage of iron produced; doesn't mean melting down perfectly good utensils to make crap pig iron did anything to improve the economy. Likewise, we today summarise economy down to one number, GDP; doesn't mean that number, which encompassing everything from paper pushing to bridge to nowhere, to bombs dropped on innocent civilians, to holes dug into the ground the filled back up . . . has much relation to the real well being of the citizenry.
"National Debt" in a fiat money system is a figment of imagination because at any time, the "debt" can be paid off at any time by a small piece of paper with a really large number on it. We saw that when Weimar Republic "paid off" their war debt with fiat notes that had face value into the billions of marks.
Some politicians do understand what "national debt" means in a fiat money system before the final inevitable collapse: the interest payment necessitating the looting of citizens in the forms of tax collection. It is this aspect that they are objecting to, and rightly so.
"National Debt" is really quite a successful political scam, in terms of its success in facilitating the collecting taxes (to pay interest) while letting the politicians spend the "borrowed" (newly created) money on their cronies and pet projects. It's right up there with inventing the need to propitiating the gods with human sacrifice to keep the sun rising everyday, as a way to kill and intimidate political enemies.
The FED adjusts interest rate through buying and selling of government securities. The FED is the price setter of government securities. That's the point of having a central bank in exchange for government granted "legal tedner" power. If you are willing to let the free market place set the interest rate on government securities, you don't need a central bank.
"The government puts in place a system, with whatever disadvantages it may have, such that we have a hopefully stable currency flowing in the opposite direction of commodities, goods, and services."
Then you should be against the fiat paper money, too. When the fiat FRN dollar was introduced in 1913, gold was about $20/ozt, just about the same price as the US dollar was introduced in 1794; today's price at close to $900/ozt means the dollar has lost 97% of its value in the 85 years since fiat money introduction, vs. no net loss for the previous century-plus. Gasoline was 20-30 cents a gallon before the mid-1960's. That same 90% silver quarter that you belittled so much previously, worth about $2 in silver content today's $12/ozt silver price, can still buy a gallon of gas. Even when gas was hovering around $4 a gallon a year ago, that same little silver coin, with silver trading at over $20/ozt, could still buy a gallon of gas! As you can see, much of the massive inflation/deflation, and long-term massive debasement of currency are the very result of artificial fiat money manipulation by the FED . . . contrary to its supposed purpose of providing the economy with a stable money, it only introduced massive instability.
If you look at the financial industry, however, the FED has injected a high degree of stability and high profitability. Relative standings among major private banks changed rapidly in the 19th century as they all competed against each other; many one-time leading banks even went bankrupt as they mismanaged themselves. Running a big bank has become a much safer profession in the fiat money era . . . and much more profitable to boot . . . at the expense of the rest of the economy, as most other industries lose resources and labor to the financial industry. The problem for members of the financial industry, especially the peons, of course is that all bubbles like that eventually burst, and make the lives of the peons grown to rely on fiat money largess all the more painful.
"Politicians talk about all sorts of imaginary subjects for political purposes;"
Exactly, even when they know better.
""National Debt" in a fiat money system is a figment of imagination because at any time, the "debt" can be paid off at any time by a small piece of paper with a really large number on it."
Yes, until such time as there is no longer faith or credit. All nations today are on this system, they are each worthy of a certain amount of faith and credit subject to change.
"contrary to its supposed purpose of providing the economy with a stable money, it only introduced massive instability."
I see generally *modest* inflation as the rule, and I know too that wages have also increased. The question is are we better off? How many hours do I have to work today to afford a pork belly? Fewer than some decades back, I am quite sure.
[Yes, until such time as there is no longer faith or credit. All nations today are on this system, they are each worthy of a certain amount of faith and credit subject to change.]
Not "nations" but "governments." The faith of credit of politicians to uphold promises made by their predecessors is marginal at best. Fiat money systems have come and go numerous times in world history at least since the 11th century. No pure fiat money system has survived for more than 60 years or thereabouts, most much less. We are at year 38 since Nixon closing gold window to foreigners and thereby creating pure fiat money. IMHO, the only question is whether this boom and bust cycle is it, or there's yet another cycle left in the FRN.
[I see generally *modest* inflation as the rule, and I know too that wages have also increased. The question is are we better off? How many hours do I have to work today to afford a pork belly? Fewer than some decades back, I am quite sure.]
Is that purported improvement because of fiat money or despite fiat money? The per capita income in the US was growing at 2% per year before the 1840's canals linking the midwest to New York. At 2% a year, the society can experience a doubling of living standards every 36 years, or each generation. Between 1840's and mid-1920's, the per capita income growth was about 4% per anum on average, despite the massively destructive Civil War. At 4%, the doubling becomes every 17-18 years. That's why European immigrants flocked to the US. Those growth statistics were easy to come by because money was gold and silver in those times. After 1933, gold was banned and silver was token money and subsequently removed from circulation altogether, so consistent metrics became hard to come by. We can look at some big ticket aggregate goods that most people buy: mass produced cars like the Model T cost $200, house about $2500, while the average wage in the US was about 50 cents per hour . . . that's 400hrs work to buy a car, 5,000hrs of work to buy a house. Today, with average hourly wage at $18, an average car would take about 1,500hrs, and a house 12,000hrs. Sure, the car today has more gizmos and the house more amenities, but these are just reflections of technological improvements, like computers getting faster. Why such a drastic increase of labor hours required before an average worker can enjoy a car or a house? Because he/she has to support a gaggle of paper pushers both in the public sector and in the privare sector favored by the government officials who also want cars and houses.
"Not "nations" but "governments.""
Fine.
"The faith of credit of politicians to uphold promises made by their predecessors is marginal at best."
Agreed. In the case of the US and certain other countries though, there is generally an environment that is friendly to the entrepreneur that I think transcends political promises.
"No pure fiat money system has survived for more than 60 years or thereabouts, most much less."
That doesn't mean that fiat money is necessarily self destructive. You have to look at the facts of each case.
"Is that purported improvement because of fiat money or despite fiat money?"
The above may be a reflection of the crux of our discussion, what is cause and what is effect. Neither of us can "prove" our positions.
"Those growth statistics were easy to come by because money was gold and silver in those times."
I don't accept cause and effect just because you are saying so. There were any number of other things going on that could have accounted for the increase growth rates.
"We can look at some big ticket aggregate goods that most people buy:"
You think "most people" bought a car and a house? Are you trying to make the case that today we are not better off materially?
"mass produced cars like the Model T cost $200,"
No fair, you picked the "Yugo" brand of the day:
http://en.wikipedia.org/wiki/Ford_Model_T#Criticism
http://en.wikipedia.org/wiki/Yugo
And the price began at $850, eventually getting down to $300 (or $280 at another source), due to vertical integration of related industries, technological innovations on the line, and volume:
http://en.wikipedia.org/wiki/Ford_Model_T#Price
I imagine the average houses weren't so great either.
"Sure, the car today has more gizmos and the house more amenities, but these are just reflections of technological improvements, like computers getting faster."
Many of the amenities for both cars and houses involve safety and are installed as a legal requirement, increasing the cost.
"Why such a drastic increase of labor hours required before an average worker can enjoy a car or a house?"
I don't accept the above statement as true, noting my points above, and I still doubt very much that I have to work more for a pork belly than they did.
["No pure fiat money system has survived for more than 60 years or thereabouts, most much less."
That doesn't mean that fiat money is necessarily self destructive. You have to look at the facts of each case.]
In other words, "this time, it's different"; four of the most destructive words in financial forecasting.
Model-T was not the Yugo of its day. Yugo was the bottom 0.001% of the market. Model-T accounted for more than 2/3 of the entire auto market in its heydays, so the "median" car was by definition a Model-T.
Sure, cars and houses have more technology improvements in them, like I acknowledged in my previous post. However, such improvements like computer processors getting faster, natural consequences of technology advance. The whole computer itself should still go down in price despite speed doubling, tripling, 1000-tupling. Using hedonistic adjustment, like the BLS actually does with computers, is seriously misguided and designed to lower the inflation reading. Even your own citings show that Model-T itself was going down in price rapidly (from $850 to less than $300) as technology imporved. Why did such price decline (i.e. workers' ability to get more car for their year's wage) stop?
Today's pork belly is not the same as pork belly from 1930. You'd have to price "free ranging" and hormone-free antibiotic-free pork belly for that :-)
Please ignore
Thanks, I'll need another day or two to get back, I don't get access to this site on the work machine and I have some holiday party commitments.
[ You seem to be begging the question again, this time that the "expected" bailout was a reasonable expectation. Meanwhile said bailout leaves me, for one, a bit under whelmed in terms of it's effects so far.]
You wouldn't be if you were one of the bankers who received the millions of dollars of bonuses as a consequence of the billions of bailouts. Stop thinking in terms of "economy" or "we." Think in terms of "I" and particular banking institutions. The bailouts are not designed to bailout "the economy" or "the public." The bailouts are looting "the economy" and "the public" to help the particular banking institutions. Without the bailout, most fraudulent banking institutions today would be bankrupt; many of the individuals responsible for the fiasco would probably be in jail if not for fear of their lives like the medieval Italian bankers used to be hauled out to be beheaded when people caught on to their fractional reserve fraud and demanded their money back and they couldn't produce the gold. That kinda put a deterrent against fraud. There's nothing underwhelming about having one's life saved and get to take home millions of bonuses out of the bailout money. There's also nothing quite underwhelming about having one's savings stolen in purchase power to pay for the fraudsters' bonuses. Stop think in terms of aggregates, think in terms of individual actors. In terms of aggregates, a robber breaking into your house, breaking a window that will need replacement, take all your valuables, and spend some of the loot in a bar with his buddies all work out to be a plus for "the economy"; of course you know better.
[AFAIK, barter is still legal, but must be reported. Taxes however must be paid in dollars, not lumber or goats.]
This arrangement creates two problems:
(1) taxes, especially income taxes, result in a market demand for a particular kind of commodity: the fiat money. Because income tax applies to all transactions, all transactions effectively have three parties: the buyer, the seller, and the tax authority. Assuming the absence of other coercion, the first two parties are not coercing each other, but the third party is coercing either of the first two or both into acquiring a very particular kind of commodity (fiat money) in order to pay taxes. That's actually the real reason behind income tax: creating a universal market demand for fiat money. That's why income tax and fiat money usually go hand in hand. In the US, both came into being in 1913.
(2) accounting. Free markets where money is freely chosen by market participants without outside coercion usually end up picking a form of natural money anyway, because it facilitates exchanges (indirect barter) and helps accounting. Obviously, free market would not choose a fiat money that's not worth anything on its own accord. Fiat money laws usually makes accounting in any units other than the fiat money difficult.
[ Respectfully, this point remains as something that you still need to *show* to be true.]
Who lowered interest rate in the early 1990's to save Citicorp (now Citigroup)? Who organized the bailout of LTCM in 1998? Who lowered interest rate again in 2001-2005? Who organized the seizure of Bear Sterns to protect its counterparties, and tossed in billions of dollars to sweeten the pot? The answer to all those questions is the Federal Reserve. The Federal Reserve was created as "the buyer of last resort," as stated clearly in the documents leading up to its founding. What exactly does "the buyer of last resort" mean? How can there be no buyer at all at any price in a free market? A company can go bankrupt and get liquidated, and its parts will find buyers, at prices low enough. The whole point of "the buyer of last resort" is to keep well connected companies afloat without going through bankruptcy and liquidation. In other words, paying prices higher than what the free market would pay. Where does "the buyer of last resord" find that kind money to overpay? Fiat money creation out of thin air, looting real producers and savers to pay the well-connected insiders of the Wall Street.
[What would you see happening here, and how would it be different from barter if done on a contract by contract basis?]
Under current law, barter does not eliminate the need for fiat money in the transaction; like you said, fiat money still has to be found in order to pay taxes arising from the barter. The accounting and filing for such taxpayment further involves fiat money. If income tax is eliminated, the market participants will quickly find a preferred currency, or set of currencies. That will go a long way towards making each participant in the economy accountable for his or her own actions . . . and avoid the concentration of power that corrupts.
More importantly, if the fiat legal tender law is repealed, people will have the right to reject money that they do not like. The Central Bank's magical ability to bailout gamblers by diluting existing money will cease. That will prevent the banks from going into the massive leverage ratios to begin with. With the crazy leverages removed, we will see less violent boom-and-bust cycles.
oldcreditiste Everyone should read the comments by cruxpuppy on December 10.
Lawrence Peters Second Principle is 'The reason problems are not solved is that everyone concentrates on the problem and no one concentrates on the solution'.
Professor Stiglitz and others have discussed the problem. Here I will outline a solution for general consideration.
The inflation of the housing and stock markets were allowed by inflation of the money supply, and the present fall in confidence has been precipitated by a fall in the money supply. I mean the 'credit money' supply which is by far larger and more important than the currency supply, which is mere chicken feed in the system, at present.
The Secretary of the Treasury should estimate the desirable level of the money supply and arrange for half of the needed amount to be given to American Citizens in equal amounts. [There are various ways for this to be done, tax cuts, direct payments, etc.] This should not be borrowed from the Federal Reserve, a private corporation, but should be United States Treasury Notes. At the same time the 'Cash Reserve ratio', or rediscount rate, for the various banks should be raised so that no excessive increase of the credit money supply would occur.
If the cash money supply is increased excessively it can be taxed back with an Income tax increase. If the increase in the cash money supply is not enough to start a resurgence of confidence the procedure should be repeated. This method of estimate, give half of the dose, and observe, is used every day in treating new diabetics,and patients with low blood volume.
Those who are against 'fiat money' must accept that we have nothing else to use in a modern nation state except credit money. Our error has been in having credit money produced behind heavy curtains by wizards with feet of clay, as they now admit. "The process by which banks create money is so simple that the mind is repelled" wrote John Kenneth Galbraith. Why should our money be created by private corporations?
The Money Supply appears to be the final common pathway that controls the economy. Too much gives inflation. Too little give depression, or recession, or slowdown, or scoop, or you euphemize it.
The Wall Street bailout of 750 Billion was $2500.00 per inhabitant of the U.S.
I will watch for your comments.
James W. McGillivray M.D. FRCSC. FACS.
jimmcgillivray@hotmail.com
Although I have tremendous respect for Stiglitz, there's something missing here: the role of energy.
I don't dispute the series of actions that Stiglitz says brought on the present crisis played a significant part. But this all could have gone on indefinitely -- infinitely -- had there been infinite energy to go around.
The world hit a plateau in oil production in May, 2005 of 86 million barrels a day. And yet, economic growth was expected to continue. Insatiable demand hit inelastic source, and oil shot up to nearly $150 a barrel. And yet, the amount produced barely budged! If you were Prince Abdullah, don't you think you'd pump every drop you could at $150/barrel? Instead, oil production remained essentially flat, until reaching a minor peak of 87 million barrels a day last July.
Now, imagine you're a young couple with a mortgage you can barely afford. You have three big pieces of your budget: food to eat, gas to get to work, and mortgage payments. Due to variable-rate loans, all three were going up. Food gets priority, of course, and if you don't buy gas, you don't go to work and you can't afford the other two. If you miss a mortgage payment or two, you won't immediately be on the street, so guess which of the three gets the cut?
So I would like to see economists like Stiglitz look seriously at the assumption of infinite growth in a finite world as the basic cause of all this. Energy is in decline, and life will never be the same. Growth will stop.
:::: Jan Steinman, Communication Steward, EcoReality ::::
it's funny -- these discussions bring up something so ironic :
it is probably the best-known word that is used to imply all other things about america , at least by its own idea of itself: FREEDOM.
think about that:
"land of the free"...
but the questions are:
FREE to do WHAT? and to BE?
to work? according to whether one has a social security NUMBER? because? issued by WHOM? for what purpose? who REALLY benefits ?
free to TRAVEL? - if one can afford it? or has the TIME from work?
free to choose? -- choose WHAT? which WING , right or left, of the WAR PARTY?. free to hear ALL views about the country , the economy, the world, in election time?
free to CHANGE jobs if one doesn't pay well or treats workers with real respect to their human worth? or ONLY if a corporation deems one "desirable?" then one is FREE?
or free to FIND a job that doesn't exist?
free to MARRY your homosexual love?
or maybe it's the FREEDOM to be left alone by the RELIGIOUS SPIRIT of America surrounding you in just about every 2 blocks , which "was founded on christianity?"...that kind of freedom maybe?
it COULD be that Freedom MEANS -- to be FREE to say you think SOCIALISM is not such a bad economic system -- AND THEN BE WATCHED because you might be UNPATRIOTIC? that must be it....that freedom....
free to CHOOSE which to study in a college -- if one can use one's FREEDOM to work very hard to EARN college money because college is beyond the reach of most people? THAT kind of "freedom?"
what about the FREEDOM to choose one's means of transport? between what? a Ford or a chrysler or a toyota - to and from work that is 50 miles away because public mass transport is either STILL too expensive or non-existent at one's community ?
hey -- what about the FREEDOM to be who you can be and JOIN THE MILITARY to go , kill and die - over there thousands of miles away -- to EARN some money for college....?that kind of freedom?
what about freedom to OPEN a bank account but ONLY if you have the MINIMUM 1,000 dollars and must pay if you make it go below that........
what about the FREEDOm to CALL , WAIT on the Phone, talk to a Customer Representative to tell you you have to pay LATE FEES based on another LATE fee because the mail didn't catch you on time? or you had to forgo payment because all your paycheck went to FOOD for your children? and , oh , the GAS for the FREEDOM GIVING Car?
what about the FREEDOM to COMPLAIN to your friends htat MAYBE, just maybe your own government is SPYING ON YOU?..and you are FREE, maybe to HIRE an expensive lawyer or ACLU if they can SPARE the FREE TIME and inclination to take your case -- while Congress decides its REALLY OK to spy on YOU?......
or maybe people are talking about the freedom to walk in a public park EXCEPT that it has been LEASED to a private corporation with signs "PRIVATE PROPERTY, NO TRESPASSING?" that freedom?..........
waiiiit a minute....maybe it's the Freedom to CHOOSE between WAL MART and HOME DEPOT to work FOR and then to shop FROM....
or maybe it's the FREEDOm to CHOOSE health care in the emergency room , if they recognize you as "eligible" , after you were FREE to talk back to your boss for treating you bad until your back breaks and no one can pick up your kid from school for the umpteenth time coz , with your wages, that congress ALLOWS, you got FIRED and lost your "employment based" health care .......
hold on now, maybe it's that HARD EARNED freedom when you're a senior citizen living alone CHOOSING FREELY between lunch in mcdonald's on your social security or buying your medicine......yup that HAS GOT to be IT!!! lots of FREE CHOICE THERE...very american...
and don't EVER forget -- you have the FREE CHOICE to select channels on TV - and be as INFORMED as you want to be between AMERICAN IDOL, MORE MAKEOVER, DANCING WITH THE STARS, HAUNTS OF THE RICH AND FAMOUS, or that ELITIST -- "jeopardy"....HAH!!!! so many choices to FREELY select!
LOTS of FREEDOM..........
as the famous Tennis player , Martina Navratilova said -- :
"I never imagined that i would leave my country, czechoslovakia, because of communist dicatorship, and become an american citizen - only to see the day that the LAND OF THE FREE has become the Land of the Frightened".
In the context of government policies, there is only one real freedom: the freedome from government intrusion; i.e. the freedom to be left alone if one wishes. Every other "free" means slavery for someone else, e.g.: free food, free clothing, free shelter and free medicine mean slavery for the food producer, clothing producer, shelter producer, medicine provider, respectively, or slavery for almost everyone in order to pay for the producers of food, clothing, shlter and medicine. Those "frees" are in reality "free lunches"; there is no free lunch from the government. Someone has to pay for it. Free lunches from voluntary charity is possible; the more prosperous the society is, the more generous the individuals living in it tend to be . . . slavery tends to destroy prospoerity because it removes producers' incentive to produce and cause waste at the consuming end because there's no incentive to prioritize.
We're all fools for continuing to participate in the biggest con the world has ever known (well, with the possible exception of organised religion, I suppose) - we let private banks create our money supply, and charge interest on it, and still think we are a 'soverign' country. As long as some private group of bankers et al controls our money (as recent events have proven, federal 'oversight' is so minimal and behind as to be non-existent), the notion that we are 'sovereign' is as realistic as Johnny and Suzie thinking they help run the household when they get mommy to buy chocolate ice cream instead of vanilla. Until We the People control 'our' money democratically, and issue the money supply of *our* country debt-free, these problems well continue. Banketeering .
Green Island
eduardo
Details, details details. No one to blame other than the gate keepers of our culture. That is, the supper or mega rich and their corporations and banks as well as those that, because of their ignorance and immaturity are easily corrupted by power/money. For those who like to blame the victim, US THE PEOPLE, I can only remind them that empires need to first colonize their people's minds before they get on with colonizing others. So we, you and I, were the first victims of empire-and continue to be so.
Joseph, in spite of his knowledge, misses the point because his mind is also colonized by the imperialist consciousness, since, like all of us, he is also a child of our corporate culture. (Please check D. Korten's earliest and last book)
"These" people do not make mistakes. Greenspan just fulfilled the cultural gatekeepers' agenda, like Regan, Clinton, Bush, etc, did.
Joseph's detailed account of the apparent '5 mistakes' masks the core truth and so it perpetuates our dependency/ignorance as well as the enrichment of the very few.
His analysis is right only under the structure of thought imposed by the imperial consciousness on us, a truly underdeveloped stage of moral, emotional and cognitive development which is imposed on every new generation by the mother culture and its sub-cultures.
Because Joseph, like all of us, is enacting the story (the one written by the colonizing victors about 5000 years ago)we have no exit (as Sartre may have put it).
The only solution, as it has been said by many, is to begin to enact the new/old story of the earth. The one that THE CORPORATE CULTURE and their rulers try so hard to suppress. If we can lift the many veils put in front of our eyes by our culture we could then see the old story and make it anew by enacting it.
Put it simply, it is the story of only 'one life'.
So, Joseph did not get the history totally right.
It's capitalism! No, it's Obama! No, it's the Democrats! No, it's the Federal Reserve! No, it's Greenspan! No, it's Ayn Rand! No, it's... ad infinitum.
One more elephant in the room: No, it's you and me!
As long as we're shining our lights on other causes, let's also shine the light on ourselves. We are ALL culpable. We buy, we consume, we type endlessly in the safety of our walled in homes. Do we extend ourselves to others? Do we examine our own motives? Do we stretch ourselves and change? Do we actually do something to unplug from this culture?
I am an admin of a local peace and justice listserv. I see the same crap coming down there - the same cynical pointing of fingers at everyone but ourselves. The same endless searching for a savior (who is anyone but who we have now). It's disheartening to see us setting ourselves up for yet another fall. And that is guaranteed to come as long as we play their game.
How many ways are there to say: WE, are the answer? I don't know...
"All Nature's difference keeps all Nature's peace." Alexander Pope
that is speaking TRUTH.
i could never remember which one, but an American poet said this :
"WE AMERICANS.......WE CAREFULLY NURTURE AN ATTITUDE OF DETACHED INDIFFERENCE TO THE SUFFERING OF OTHERS........EVEN IF WE ARE THE CAUSE OF IT".
all this is blowback for a cultural mindset accepted by all, coerced or otherwise , that is based on the idea of "american exceptionalism". it's really part and parcel of the Myth of it all...including "american rugged individualism", the "protestand work ethic" (as if the rest of the world is LAZY in comparison) ..the blind and unthinking acceptance of "be the best that you can be" which amounts to CONSUMPTION ever lasting and never-ending...which degenerates further into "getting MINE"...until it is reduced to getting "what i CAN manage"...which is the result of what the "trickle down" economics blesses everyone with. ..all the while that it is all treated like a RELIGION -- while it exacts a price on everyone.
i often asked myself a question:
"why is it that when the IRAQ war was being , in appearance, during the shock and awe phase -- SUPPORTED by americans, left and right? even if the obvious: lies, was so easy to note...and then when the shock and awe dissipated and the war began to exact a price HIGHER than americans are willing to pay ....ONLY THEN did they turn against it, because it is TOO EXPENSIVE and say *we have to pay attention to our domestic problems?"
was it acceptable ONLY when it was "victorious" but suddenly bad when it was being LOST?
and it made me think:
americans ARE willing to go to wars SO LONG AS THEY CAN bring "home the bacon". ..because in reality - it might be very true that what the american general (smedley butler, i believe) said:
"the REAL PURPOSE OF THE AMERICAN MILITARY IS TO MAKE THE WORLD SAFE FOR CAPITALISM , OUR BUSINESS EXPLOITATION AND OUR CULTURAL ASSAULT OF OTHER COUNTRIES...OUR FOREIGN POLICY IS GEARED TOWARDS GATHERING AS MUCH OF THE WORLD'S RESOURCES UNTO OURSELVES...AT THE EXPENSE OF OTHER NATIONS".
I enter here because you "Got it!"
It has never been "Democracy vs Communism" or "Democracy vs Socialism". It has always been "The American Capitalist/Corporate Elite" in search of their economic interests and using "The Enemy" as the opposition. The "Enemy" was always a "Myth" just as "The Global War Against Terrorism" is a myth.
Ask yourself: Who created the Islamic Militant Force? Who put Saddam Hussein in power? Who made Osama Bin Laden a legend? Who put the Taliban in power? Who supplied all the money and arms for those mentioned enemies? Who used the ISI of Pakistan to train and house militant Islamic terrorists? If you answered: Russia, China,North Korea, Iran, you would be wrong. The answer is the United States of America and Saudi Arabia Only when those above mentioned went against the "Economic Interests" of the United States did they become the "Enemy".
Joseph Stiglitz explained how economic decisions were made to enrich "The Corporate Elite"....He did not mention his book, "The Three Trillion Dollar War" and the costs to the American Society of a "Dead End War".
All the decisions from the Election of 2000 to 9/11 (Yes, World Trade Center #7 is an obvious demolition.) and the Invasions of Iraq and Afghanistan were designed to enrich "The Corporate Elite" and to soldify their control of the Middle East.....
The "Now" 2 trillion dollar "Bail Out" is nothing more than the "Privatization" of the United States Treasury.....It is better than the "Privatization" of Social Security.
Joseph Stiglitz mentioned two names that helped the deregulation of the financial industry: Rubin and Summers, who are two of Obama's appointees. Are they going to come up with a solution? I doubt it!
They can not even find out where the 2 trillion dollars has gone. There is no supervision and Paulson seems to be able to keep the money flowing.
The losers, as usual, are the American People.
"americans ARE willing to go to wars SO LONG AS THEY CAN bring "home the bacon"."
Yeah, I know...that's very true. And sadly, I'm no exception.
The way I live supports war and I hate that aspect of my life. I am in a system that demands blood sacrifice and it pains me. A few months ago, my cousin sacrificed his life for the system I live in. That pains me.
However, I am, and have been, trying to disconnect. I am part of groups that are looking for ways to do that and giving each other support in that regard. It is most important that we do this together - we will need each other in the near future. This system is not sustainable, and that which can't be sustained, won't be.
It used to be that we cared about our nation, our people. Then that shrank to caring about our neighborhoods. Then that shrank to caring about our families. Then that shrank to caring about ourselves. What's next? Caring about nothing?
I think we need to start caring about one another again...or maybe for the first time. Only together will we weather what's ahead.
"All Nature's difference keeps all Nature's peace." Alexander Pope
Ted Markow -- i am sorry that you lost a beloved cousin this way. i hope that somehow, good can still arise out of your family's tragedy.
while being an american that has enjoyed the prosperity of a country that has exacted such a heavy price from OTHER peoples through so many generations is , if one looks at things with conscience, a HEAVY burden, and indeed, even a DEBT that might never be repaid ....you also can not BLAME yourself for being born , raised, accultured within a system that TRAPS people ...and has ensnared the entire world in its power. we can only do what we can as best as we can.
the seeds of all the destruction -- in between the "islands" of prosperout times and communities (elites, etc, which serve as the "bait" for others worldwide and in america to adore the quest for the "american dream" even if THEY become COLLATERAL DAMAGE as a result) -- had already been planted long ago..and the inexhorable motion of that "grand destiny" -- that MANIFEST DESTINY..that EMPIRE building, that "american way" -- we can surely see now...was probably INEVITABLE in its arrival to the kinds of things we see and HAVE seen and realize WERE going on , all along, such as the deprivation of lives, cultures, futures, the environment, the planet's own health and the very decencies that we would LIKE to claim as part of being civilized and decent.
it's sad. it's frightening. and so tragic. it's almost as if none of us deserve this beautiful, wonderful planet of ours. it really brings tears to my eyes.
Yes, and WE have chosen to profit at the expense of each other. This is insanity.
and as Franklin Delano Roosevelt said:
"WE HAVE ALWAYS KNOWN THAT GREED IS BAD MORALS.........WE NOW KNOW THAT IT IS ALSO BAD ECONOMICS".
"ALL foreign wars are waged for Power and Profit" -- Socrates.
and a famous historian said , Ludwig von mises , i believe, but observation was also shared similary by the famous war theorist , Claus von Clausewitz , to the effect:
"THE MONEYED CLASSES WILL NEVER SUPPORT WARS ..........unless a profit is to be made".
"Yes, and WE have chosen to profit at the expense of each other. This is insanity."
Yes, it is in fact, insanity. It is a cultural insanity and we are all part of it.
While there is no easy way out, we can start the process by detaching in whatever ways we can. And, (and this is the important part), by helping others to do it. We cannot do it alone, nor should we. Life is meant to be a cooperative effort. All other successful life forms have some symbiotic relationship with others. Our culture (not our species) thinks it can live in a competitive relationship. So, how are we doing so far?
It pains me to see "progressives" following the same path. Maybe we are actually regressives in that we follow the same insane path as others, even conservatives. We're seem to merely be interested in a different lifestyle, an appearance of cooperation and caring. As long as we keep sucking on the system's teat, we will be dependent. The Matrix was an apt analogy to how we are. As long as we live this way, we are Coppertops.
It really does come down to choice. Neither Obama nor Nader nor McKinney nor Ish Kabbible can make a difference as long as we choose to live this way.
"All Nature's difference keeps all Nature's peace." Alexander Pope
Exactly! Seeking profit at the expense of each other is the very nature of coercion . . . which is most of what a government does. In free market exchanges, people have to engage in give-and-take, profit with each other in collaboration, not at the expense of each other.
I like the original commentor's quote of Alexander Pope. Indeed the differences among people are what make peace possible: you and I have to have different priorities so that you can have what you want the most and I can have what I want the most. Otherwise, we'd be fighting over what both of us want the most. Government enforcement is nothing other imposing one group of people's value system on another group through the use of force, or threat there of.
The only proper role for government is proventing the rise of an even more abusive form of coercion (i.e. a more abusive government; e.g. a violent local mafia, which is a de facto government in the absence of law enforcement). Whenever one group tries to use government power to impose their own dreams on other people, the result is violence, coercion, and chaos.
We weren't born like this. We have been told the lie so many times we had no choice but too believe: The lie that I can have what I need only at your expense. We hate this system, but we feel trapped.
Anybody who could live in cooperation for one year would never go back to competition. They would rather die.
If we could, if we only could, the booze, the drugs, divorce, war, crime (almost all crime) would vanish as if by magic.
and you know what, Nietzsche? .....contrary to what "capitalists" declare as the "natural human instinct of greed and selfishness" -- strengthened by the AYN RAND principles moderinizing the Adam Smith "wisdom of the invisible hand of the market" -- based on "rational, enlightened self interest" -- which means GREED....
social scientists have recently concluded that COOPERATION - when humans are allowed to apply it , even in the most dire of circumstances -- actually GIVES a "pleasure feeling" beyond that which GREED gives.
in other words -- they found out that COOPERATION IS the basic nature of human beings, the nature to CARE for "ANOTHER BEING" , they said, is WIRED into our system to create PLEASURE and that , given the freedom and without coercive systems -- we ACTUALLY SEEK IT in order to have our brains FIRE UP pleasure centers and a feeling of well-being.
that's tied, they said to the MOTHER entering , LITERALLY, a "zone of pleasure" that , they described as so pleasurable - it gives a mother , when nursing her baby , and THUS SPENDING her body's energy in milk for another creature, moments of "TRANCELIKE pleasure".
the philosophies of GREED 'as nature' -- are actually ABERRATIONS and DEFORMED ideas .
they base it on animals which have a necessity to KILL and EAT prey - such as lions, which however do NOT GO BEYOND what they NEED to survive -- which is GREED.
But they actually also LEAVE OUT another thing that scientists and we can see on You Tube -- have found out -- that even the most PREDATORY of animals ...WILL care for abandoned offspring of even other species if these predators are already well-fed.... again ..there is a "pleasure principle" beyond and outside of necessary "predation" according to the animals' or species' need to survive...that pleasure principle is WIRED - towards caring for and protecting some creature that they sense is IN NEED of protection or caring.
that's why we have seen a mother Tiger , having given birth, adopt piglets , or a lioness adopt an orphaned gazelle AFTER the lioness had just killed the gazelle's mother...
HUMAN BEINGS OUGHT to have arrived at a HIGHER ability to apply this WITHOUTH the destruction of OTHER human beings in order to ARRIVE "at the pleasure principle of caring for another human being". because -- as WE claim -- WE are not lions or animals. !!!
imo -- to PROFIT , knowingly, at the expense of another human being , is the equivalent of STALKING and being a PREDATOR of ANOTHER human being , in order to 'survive', even if it is actually NOT necessary nor moral . it is like a lion killing a zebra in order to "eat". but humans "eat" other humans through the act of PROFITEERING..and exchanging NOTHING for having "taken" life.
and that means - to me, profiteering as GREED which animals do not display.
and neither does it have anything to do with "caring".
it is just PURE GREED.
There is indeed a flaw: fiat money.
When money is not a free market choice, but a government say-so, the fiat power corrupts the market. The banks and foreign central banks made those ridiculous one-way bets because there was an implied bailout by the government via the fiat money system all along. The models that the banks were using for the default swaps were essentially the same as the LTCM did back before 1998 bail-out: write huge insurance against n-sigma events. Most of the time, that event won't happen, so you keep the premium as profit. When the hurricane finally hits, you know your institution is so bankrupt that the FED will have to bail you out. The bailout is what makes the gambling so profitable.
I'm not advocating "Gold Standard," which means very different things for different people. I advocate free-market money: instead of having the government fixing what a "dollar" is, let the contractual parties decide what the form of payment should be. A free market exchange media will emerge, without government intervention fixing the "standard" which would only invite Gresham's Law. In colonial times, the market place eventually settled on imported silver discs, because the consistency of production quality, not because of any law made by the governments of the British colonies; the official British money was very rare in the North American colonies.
Government is not capable of doing anything to moderate the business cycle, period. All the things that are done in the name of "government" only end up exacerbating the business cycle, if not creating the business cycle to begin with. Just look at what FED intervention in 1926 to rescue the Florida land speculation bubble led to (stock market bubble and collapse in 1929), what FED intervention in 1997-98 to rescue emerging markets and LTCM did (dot com bubble in 1999), and what FED intervention in 2001-2005 to rescue the stock market again resulted in (current housing bubble and crash).
Government is not a living entity; it's quite incapable of thinking or acting. Real people, the very imperfect bureacrats have to do all the thinking and acting in the name of "Government," just like high priests were the ones spoke on behalf of Olympic Gods when people believed such things. Stop thinking of "Government" as some kind of godly entity of omniscience and omnipotence. If the bureacrats were so good at spotting bubbles, they'd be making fortunes trading in the market place and moderating the cycles by their trades (sell high and buy low). The fact is that, they become bureacrats because they can't trade well. So all they can do is exacerbate the business cycles while trying to benefit their friends. How many burreacrats do we know that do not have kids to send to college, spouse with shopping habbits, friends whose back need scratching? and do not eat, drink, or need a place to live?
One little problem with your theory about free market capitalism in this modern age: The "Fed", or the Federal Reserve is run by bankers and takes essentially no direction from the government these days, but instead dictates policy. That's why when asking for the 700 billion bailout from tax payers, they also were able to print up about 3 trillion in loan money under the radar at the same time. The repeal of Glass-Steagall, and the castration of the SEC (all the government oversight that we had left) sent the whole system into free fall. Still, the hedge funders, credit default swappers, and derivatives brokers are making out like bandits doing their pump and dump philosophy until there is nothing left. Free market capitalism is great when there are rules in place that must be adhered to. Those rules need to be provided by government.
What makes you think the "government" is not run by the bankers? Check the list of top donors to both Obama and McCain . . . they were all bankers. FED governors are appointed by the President of the US. FED is a branch of the government. Government guns forcing everyone to accept the funny green paper as "money" is what gives FED power. FED officials are the same group of people as government officials. The clearest example is Tim Geithner, who was a Treasury Department bureacrat under Robert Rubin, who in turn was a former "Government Sachs" (GoldmanSachs) CEO. Geithner has been the governor of New York Federal Reserve (the most important branch in the FED system, as all the othe branches are supposed to set money supply so that their regional dollars are of the same value as the New York dollar) for about a decade. Now he is going to be the head of Treasury Department.
Rules in a free market place can arise through mutually willing interactions that take place in the market place . . . just as human rights are natural rights, not gift from the government. To the extent that goverment recognize those natural rules and common laws in mutually willing exchanges, it facilitates trade and benefits from it. On the other hand, when the government intervenes and make rule changes on an ad hoc basis, it creates chaos and waste in the market place. That's exactly what the FED does, its central planning policies through interest rate adjustment and forcible monetary policies have been causing market chaos for nearly a century, with gigantic booms and busts.
the mighty xzorloc says
A penny saved is a liberation theology.
there is one basic thing that comes out of all this -- especially if one understands and includes the ENTIRE, COMPLETE history of events in the rise of the USA as the premiere capitalist nation which is of course an EMPIRE brought on by racism, Slavery, torture, genocide, militarism, occupations, invasions, over and covert wars, economic warfares, "coup d' etat" of governments and systems and cultures through manipulative monetary policies rendering "dollar hegemony" while making other countries PAY for being exploitated by the USA through those monetary and other policies.........
and if coupled with HOW the USA has to "save" and "protect" THIS system - and structure - including attitudes and denials that go with every generation ..
one face emerges:
THE UGLY AMERICAN. ...that is intrinsically tied to its own system and structure of what it is to be "america".
and the whole world is watching, whatever ELSE their flaws in the EYES of the american.
this, beyond all the rhetoric among americans about being "exceptional" is the most ironic reality of all.
it is also ironic in that this VERY DARK and BROAD history behind the "shiny city on the hill" face of prosperity and supposed "justice and freedom and fairness" --
has been , just about every step of the way, is , in fact, CENTRAL to the rise of the USA as a superpower. in other words -- it could NEVER have become the superpower that it IS
WITHOUT the DARKNESS that envelopes its "shine"....once one see things in their whole context in history .
and i think it is that darkness that is emerging in all its gory glory -- as we see, in the tortures, the illegal and criminal wars (over 200 hundred of them abroad against countries Deemed BY the USA as "rivals and threats" to its primacy) , as well as the corruption of its own core structure that is displayed for all the world to see.
IMO -- this is the ROT that was WITHIN since its inception that is now eating its way OUT through the flesh and appearing as BOILS on the skin.....
it can not be saved in its present and continuing state....
imo -- it is already a failed state. and it's just a matter of time before it collapses on itself.
you can even already see :
in the attempt to "reshape the middle east" and from that to "reshape the globe in our image" -- the USA , continuing a long tradition of UNPROVOKED foreign wars , in fact often initially , previously SEEDED by american interferences abroad to "reshape" things as it sees fit -- and coming back as "unintended consequences" (including monetary and economic policies , as every can see very well) --
the usa is right now -- being SWALLOWED UP in the sands of Mesopotamia...and soon will be swallowed up in the mountains of Afhganistan.....and if obama or the next leaders want to continue to provoke an ancient culture and region such as Russia or China or central asia - will also be dismembered RIGHT THERE where it attempts to create "pax americana".
what american leaders , business and cultural and political leaders included need to begin leading americans with is that PAX AMERICANA WAS OVER the moment it began.
it was , from inception, no matter the short period of relative "Omnipotence" (compared with far older and longerlasting empires) - was DOOMED from the very beginning.
and the WAGES of "sin" are exactly what everyone sees today BEGINNING to show within america itself. the RUINS of its own arrogance and hubris and delusions of grandeur.
If the progressives feel that they have been taken for a ride by Obama,
whey can't they produce a bill to regulate the Financial Industry and make
sure that Obama recieves it. The next step would be to buy some space in
a newspaper and explain what they want so that the working classes can read
and understand what is being proposed. The problem with the Progressives is
that they love to play it safe and walk on both sides of the fence.
.Legislators produce Bills, that is why we elect them.....The progressive message is rather purposively suppressed, and not just by silliness as you have posted above.
.
We see things, not as they are, but as we are.
Anais Nin
And which newspaper, dear Freddie, would that be? Are you thinking of some of the papers and magazines on Common Dreams? And who are these working classes that read newspapers, anyway? Get real!
"'Captain says stand tall the ships listing and about to sink', pass it on"
"'Cap says stand tall listing about to sink', Pass it on"
"Cap, stand tall, listing, sink', pass it on"
"'Cap, tall, list, sink', pass it on."
"Hey Sweeney, 'Cap it all lists ink'".
"What are you talking about mate?"
"You heard him Sweeney, 'Capitalists stink'".
Volcker induced a mean recession by throttling the economy with draconian interest rates which Stiglitz seems to regard as appropriate behavior for the Fed. Low inflation benefits creditors and it is usually accompanied by deflation, a double-whammy for debtors. Volcker damn near killed the economy in his attempt to cure it.
Joe Stiglitz's praise for Volcker is followed up with stark criticism of Greenspan and the naive ideology of free ( unregulated ) markets. The Fed failed in its mandate to support financial stability through sins of omission, the failure to act to curb excessive exuberance in the markets.
So, do we lynch Greenspan and his neo-con entourage and belatedly canonize Volcker and his Calvinist approach? He's back. You can spot his head clearly above the group photo of Obama's economic team. The tall guy with a ratty cigar.
Joe's analysis seems naive because it ignores the brute fact of deflation. Volcker brought the economy to a screeching halt and cured the problem of inflation, but he didn't get it running again. Instead, he initiated an incipient deflationary potential hat would have killed the economy more efficiently than inflation. There was already considerable debt overhang in them sunny morning-in-America days of yore.
There is the Kondratieff deflationary cycle, the down wave that threatens a debt burdened economy, the reverse image of the inflationary cycle. It's like a bear chasing you in the woods. The only way to beat it is to run as fast as you can. That is what Greenspan and the Ideologues set out to do: get the economy moving, cut interest rates, run like hell. And that is precisely what was happening in the deregulating fever that infected Clinton and became a full blown psychosis under Bush.
And here's the kicker: Greenspan is not to blame for his flight from deflation. Nor is Volcker to be praised for his assault on inflation. Their different approaches lead to he same destination: right where we're at now. Deflation. You get there through stern suppression or through irrational exuberance. Doesn't matter.
The underlying problem is debt itself and the Federal Reserve System, which is a private corporation tasked with managing a private monetary system in the name of the public good with nominal oversight by the government. As former Fed Chairman Mariner Eccles noted if all debt were retired, there would be no money in circulation. This is the nature of "modern money mechanics". There is always more debt than there is money to pay it down and the credit spigots must be kept open to create liquidity so that the economy may grow. We have therefore gotten accustomed to debt and don't worry about it. What scares us is a lack of growth: DEFLATION.
The point is that "capitalist fools, inc" must also include Joe Stiglitz as board member because he is a card carrying apologist for the Federal Reserve System which promotes money-as-debt, and as such cannot, by definition, outrun the bear. The poet Browning once said a man's reach should exceed his grasp, else what's a heaven for. Joe says the economy's growth should exceed its debt or we're all food for the bears. Like sharks our system will down if it doesn't keep moving.
The only way out of the dilemma is the de-privatization of the monetary system, the elimination of the Federal Reserve, and the revolutionary initiation of public monetary system.
Great post -- with the right conclusion. Volcker should get an A+++??? Reagan reappointed Volcker in 1983, and didn't replace him until four years later. During this time, Volcker worked with Reagan, coninuing what he had begun under Carter -- an attack on the working class through wage suppression, union-busting economics and excruciatingly high interest rates. Obama, Stiglitz, Greenspan....Capitalist fools, indeed.
VERY ClEAR HEADED explanation, cruxpuppy. thank you for those comments.!
Pretty well put, and right conclusion. Any idea how to make it so?
One Word.... Jubilee !
Duplicate.
There is indeed a flaw: fiat money.
When money is not a free market choice, but a government say-so, the fiat power corrupts the market. The banks and foreign central banks made those ridiculous one-way bets because there was an implied bailout by the government via the fiat money system all along. The models that the banks were using for the default swaps were essentially the same as the LTCM did back before 1998 bail-out: write huge insurance against n-sigma events. Most of the time, that event won't happen, so you keep the premium as profit. When the hurricane finally hits, you know your institution is so bankrupt that the FED will have to bail you out. The bailout is what makes the gambling so profitable.
below is a VERY long, but exhaustively historical explanation of the bubbles, etc...tracing Federal bank beginnings..effects, policies, consequences. it is part of several SERIES of articles covering global economics covering at least the last 500 hundred years since the inception of "modern" capitalism...it is by Henry CK LIU from Asiatimesonline. he also has a series called "the case against central banking" (although one has to understand, explained there also, abotu the historical , original differences, blurred today, between "central banking" (FEDERAL BANK of the USA is an example - geared towards preservation of MONETARY value over real economy value) -- and "national banking" geared towards actually being of use to the real economy...
----------------
MONEY, POWER and MODERN ART
PART 2: A monetary coup d'etat
By Henry C K Liu
See also PART 1: Ruthless empire builders
The nature of money has been a controversial issue since the founding of the United States. The founding fathers recognized that the people's power to issue money was fundamental to the functioning of democracy, while the Federalists led by Alexander Hamilton advocated the need of a national bank controlled by the moneyed elite to support the development of the newborn nation's economy. Unlike Thomas Jefferson, who wanted to create a new, revolutionary democratic nation, Hamilton wanted to build a powerful new nation that would rival Britain, its former oppressor. Hamilton turned the American Revolution from a struggle to form a new democratic society as envisaged by Jefferson toward an oligarchic secession from Britain. Yet Hamilton's national bank was partially state-owned, quite unlike the Federal Reserve System, which is wholly owned by private banks that have usurped the people's sovereign power to create money.
The first national bank, modeled after the Bank of England, which had been instrumental in the emergence of the British Empire, was established by Federalists as part of a nation-building system proposed by Alexander Hamilton, the first secretary of the US Treasury, who realized that the new nation could not grow and prosper in a competitive world without the full application of sovereign credit with a sound financial system mediated through a national bank chartered, partially owned and fully controlled by the central government. The first national bank in the US was the Bank of the United States (BUS), which was founded in 1791 and operated for 20 years, until 1811. A second Bank of the United States (BUS2) was founded in 1816 and operated also for 20 years until 1836.
The national-bank charter was approved by Congress and signed into law by president George Washington in 1791 when the federal government of the new nation was only three years old. The new Bank of the United States was to handle the finances of the federal government. It held the government's funds and dispensed sovereign credit through the issuing of notes that would circulate as legal tender. The national bank was to maintain an adequate supply of stable money and extend sovereign credit to support an industrial policy to promote national economic expansion without having to succumb to foreign, mostly British, financial domination.
To understand the thinking behind Hamilton's proposal for a national bank, it is necessary to remember that the Treasury was restricted by law to limit its issuance of money to the coinage of gold and silver, and not to print paper money. According to the Quantity Theory of Money, specie (gold- or silver-backed) money was the only reliable currency, though it could be supplemented by banknotes fully and freely redeemable for gold or silver. Thus sovereign credit was limited by the amount of gold held by the Treasury and a national bank was needed to create money through partial reserve. Congress granted a 20-year charter for the BUS despite arguments by Jefferson that the constitution did not give Congress power to establish a national bank and the charge that the national bank was designed to favor mercantile interests over agrarian interests, and the rich over the common man, in the name of national interest. Jefferson believed that the path to a strong nation was through the cultivation of a strong citizenry of independent wealth, not a strong central government led by a financial elite who would control the nation's money supply for narrow sectional and class benefits at the expense of the general population.
The federal government subscribed one-fifth of the US$10 million capital of the BUS, with a loan of $2 million immediately advanced from the BUS to the government, with the remaining $8 million subscribed by private investors. The BUS acted as the exclusive fiscal agent for the government and also conducted commercial banking business. Despite being well managed and financially profitable, the BUS antagonized state-chartered banks and western frontier and southern agrarian interests, which formed a coalition that successfully blocked its rechartering in 1811.
Jefferson's opposition to the establishment of a national bank was the focus of his overall opposition to the entire Hamiltonian program of strong central government and elite financial leadership. Jefferson felt that a national bank would give a small group of elite private investors, mostly from the New England states, excessive power over the national economy with unfair opportunities for large certain profits. The constitutionality of the bank invoked the dispute between Jefferson's "strict construction" of the words of the constitution and Hamilton's doctrine of "implied power" of the federal government.
Throughout the history of the United States, up to the present time, this dispute, along with the controversy between specie money and fiat money, remains philosophically unresolved, although in practice both the constitutionality of the "implied power" doctrine and the legality of fiat currency have been repeatedly upheld by the US Supreme Court. Jefferson considered the whole Hamiltonian banking scheme an unconstitutional threat to the basic fabric of American civilization. Jefferson prophesied: "If the American people allow the banks to control the issuance of their currency, first by inflation, and then by deflation, the banks and corporations that will grow up around them will deprive people of all property until their children will wake up homeless on the continent their fathers occupied ... The issuing power of money should be taken from the banks and restored to Congress and the people to whom it belongs." It was a definitive statement against the political "independence" of central banks. This warning applies to the people of the world in the 21st century as well. All over the world, central banking has usurped the power of the people to issue money as legal tender and made money an instrument to serve those who already have it in excess at the expense of those who have not enough. The British saying "the rich get richer and the poor get children" has been transformed in the US as "the rich get richer and the poor can't afford children". A national bank is at least an instrument of economic nationalism; an international central banking regime is an instrument of the international financial elite for the perpetuation of poverty for the majority of the world's population as a natural law of finance, robbing them of their natural power to issue sovereign credit for their own development. Thenceforth, being creative and hard-working is insufficient for fulfilling one economic potential: one also needs capital, which can only be acquired from those who have excess money or those who exercise control on the issuance of money.
Andrew Jackson as Democratic president (1829-37), in advocating what came to be known as Jacksonian democracy, was also vehemently opposed to the idea of a national bank as a citadel of privilege and monopoly against the common man. Jackson maintained that a national bank was a threat to democratic institutions. BUS2, under Nicholas Biddle, a member of the financial elite from Philadelphia, sought political support by lending large sums to congressmen and newspaper editors without proper collateral and not pressing them for repayment. Roger Taney, Jackson's Treasury secretary, carried out the president's order to withdraw federal deposits from BUS2 beginning in September 1833 to a number of state-chartered banks in the west that, free of BUS2 supervision and buoyant by federal deposits, pushed the US economy quickly into a debt bubble, much of it unfortunately centering on speculation on the sale price of public land rather than infrastructure development. The boom produced a sudden increase of government revenue and, in 1835, for the first and last time in history, the US paid off its national debt completely, with a mounting surplus in the Treasury. In 1836, Congress passed a bill to distribute the surplus to the states. Far from being an economic blessing, this development turned out to be an economic disaster because it had the effect of shrinking the nation's money supply. Alan Greenspan's recent warning about US deficits is misplaced. A balanced budget or a fiscal surplus was the last thing the US's expanding economy needed at the time of Jackson, or ever. The problem with the fiscal deficit was not that it existed, but that the funds were spent on the land speculation that did not contribute to full employment and real economic growth. Today, the problem with the US fiscal deficit is that it is spent mostly on war, homeland security and interest payments, rather than on constructive projects such as infrastructure and education that will lead to further growth.
The fall in money supply led to a market crash in early 1837, precipitated by the Treasury secretary's issuance of the Specie Circular, requiring payment for public land sale be made only in gold or silver, not even partially gold-backed banknotes. The resultant depression lasted throughout Democrat Martin Van Buren's administration (1837-41), but despite consistent adherence to Jeffersonian and Jacksonian democratic principles, the new president's commitment to strict constitutional construction prevented him from taking any countercyclical federal action toward economic recovery. Van Buren's main focus was putting government's finances on a sound footing. The widespread failure of state-chartered banks highlighted the danger of trusting private banks with government funds. Van Buren decided thenceforth to separate government finance from private banking. The government would keep its money in an Independent Treasury, with "vaults" constructed in major cities where government officials would receive and pay out funds on a strict specie basis.
All the robber barons of this era were members of the new Republican Party, which throughout history has represented big business and finance. The party was founded before the Civil War as a result of a spontaneous outpouring of public anger after passage of the Kansas-Nebraska Act of 1854. The Great Plains area west of Missouri and Iowa had become a refuge for native Americans pushed earlier off their land in the east, but white settlers soon realized that these vast expanses of open land offered new opportunities for farming and ranching. The native Americans were again forced to give way to white encroachment. By 1854, the administrative organization of the vast Platte and Kansas River countries west of Iowa and Missouri was overdue. As a free-standing issue, territorial organization of this area presented no controversy. It was, however, irrevocably bound to the bitter sectional controversy over the extension of slavery into the new territories and was further complicated by conflict over the location of the projected transcontinental railroad.
Working on the railroad
In 1845, Asa Whitney presented to Congress a plan for federal government subsidy of the building of a railroad from the Mississippi River to the Pacific coast. The settlement of the Oregon boundary in 1846, the acquisition of western territories from Mexico in 1848, and the discovery of gold in California in 1849 increased support for the project. In 1853, Congress appropriated funds to survey proposed routes. Rivalry over the route was intense. When Illinois senator Stephen Douglas introduced in 1854 his Kansas-Nebraska Act intended to win approval for a line from Chicago, the ensuing sectional controversy between north and south forced a delay in the plans. During the Civil War, a Republican-controlled Congress enacted legislation on July 1, 1862, providing for construction of a transcontinental line, to be built by two companies, each receiving federal land grants of 10 alternate sections per mile (a section is an area nominally one mile square, containing 640 acres, or 259 hectares) on both sides of the line (the amount was doubled in 1864) and a 30-year government loan for each mile of track constructed. The transcontinental railroad system was in essence financed by sovereign credit granted to private companies. The transcontinental railroads, despite brazen fraud, immeasurably aided the settling of the west and hastened the closing of the frontier. They also brought rapid economic growth as mining, farming, and cattle-ranging developed along the main lines and their branches.
In 1863, the Union Pacific Railroad began construction from Omaha, Nebraska, while the Central Pacific broke ground at Sacramento, California. The two lines met at Promontory Point, Utah, and on May 10, 1869, a golden spike joined the two railways, thus completing the first transcontinental rail link. Other lines followed. Three additional lines were finished in 1883: the Northern Pacific Railroad stretched from Lake Superior to Portland, Oregon; the Santa Fe extended from Atchison, Kansas, to Los Angeles; and the Southern Pacific connected Los Angeles with New Orleans. A fifth line, the Great Northern, was completed in 1893. Each of those companies received extensive grants of land, although none obtained government loans as the rising value of land grants was providing adequate collateral to attract private capital. The profit incentive from land speculation often led to shoddy rail construction merely to qualify for land grants. Unsavory profiteering on a large scale became widespread. In 1872, the Credit Mobilier of America scandal was unearthed, exposing a short-lived holding company to which most of the Union Pacific's liquid assets had been transferred in 1867. The fraud, combined with mismanagement and cost overruns, left the Union Pacific with unmanageable debt, and in 1893 the company went into receivership.
"There is indeed a flaw: fiat money."
Do you advocate the gold standard then? This no longer exists anywhere, everyone uses fiat money. The the rigidity of a commodity money system the gevernment can't do anything to moderate the business cycle.
"Gold Standard" mean very different things for different people. I advocate free-market money: instead of having the government fixing what a "dollar" is, let the contractual parties decide what the form of payment should be. A free market exchange media will emerge, without government intervention fixing the "standard" which would only invite Gresham's Law. In colonial times, the market place eventually settled on lumps of silver discs minted by the Spanish, because the consistency of production quality, not because of any law made by the governments of the British colonies; the official British money was very rare in the North American colonies.
Government can't do anything to moderate the business cycle, period. All the things that it does only end up exacerbating the business cycle, if not creating the business cycle to begin with. Just look at what FED intervention in 1926 to rescue the Florida land speculation bubble led to (stock market bubble and collapse in 1929), what FED intervention in 1997-98 to rescue emerging markets and LTCM did (dot com bubble in 1999), and what FED intervention in 2001-2005 to rescue the stock market again resulted in (current housing bubble and crash).
Government is not a living entity; it's quite incapable of thinking or acting. Real people, the very imperfect bureacrats have to do all the thinking and acting in the name of "Government," just like high priests were the ones spoke on behalf of Olympic Gods when people believed such things. Stop thinking of "Government" as some kind of godly entity of omniscience and omnipotence. If the bureacrats were so good at spotting bubbles, they'd be making fortunes trading in the market place and moderating the cycles by their trades (sell high and buy low). The fact is that, they become bureacrats because they can't trade well. So all they can do is exacerbate the business cycles while trying to benefit their friends. How many burreacrats do we know that do not have kids to send to college, spouse with shopping habbits, friends whose back need scratching? and do not eat, drink, or need a place to live?
"I advocate free-market money: instead of having the government fixing what a "dollar" is, let the contractual parties decide what the form of payment should be."
In all the millions of transactions made every day, you advocate that parties make a decision as to the form of payment in each and every case? Are you talking about going *back* to a barter system?
"A free market exchange media will emerge,"
The market needs universally recognized exchange media that is widely circulated, one or perhaps a few forms thereof. Such as today's dollar.
"In colonial times, the market place eventually settled on lumps of silver discs minted by the Spanish"
It would appear for a limited time that they were using the Spanish *government* as a proxy. It was that governments lawas that led to the consistency of the manufacture of those silver bits. In time, Their own government was able to develop a competency around issuing an acceptable form of money.
A central reason for the dollar being the medium for exchange today is that federal law provides that taxes be paid in that form *only*. At a minimum, your idea of letting the market allow some other medium to emerge would cause chaos in that area.
"Government can't do anything to moderate the business cycle, period."
You then provide examples where they simply failed to do so in your opinion. That doesn't support the original statement. I wonder why it is you feel it to be true.
"Stop thinking of "Government" as some kind of godly entity of omniscience and omnipotence."
I can't think of who does, given all the debates around specific politicians and political issues on the table.
"The fact is that, they become bureacrats because they can't trade well."
It's your *opinion*. Even the best traders lose big at times. They presumably have the temprament for that, where a bureacrat may simply prefer the safety and comfort of a steady job.