Thursday, June 2, 2011

Good as Gold

Monetary policy and the gold standard can be confusing topics, but we must understand them if we are going to put a stop to government's wealth destroying shenanigans 

I've dipped my toes into Austrian School economics and f oundthe water a pleasant intellectual temperature but very, very deep.  I've read Ron Paul, I've read Murray Rothbard, and I still have at best a only very fundamental understanding of money and banking.

Why the Opposition to the Gold Standard?

Government meddling has destroyed the value of our currency, which in turn robs us of our savings and destroys our buying power.  Nathan Lewis has a gift for breaking down complex issues like the gold standard.  First, he explains why money manipulation is attractive to the mercantilists (those who oppose a gold standard or fixed currency.)
Mercantilists don't see currency instability and monetary fiddling as problems; they see them as solutions. A gold standard system prevents them from implementing this apparent solution, which is why they sometimes refer to the "golden fetters" that used to hold them back.
A standard pro-Federal Reserve argument says that the Fed expands and contracts the money supply to keep the economy on an even keel.  We know how well that has worked over the past 100 years.  Lewis explains the flaw in this argument:
In the short term, a currency devaluation, or an easy-money policy, can create what appears to be an improvement in economic conditions. We saw this with QE1 in March 2009 and QE2 in late 2010. In the longer term, however, this sort of strategy tends to cause stagnation and economic decline. The notion that a country can become wealthy just by fiddling with its currency is patently ridiculous. The most successful countries worldwide have always been those with the most stable currencies.
Such manipulations provide the illusion of wealth, but that's all it is, an illusion.  My house is worth more now than it was 10 years ago, but the dollars that it is priced in are worth so much less, it's probably a wash.  Again, Lewis explains how the Dow Jones Industrial Average is valued higher now than in 2000.  However...
The Dow Jones industrial average was worth about 43 ounces of gold at its peak in 2000. Today, it is worth about 8.5 ounces, a decline of about 80%!
So, like my house or the DJIA, it all looks good on paper, but it's just paper!  You can add zeros on to the price of something, but it will not increase or create real wealth.
A similar story could be told by per-capita GDP, in nominal and gold terms. Today, after 40 years of floating currencies--since 1971--U.S. per-capita GDP, as measured in ounces of gold, is back to levels first seen in the early 1950s. Forty years of easy-money currency fiddling has caused stagnation and decline, just as the Classical economists said it would.
This explains why when government economists point to statistics to say how much better off we are, we really don't feel any better off.  It's all accounting tricks done with currency manipulation.  We went off the gold standard in stages, with Nixon dealing the final blow:
The floating currency system appeared in 1971 for this exact reason. Richard Nixon wanted to boost the economy with easy-money before the 1972 election. Did it work? Officially, GDP rose 5.3% in 1972. Nixon was re-elected. This kicked off a decade of inflation and economic decline.
The Reagan recovery was real because it was driven by a strong dollar.  We all really did get richer because our money was not losing value in the 80's.  Alas, George W. Bush went back to the old government tricks, with President Obama kicking the printing presses into hyperdrive.  Here we are today, richer on paper, poorer in reality.  Thank the Federal Reserve.

Nathan Lewis - If the Gold Standard is so Great...
Market Skeptics


Silverfiddle said...

Thanks AOW!

Anonymous said...

I can't even begin to put worth-while commentary into this, because money policy is probably my weakest area in economics, and economics is my weakest area in politics.


Bunkerville said...

Just waiting for the inflation to kick in. The next step in this nonsense called economic policy.

Anonymous said...

The Fed, like most central banks, is owned by private banks. By maintaining a policy that is somewhat inflationary they can legally rob us of our money. The central bank will avoid like the plague any risk of deflation. They couldn't do this while there was any kind of a gold standard. So the gold syandard had to go and we common folk are paying dearly for it.

Excellent post!

Silverfiddle said...

Conservatives on Fire: You called it what it is. It is government sanctioned robbery.

TonyFernandez said...

Gold for years was supposed to be convertible to dollars at a rate of $35/ounce. This is not hundreds of years ago, but something that was still around after WWII and before Bretton Woods. The price now is around $1500/ounce. Inflation, thy name is the Fed.

Z said...

"The Fed, like most central banks, is owned by private banks."
I'm like Jack Camwell; I know less about this than about anything but maybe physics!....and I always believed the FED was government owned, not privately owned. What a difference it makes when you know the truth.

It used to be that I trusted government more...then I grew up and trusted private business more; Now I can't trust anybody.
Was it really Geo Bush or his Dem congress that forced his hand, by the way? He was constantly calling for a better look at the Fannie and Freddie situation and nobody was he's blamed for letting the housing market get where it did.

Jersey McJones said...


In 2006, when the mortgage boom hit it's zenith, F&F only backed 6% of the sub-prime loans. SIX PERCENT. This stupid, retarded, idiotic, moronic insistance thaat F&F and the CRA caused the mortgage meltdown is just a phony liars' ideological fodder for dummies.

The repeal of Glass-Steagal caused the meltdown, just as it caused the ridiculous rate increases in insurance after the NASDAQ collapse in '99.

You are being played for a fool.

Everyone else,

As for the Gold Standard - I have some news for you guys - there is not enough gold in existence to back the US dollar. Get used to it. Your argument is moot.


Finntann said...

Jersey, we've been on this merry-go-round before...

Where do you get your 6% figure for F&F? Because Fannie Mae alone reported that 6% of its conventional mortgage book was sub-prime and 12% was Alt A at the close of 2006.

Finntann said...

As far as the gold standard goes, we really ought to consider switching to the plutonium standard.

Nothing gives you that warm all over feeling than a couple of plutonium coins in your pocket.


Jersey McJones said...

Finn - the TOTAL sub-prime backing was 6% from F&F, not the total of THEIR backing!

As for plutonium - LOL! That was funny! Maybe we should bring back the old Populist Party from the 19th century!


Finntann said...

Jersey, you're falling for their smoke and mirrors. I used to have a significant investment in Fannie Mae and Freddie Mac which I pulled in 2008.

The overall percentage of subprime loans backed by F&F is completely and utterly irrelevant to the viability of F&F.

So 6% of their book was sub-prime
12% of their book was Alt-A
1% of their book was PLS Alt-A
9% of their book was high LTV
2% of their book was PLS sub-prime
Making 30% of their book high risk.

F&F underwrote 50% of the US mortgage market, which at the time was 12 Trillion, so a mere 8% of their book (Their sub-primes and Private Label Securities) being sub-prime is still a very large investment in sub-primes.

On top of all that their CEO Franklin Raines, CFO J Timothy Howard, and Controller Leanne G. Spencer were indited on 101 charges related to manipulating their books resulting in 100 million in penalties.

You can play Obi-Wan and continually repeat "these are not the droids you are looking for", but no one is buying it anymore.

I can say one thing that is 100% the truth... I am certainly glad I pulled all my money out of F&F.


jez said...

Governments need to have floated currency in order to defend against currency speculators, who can be devastating. It's the same reason the UK had to leave the European Exchange Rate Mechanism following black Wednesday.

I think it's a bit unfair to compare using the gold prices at a moment when gold is so unusually expensive and probably near a peak.

Also, inflation isn't a terrible thing, we aim for some small amount of it because it's so much preferable to deflation.

Silverfiddle said...

Jes: One man's loss is another's gain. Inflation robs people of their savings and hits the working poor the hardest because they have no way to escape it.

Gold is so expensive... Wonder why...

You make my point. Dollars are more fungible than gold, ordinarily making them worth holding. But print too much at the value erodes, causing people to get out of the rigged game and go to gold.

Would you buy into my money system if you knew I would demand 1/2 % (a reverse interest) from you every month just for holding the dollars I issue?

You've bought into the myth that we need money manipulators.

jez said...

Yes, inflation means that there is some cost to keeping your money under the proverbial matress. This is quite useful to society since it encourages you to put your money to work instead, and we'd rather you invested in business than keep it in a vault. The deleterious effects of zero or negative inflation are very well understood, I learned about them at high school and they are listed on eg. wikipedia. As well as the direct effects of too low inflation that are worth avoiding, consider that inflation naturally rises as we approach full employment. Would you rather keep unemployment above a certain level to maintain your allegedly desirable zero inflation rate?

Anyway, history shows that the gold standard doesn't do away with inflation, all that'd happen now is you'd become beholden to the folks in charge of gold extraction (is that the Chinese?) and systemically, a gold standard can exaggerate instability: this is what happened in the great depression.

The bottom line is that in America under the gold standard, output and prices were dramatically less stable, and unemployment was higher.

Silverfiddle said...

Jez: Got a source or link for that last statement?

A deflationary spiral is a documented danger, but natural lowering of prices due to innovation is a good thing. Imagine things getting cheaper and cheaper, especially if you are a retiree on a pension.

Anonymous said...


President Reagan once said "Inflation is the cruelest tax of all."

How right he was! Now, if the government would only allow us to index our (largely mythical, purely theoretical) capital gains to inflation and adjust the actual value accordingly, I might find it more tolerable, but they don't even consider it.

For example: If you bought a house thirty years ago for 50K, and sold it last year for 400K, your all-wise, all-knowing, all-loving, supremely compassionate government has enough tender regard for you to expect you to pay the full tax on the 350K you have "technically" or "theoretically" gained, when in fact the value of your gain may only be 50-75K in terms of the value the dollar held when you purchased the house.

Is that fair? Is it honest?

Please understand my figures are entirely theoretical, and may have no basis in reality, but the infernal policy I've outlined is perfectly true in principle, and in plain English the practice stinks to high heaven.

Now why do you suppose no politician or sitting president in my recollection has ever addressed this issue, and why aren't members of the investor class up in arms about it?

I'm asking, because I have no clue. Do you?

~ FreeThinke

Anonymous said...


One of my grandfathers never earned more than $20.00 a week in his entire working life. A century ago, however, he was able to raise eight children in New York City on that salary, and my grandmother was a stay-at-home mom. [She had no choice there was just too much work done in the home to allow for her even to dream of seeking employment elsewhere.] Not only that, despite their apparent poverty, my grandparents were able to save enough to buy two acres of property in northern New Jersey and build a three storey house with a wraparound porch. There was a small apple and peach orchard attached to the place and room for a large vegetable garden and a hen house. Grandmother grew vegetables all summer and and canned what was left of the harvest in the fall. And of course she also canned peaches.

She raised chickens, gathered eggs, and chopped the head off one, pulled the feathers off it, then singed it every couple of weeks to cook for Sunday dinner. She also made all her children's clothes, attended church every Sunday, was active in the women's sewing circle, and even managed to find time to minister to the ill and the less fortunate. [The church ladies of that pre-World War I era took turns doing things government agencies do full time today. The agencies do it much more expensively and to much poorer effect.]

The house my grandfather built for $1,200.00 -- yes that's right I said TWELVE-HUNDRED DOLLARS -- still stands and would sell in today's inflated currency for at least $375,000.00 -- minus the acreage, which was sold off long ago after my family moved away. The orchard was cut down and the land cleared before I was born to make room for development.

My mother was the last of the eight children. She was born in 1913 -- the year we got the income tax and the federal reserve thanks to Woodrow Wilson and the "progressives."

Our family has been fortunate. We have lived uncommonly well all our lives, but I don't think we've really made any significant progress in developing a better quality of life since those faraway days. All we've done is make things far more complicated, far more expensive, far more dangerous and far more prone to violence and corruption.

I've never made a formal study of economics, and don't begin to understand the sophisticated machinations and complex, self-serving trickery engaged in by the Federal Reserve, the international bankers and those who formulate governmental policy, but it seems to me we'd be far better off with a stable currency backed by gold and possibly other materials that have intrinsic worth as well. We might have fewer dollars in our investment accounts, our salaries might go down dramatically, and our houses might only fetch a fraction of what they do now, but wouldn't it be a comfort to know that the money we did have was actually worth something, and not constantly degenerating in value?

~ FreeThinke

jez said...

Sure, try Michael Bordo: (the data I used is near the end, just before the conclusion).

I don't have to imagine innovation making goods cheaper, that's been happening in computers for 30 years. The result is that personally I'm always reluctant to buy hardware, because I know that it will depreciate and become obsolete very quickly. (I wouldn't choose not to have innovation in that field, though!) Applied to the entire economy it'd quite clearly induce people to hoard money, which leads directly to price instability. (once a few people pull the trigger and buy, everybody rushes to buy before the price responds upwards, magnifying the price shock).

Silverfiddle said...

I'm no economist, Jez, but he didn't show that this instability was caused by the gold standard. Speaking of which, prices are a vital market signal. Mask their natural movement, and you create a dysfunctional market, like we have now.

A group of really smart people cannot monitor and adjust the way a free market can. It's just impossible to control something so large and so intricate.

jez said...

Well that's true, but control isn't the aim: what I'm advocating is for more modest: the ability to defend against currency speculators, and the ability to guide inflation towards the low but positive sweet-spot. I don't think I'm capable of making the case for that sweet spot any more better than I have already.

Silverfiddle said...

I get you, Jez. We don't completely agree, but economics is a difficult domain, especially for non-economists.

jez said...

jesus, I'm shuddering at all the typos in my last comment. Sorry guys, what must you think of me.

"Would you buy into my money system if you knew I would demand 1/2 % (a reverse interest) from you every month just for holding the dollars I issue?"

Nice example, since 0.5% per month is just over 6% per annum, which is not an unusual level over recent decades. I've been quite happy with our currencies doing what they do all my life. (except for property inflation, that's just nuts, but that's hardly the fault of the underlying currency).

I'm looking at a graph of UK annual price changes going back to 1750 (, and I notice that before the modern era although prices didn't trend upwards much (thought they do a bit), they were incredibly volatile. By the 20th century, a consistent upwards trend had emerged, but volatility is much more under control. From the graph you can immediately identify the main inflationary events: the world wars and the 1970s.
I'm no historian, but I'd challenge anybody to tease out the external events which cause all of the shocks and contractions prior to 1900. The economy almost seems bipolar: rapid cycling is business as usual for that period. Imagine trying to navigate those choppy economic waters as an entrepreneur, when prices might leap or fall as much as 20% in a year!

I'm not equipped to blame that volatility entirely on the Gold Standard, but I do think that constant, positive inflation is entirely necessary to avoid it. It might be possible to achieve that with a gold-backed currency.

However, investors' opinion of gold is that it makes a lousy long-term investment -- it's incredibly volatile in the short term, but you aren't rewarded for that volatility in the long term. The current high value of gold, for example, is a bubble. It'll fall again, mark my words, and you'll be pleased that your dollars aren't manacled to it when it does.

Ducky's here said...

The Reagan recovery? You man the largest middle class tax increase in history?

No, what you mean is the actions taken by Paul Volker (the JIMMY CARTER appointee, LEARN IT!) at the fed to counteract the actions of that fool Arthur Burns who caved to Nixon's desire for cheap money to give himself a temporary electoral advantage.

Silverfiddle said...

Ooooooh! He's typing in ALLCAPS, so he's sewious!

Of course I know Volker was a Carter appointee; I never said otherwise.

So c'mon Ducky, explain to us how the Obummer recovery is so much better than Reagan's...