The “gold bugs” seem to forget that we actually have tried the gold standard before – in the era more or less between 1870 and 1930 – and with disastrous results!Lars P. Syll's blog
Paul Krugman on gold buggism – so right, so right
Lars P. Syll | Professor, Malmo University
(h/t Ralph Musgrave via email)
43 comments:
According to Keynes, "Of course, a fall in prices, which is the the same thing as a rise in the value of claims on money, means that real wealth is transferred from the debtor in favour of the creditor, so that a larger proportion of the real assets is represented by the claims of the depositor, and a smaller proportion belongs to the nominal owner of the asset who has borrowed in order to buy.
The problem I have with this statement by Keynes is that makes no distinction between monetary deflation which is unambiguously bad and deflation which comes about as a result of technological progress and increasing labor productivity. This latter kind of deflation is good because even if wages are more or less stable, purchasing power nevertheless rises over time.
Think of the steadily dropping price of computers and related electronic devices. Laser eye surgery is another good example because the cost is continuously dropping in contrast with the cost of delivering most other health care services which is rising at a faster rate than the general rate of inflation. The reason for that difference is because laser eye surgery operates in a free market while health care in general is distorted by government intervention, subsidies and bureaucracy.
These zombies seek to have these metals intermediate human exchange instead of human civil law... prehistoric and D-A-R-K....
rsp,
Matt - Why do you think the central banks hold gold bullion as reserves, and what do you think they should do with this hoard?
The problem I have with this statement by Keynes is that makes no distinction between monetary deflation which is unambiguously bad and deflation which comes about as a result of technological progress and increasing labor productivity. The Rombach Report
It doesn't matter. Productivity gains occur because people take risks with their money. But an appreciating money supply encourages risk-free hoarding. Thus falling prices are anti-progress.
What is important is a person's total purchasing power which is value per monetary unit X (times) number of units.
Ideally, prices should be stable while incomes steadily rise to match productivity gains.
Of course wages have not risen in line with productivity gains because the existence of the government backed counterfeiting cartel (the banks) allows business to bypass the need to share wealth and/or power with the workers.
Why do you think the central banks hold gold bullion as reserves, and what do you think they should do with this hoard?
CBs buy and sell gold to affect the availably of their currencies, thereby influencing the exchange value. So they keep buffer stocks in reserve.
"CBs buy and sell gold to affect the availably of their currencies, thereby influencing the exchange value. So they keep buffer stocks in reserve."
Tom - In other words, even though gold may be a "barbarous relic" as Keynes claimed, it still remains a monetary asset?
"It doesn't matter. Productivity gains occur because people take risks with their money. But an appreciating money supply encourages risk-free hoarding. Thus falling prices are anti-progress."
F. Beard - I haven't a clue what you're talking about.
it still remains a monetary asset?
Only because of foolishness and the wicked hope that government will remonitize gold.
Why take a risk when one can "bury one's talent" and gain a risk-free return? But progress requires taking risks so an appreciating money supply is anti-progress.
"Only because of foolishness and the wicked hope that government will remonitize gold."
OK, so tell me what you think should be done with that hoard of gold held by the central banks.
Interesting question.
I would force the CB to sell its gold (but not too quickly). That would be deflationary. Then I would have the fiscal authority counter that deflation by sending new fiat equally to all its citizens.
"Why take a risk when one can "bury one's talent" and gain a risk-free return? But progress requires taking risks so an appreciating money supply is anti-progress."
I don't know what you mean by "bury one's talent" and gain a risk free return? Aside from that I agree that progress requires taking risk but I don't get the part about how an appreciating money supply is anti-progress. By appreciating money supply, do you mean a deflating currency? If so, are you referring to a deflationary economic contraction caused by mal-investment like for example the housing bubble? Or are you talking about the natural and healthy deflation that comes about because of rising labor productivity triggered by technological advances applied to the production process?
Tom - In other words, even though gold may be a "barbarous relic" as Keynes claimed, it still remains a monetary asset?
Actually, gold is a non-financial asset, and so the cb buying and selling of it affects amount of $NFA. Purely monetary ops don't since only the composition of $NFA changes and not the amount.
I'm talking about falling prices whatever their cause.
And btw, I don't buy "Austrian Malinvestment Theory"; because given enough deflationary (including from the falling velocity of money) just about every business would fail. And that theory presupposes the "loanable funds" theory of bank lending which has been disproved.
correction: "deflationary" should be "deflation"
"tell me what you think should be done with that hoard of gold held by the central banks"
why does anything need to be done with it?
Regarding deflation and inflation, Karl Marx’s critique of capitalist political economy argued that debt tended to expand at a faster rate than the underlying real economy which fed into the boom bust cycle. In connection with this, I think Marx had it right on this fundamental problem that he saw for capitalist accumulation.
Marx claimed that rising levels of labor productivity attributable to applications of new technology had a tendency to undermine in real terms, the inflated values of existing paper capital investments in older technology from previous production cycles. Austrian-Hungarian-American political economist Charles Schumpeter, a contemporary and antagonist of Keynes borrowed this theme from Marx, referring to it as the creative destruction of capital.
In the macro economic picture, Marx referred to this as "the tendency of the rate of profit to fall". However, credit expansion provides a way to temporarily prop up the outstanding mass of un-depreciated fixed capital by re-circulating the difference to the overall economic output of goods and services which could be sold at inflated prices.
This ongoing inflationary credit expansion results in an accumulation of potentially illiquid capital holdings, or what in 2008 came to be known as toxic assets cobbled together from the housing bubble accumulating on bank balance sheets, which must eventually be purged in order for real economic growth to resume.
The problem is that the toxic assets have largely not been allowed to be purged and liquidated. The most interesting parallel with Marx’s critique is the notion that greater and greater amounts of credit expansion are required to prop up older un-depreciated investment holdings and maintain full employment at the same time.
This explains why entrenched capitalist oligarchs sought to have a buyer/lender of last resort in the form of a central bank.
Compare this to what Ron Paul and Jim DeMint wrote in a WSJ Op Ed ‘Americans Deserve a Transparent Fed’ on Nov 19, 2009. “The Fed has also for the past three decades, been required to engage in monetary policy with the goal of maintaining stable prices and full employment. Since the natural trend over time is for prices to decrease, a mandate to maintain stable prices is a mandate to pursue an expansionary monetary policy and inflate the money supply to counteract the lower prices we would expect from increased productivity.”
http://online.wsj.com/article/SB10001424052748704782304574542280971009044.html
Paradoxically in this context I think Karl Marx and Ron Paul are on very similar wave lengths.
Ed,
Seems like western civilization always had large quantities of these 3 metals (copper, silver, gold) in inventory for use as coins, but in the past the humans who were in positions of authority understood that they only USED these useful corrosion resistant metals as coins or tokens stamped with the imprimatir of the human under whose authority the coins were struck and who represented/personafied the authority of our human civil law under which we issued the coins and regulated their value.... this was termed "nomisma" in the Greek texts...
So they would keep what eg. Augustus termed a "patrimony" of the 3 metals that could be struck into coins if they were needed by the non-government sector in managing their economy as needed (fiscal injection)... sometimes they would construct pagan idol images out of these metals if they had surpluses...
Then somewhere along the line, looks to me around the end of the Pax Romana, "morons" populated our institution of civil govt and switched out the authority of human law for the authority of these metals and subjected 'human action' or 'human exchange' to the authority of these metals, I believe Apostle Paul termed the silver-based form of this phenom "philargurion" in the first century... or "fondness for silver"...
... in effect we could not operate or advance economically beyond the rate at which these metals would present themselves to humans... very anti-human civil authority, very pagan, chaos inducing...
so this lack of a view of our own human authority has been around since then and current... and seems like it has been increased and strengthened, reinforced over the last century and a half manifested thru Libertarianism which overtly seeks to denegrate authority...
Libertarians have become quite bold about this... they dont even try to hide it anymore... they are right out there...
When FDR went off gold back in '33 in my view it was not because he saw gold as an affront to human authority and wanted to return to human authority, it looks like it was because he didnt want to lose the gold into circulation... similarly with Nixon in '71, it wasnt because he repudiated the authority of the metals, he didnt want to lose our gold to the Europeans... both of these Presidents wanted to in effect "keep the gold"... so they reneged on convertibility of our USDs and kept it...
So we find ourselves off metals, which is good, but imo NOT for the right reason, at least not yet...
I'm hoping we may be able to see what is really happening soon during this current relatively short hiatus ... MMT helps in this regard...
"philargurion" or perhaps we can term it "metal love" still exists (it is an eternal entity looks like), so the humans in positions at the CBs are keeping these metals, they simply cant let them go for now... the Germans want theirs back, etc.. they are all caught up in this.. they are literally in effect "in love" ...
MMT reveals a method whereby we can finally return to our past and embrace our human authority again via the institution of our civil government formerly known as 'nomisma' or perhaps today 'state currency' ...finally repudiate metals which have been reigning for almost 2,000 years now looks like to human detriment..
This is all hard to see if you are a heavy Libertarian I realize... as most in the US seem to be these days (Statue of Liberty, etc...)
So if we ever come into full repudiation of these metals, perhaps we could just release our official reserves into the industries that have an industrial need for them slowly so as not to create an absolute crash in the mining sectors...
perhaps issue USD balances to bailout the "preppers" who have been deceived into buying at these high prices due to the fear inducing propaganda that has been allowed to be dispensed by the gold sellers.... help those folks out... that's about it I'd think...
rsp,
... help those folks out.. Matt Franko
Everyone should be helped out, not just ignorant gold-worshippers. So let's hand out new fiat equally and let Garry North, for example, waste his buying gold from the US Treasury/Fed.
"the natural trend over time is for prices to decrease"
really?
....so happy professor lars syll is a subscriber of the schitt report!
This ongoing inflationary credit expansion results in an accumulation of potentially illiquid capital holdings, or what in 2008 came to be known as toxic assets cobbled together from the housing bubble accumulating on bank balance sheets, which must eventually be purged in order for real economic growth to resume.
Makes no sense. Even though housing is treated as investment, houses are not capital goods and there is no depreciation and falling rate of profit associated with them.
Falling rate of profit on capital makes investment less attractive and direct funds instead into speculation in search of higher returns. This results in Ponzi finance and financial bubbles.
Also PKE and Austrian price theory are fundamentally different. According to PKE, there is no tendency for prices to fall since producers are price-setters rather than price-takers.
"According to PKE, there is no tendency for prices to fall since producers are price-setters rather than price-takers..."
According to MMT, under a FFNC currency system, government is the price setter and/or "ratifier" in all cases....
rsp,
According to MMT, under a FFNC currency system, government is the price setter and/or "ratifier" in all cases....
Not in all cases, Matt. Only in cases that government is involved in the market. There are many markets in which government is not involved and firms are price-setters by regulating supply, for example., that is, creating artificial scarcity. Firms don't actually collude, just follow the same overall business model to maintain price rather than let it adjust downward.
I could explain to you the many ways this is done in practice if you have never been in business and don't know from experience.
Economists, on the other hand, approach price in terms of ideal markets that likely never existed anywhere and then act as if their price theories apply in the real world.
"the natural trend over time is for prices to decrease"
"really?"
Yes, really. y, Haven't you ever noticed how the price of computers and related electronic devices falls continuously even while the product gets better? Or how about laser eye surgery? The cost is continuously dropping in contrast with the cost of health care in general which only rises faster than the general rate of inflation.
Makes me wonder if it has anything to do with the fact that laser surgery operates (pun intended) without government intervention, subsidies or bureaucracy?
Change in relative prices is irrelevant in economics. What is at issue is the price level, which price index like CPI or PPI measures. Shouldn't the statement be, "the natural tendency over time is for the price level to decrease"? Is there empirical evidence for that based on price index adjusted for inflation? That is to say, is it the tendency for real price level to decrease in the long run?
Shouldn't the statement be, "the natural tendency over time is for the price level to decrease"?
Yes.
Is there empirical evidence for that based on price index adjusted for inflation? That is to say, is it the tendency for real price level to decrease in the long run?"
I believe so. There was a period of time during the later part of the 19th century in the US when the general price level gradually over an extended period of time which did not involve one of the many depressions per se of that span of time. I'll try to find the actual data.
"Haven't you ever noticed how the price of computers and related electronic devices falls continuously even while the product gets better? Or how about laser eye surgery?"
So your argument is that the price level keeps rising "because of the Fed" but the price of computers falls... despite the Fed?
If the Fed causes prices to go up why does the price of computers go down?
"There was a period of time during the later part of the 19th century in the US when the general price level gradually over an extended period of time"
Oh god not that austrian canard again.
"health care in general which only rises faster than the general rate of inflation.
Makes me wonder if it has anything to do with the fact that laser surgery operates (pun intended) without government intervention, subsidies or bureaucracy?"
Healthcare costs rise faster in the US than in countries with nationalized heathcare systems.
According to the Economist, some prices went up in real terms, and others went down in real terms between 1900 and 2000.
http://www.economist.com/node/457272
Tom,
"Not in all cases, Matt. Only in cases that government is involved in the market."
That is not the way I interpret it Tom:
"We will begin by showing the basic relationship between prices paid by the government and the quantity received by the government from the private sector,2 based on the following cause and effect, as outlined in Mosler’s analysis "Soft Currency Economics":
1. The government needs real goods and services (g&s).
2. The government imposes taxes, in dollars, in order to create sellers who offer real g&s in return for the needed dollars.
3. The government purchases the desired g&s.
4. The government is the monopoly issuer of its currency. Therefore, it has the ultimate
power to determine the price it pays for g&s; i.e. prices are exogenous."
http://www.epicoalition.org/docs/Pavlina_2007.pdf
Govt either directly sets the price or "ratifies" all prices within the economy is the way I interpret this...
perhaps you are thinking about thin markets that are temporarily under supplied, like a "supply shock" type of thing that is being worked out between buyers and sellers, or a monopoly/oligopoly type of situation (oil)...
rsp,
So your argument is that the price level keeps rising "because of the Fed" but the price of computers falls... despite the Fed?
Not so much the Fed, because the Fed mostly just sets interest rates, and certainly not because of QE because I fully buy Mosler's argument that if anything, QE is more deflationary than inflationary. I think it is more about ongoing deficit spending that boosts consumer spending more so than would otherwise be the case, even as it dilutes the purchasing power of the currency. Lots of overlapping cross currents here and not a particularly easy job to sort out the impact of offsetting factors.
I don't have a definitive answer as to why the cost of computing continues to fall relative to the general price level, because I don't have enough granular knowledge of that very competitive industry but I'll go out on a limb and suggest that it has a lot to do with the ultra fast pace of technological development and advance in that space. According to Wikipedia, "Moore's law is the observation that over the history of computing hardware, the number of transistors on integrated circuits doubles approximately every two years."
Rombach,
There's a bit of a contradiction here, on the one hand you say prices rise because of government spending, on the other hand you say prices "naturally" fall (in nominal terms?) and this is demonstrated by falling computer prices.
So falling prices in an economy with govt spending shows that prices "naturally" fall, and rising prices in an economy with govt spending shows that price rises are caused by government spending?
Matt, it may be true that govt set prices at the macro level by the prices it pays.
But this is not how business works at the micro level according to microeconomics, which PKE disputes. Prices are supposedly set by competitive markets with prices falling with falling demand. But in actually, firms protect the price level of their goods as a matter of industry policy by creating artificial scarcity. When inventories build, instead of making prices down, they destroy the excess inventory, sometime literally, sometimes selling to liquidators, and sometime just holding it off the market if it has enduring value, like banks are doing with excess housing to keep the value from collapsing.
There is a huge amount of price fixing in modern markets. It is in this sense that PKE economists say that firms are price-setters rather than price setters.
I don't have a definitive answer as to why the cost of computing continues to fall relative to the general price level, because I don't have enough granular knowledge of that very competitive industry but I'll go out on a limb and suggest that it has a lot to do with the ultra fast pace of technological development and advance in that space. According to Wikipedia, "Moore's law is the observation that over the history of computing hardware, the number of transistors on integrated circuits doubles approximately every two years."
While it is true that the price of tech falls over time due to innovation, the nominal price doesn't always fall that much. One just gets a better product for about the same price. There are price drops but the real gain in improvement in quality.
Look at digital cameras, for instance. The prices remain fairly constant but the bang for the buck goes up every year, creating "planned obsolescence" and ensuring on-going demand for new models, even though most purchasers could actually do without without suffering any big loss. Is this "rational"?
I would have thought that paying people in other countries a pittance to make you goods would have something to do with it too, maybe?
y - Just to clarify my thinking. Is your statement here... "I would have thought that paying people in other countries a pittance to make you goods would have something to do with it too, maybe?"
in response to the following statement I made earlier?
Makes me wonder if it has anything to do with the fact that laser surgery operates (pun intended) without government intervention, subsidies or bureaucracy?
Here's quite an interesting paper by Randall Wray and Dimitiri Papadimitriou on this subject:
"Understanding Deflation"
http://www.levyinstitute.org/publications/?docid=74
Rombach,
no, I wasn't thinking about that. I was referring more to electronic goods assembled in the far east, etc.
"I was referring more to electronic goods assembled in the far east, etc.
I reckon paying slave labor wages in the sweat shops of Asia to mass produce a lot of consumer goods that are bought over here has a lot to do with keeping downward pressure or at least a lid on consumer prices for electronic goods bought here.
seems likely, Rombach. However as they consume more this could potentially put upward pressure on the price of basic resources, feeding back to prices in the US.
As for the healthcare cost question, costs haven't risen in other western countries as much as they have in the US, including in countries which have comprehensive nationalized systems, which makes me think that the problem is not necessarily bureaucracy, but it could have something to do with inflated subsidies (i.e. providers charging the govt overly high prices for example). A system which combines public and private in a more efficient way would be better of course. I don't think a purely private system would provide adequate and affordable healthcare for all, or perhaps even most people, however. I don't know of any developed countries that don't have some public provision or funding of heathcare.
As with the falling-computer-prices example, it might be a mistake to extrapolate too much from the laser eye surgery case.
(However my knowledge of heathcare economics is quite limited).
I have an acquaintance who is a podiatrist and he claims that his unit reimbursements have gone way down (like from $4,000 per bunion removal down to like $500 now...) but what he sees now is more procedures but at the lower unit price...
So overall "healthcare" spending in the US can go up while unit costs have gone way down...
I think govt should just provide the balances for medically necessary procedures....
rsp,
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