Defend the Gold Standard

[Kevin_Kennedy]

For some reason, there are a lot of people out there who can't stand the gold standard. Maybe their hostility is in reaction to the large (and growing) number of gold bugs who think the worst day in history was August 15, 1971. But since I'm an economist, not a psychoanalyst, all I can really do is patiently explain how silly the antigold arguments are, rather than speculate on the motives of their authors. For today's article I will focus on a recent Bloomberg piece with the suggestive title, "Gold Standard Fans Yearn for Great Depression."

Defend the Gold Standard - Robert P. Murphy - Mises Institute

 

[sealybobo]

Good man Kevin! Good article and subject.

 

[GHook93]

For some reason, there are a lot of people out there who can't stand the gold standard. Maybe their hostility is in reaction to the large (and growing) number of gold bugs who think the worst day in history was August 15, 1971. But since I'm an economist, not a psychoanalyst, all I can really do is patiently explain how silly the antigold arguments are, rather than speculate on the motives of their authors. For today's article I will focus on a recent Bloomberg piece with the suggestive title, "Gold Standard Fans Yearn for Great Depression."

Defend the Gold Standard - Robert P. Murphy - Mises Institute

Good article, both the original the critique. I am not so sure about the gold standard. Having our monetary system based on the price of a precious metal scares me! If the price of gold was falling and hyper-inflation kicked in, we would be at the mercy of the price of gold and would have no method to turn it around. Yep the fiat system isn't perfect, just look at Zimbabwae or Mexico, but I prefer it over the gold standard!

 

[Kevin_Kennedy]

For some reason, there are a lot of people out there who can't stand the gold standard. Maybe their hostility is in reaction to the large (and growing) number of gold bugs who think the worst day in history was August 15, 1971. But since I'm an economist, not a psychoanalyst, all I can really do is patiently explain how silly the antigold arguments are, rather than speculate on the motives of their authors. For today's article I will focus on a recent Bloomberg piece with the suggestive title, "Gold Standard Fans Yearn for Great Depression."

Defend the Gold Standard - Robert P. Murphy - Mises Institute

Good article, both the original the critique. I am not so sure about the gold standard. Having our monetary system based on the price of a precious metal scares me! If the price of gold was falling and hyper-inflation kicked in, we would be at the mercy of the price of gold and would have no method to turn it around. Yep the fiat system isn't perfect, just look at Zimbabwae or Mexico, but I prefer it over the gold standard!

The gold standard is a deterrent to hyper-inflation, it's fiat currency that leads to hyper-inflation.

 

[GHook93]

The gold standard is a deterrent to hyper-inflation.

How so? If the price of gold changes drastically, since the price is directly effected by the law of supply and demand, then inflation or deflation occurs. If the pace is rapid so is inflation/deflation.

 

[johnrocks]

Prices and wages were stable until fiat currency came along, inflation with the gold standard has never happened.

 

[Kevin_Kennedy]

The gold standard is a deterrent to hyper-inflation.

How so? If the price of gold changes drastically, since the price is directly effected by the law of supply and demand, then inflation or deflation occurs. If the pace is rapid so is inflation/deflation.

Murphy mentions the fixed dollar/gold exchange rate in the article, which means that you wouldn't print any money unless you have the proper amount of gold to back it up. Inflation would occur as you increase your gold reserve, but it certainly wouldn't be anywhere near as rapid as simply printing paper dollars with no limit other than your imagination.

 

[editec]

I suppose it's theoretically possible to build a modern economy around the assumption that the value of money will have to fall while the value of gold (relative to money and what it will buy) is bound to rise.

But the transition from fiat money to gold-backed money might be rather shocking for those who are currently in debt though, don't you think?

After all the modern borrower assumed their debts (and the interest they are paying on those debts) based on assumptions regarding inflation.

And it's not just consumers who'd be screwed by this but most corporations, too since they actually borrow MORE money (at interest predicated on inflation) than consumers do.

What is the solution to that massive transition problem which would quite literally bankrupt MOST people and most corporations (as most people and most corporations have some debts even if it's ONLY mortgages and long term bonds)?

So somebody in, say a 30 year fixed mortgage, who is paying 6% interest could easily find themselves underwater on his mortgage when the prices of RE crashed in order to align with the gold standards, continuous DEflationary pressure on the specie.

Or some corporation, (say an electric company) issued bonds paying 3% only to suddenly discover that the rate is 11% higher than the rate of deflation.

Anyone have any solution to that kind of transitional problem?

That would be the inevitable outcome of returning to a gold standard, after all.

Or does none of that matter to those of you who believe that the gold standard is the only answer to fiat money's inflating effects?

Or am I the first person to point this out to youse guys?

 

[Kevin_Kennedy]

In a deflationary environment the value of money goes up, not down.

 

[johnrocks]

I suppose it's theoretically possible to build a modern economy around the assumption that the value of money will have to fall while the value of gold (relative to money and what it will buy) is bound to rise.

The transition from fiat money to gold-backed money might be rather shocking for those who are currently in debt though, don't you think?

After all the modern borrower assumed their debts (and the interest they are paying on those debts) based on assumptions regarding inflation.

What is the solution to that massive transition problem which would quite literally bankrupt MOST people (as most people have some debts even if it's ONLY mortgages)?

So somebody in, say a 30 year fixed mortgage, who is paying 6% interest could easily find themselves underwater on his mortgage when the prices of RE crashed in order to align with the gold standards, continuous DEflationary pressure on the specie.

Anyone have any solution to that problem?

It would be the inevitable outcome of returning to a gold standard, after all.

Or does none of that matter?

One of the reasons our "libertarian and Austrian Economics world" will never happen< I don't think, people can't be patient enough to suffer the short term problems associated with such a drastic change, we could have a slower transformation though, starting with competing currencies.

 

[mash107]

I suppose it's theoretically possible to build a modern economy around the assumption that the value of money will have to fall while the value of gold (relative to money and what it will buy) is bound to rise.

The transition from fiat money to gold-backed money might be rather shocking for those who are currently in debt though, don't you think?

After all the modern borrower assumed their debts (and the interest they are paying on those debts) based on assumptions regarding inflation.

What is the solution to that massive transition problem which would quite literally bankrupt MOST people (as most people have some debts even if it's ONLY mortgages)?

So somebody in, say a 30 year fixed mortgage, who is paying 6% interest could easily find themselves underwater on his mortgage when the prices of RE crashed in order to align with the gold standards, continuous DEflationary pressure on the specie.

Anyone have any solution to that problem?

It would be the inevitable outcome of returning to a gold standard, after all.

Or does none of that matter?

One of the reasons our "libertarian and Austrian Economics world" will never happen< I don't think, people can't be patient enough to suffer the short term problems associated with such a drastic change, we could have a slower transformation though, starting with competing currencies.

That's true enough... anything is better than a fascist state with complete and utter control over our financial lives. I'd rather have laissez-faire over money and have competing currencies than a gold standard, to be honest. A gold standard can still be manipulated by the State to go to war or to bailout their buddies-- to a lesser degree than what is going on today, granted. But competing currencies would allow the most honest to be most widely used, and the least honest (i.e. the U.S. dollar) to die out. Banks would be forced to not leverage up more than they own, and so, they would be financially solvent and a crisis like this won't ever repeat.

 

[Peejay]

Gold has intrinsic value. Any argument to the "price" of gold is of no merit. The "value" of gold does not rise and fall, the value of notes rises and falls against it's value. With a gold standard, a note has a value of measure. A note is always worth a particular measure of gold, as such, it's price does not rise and fall within it's own system of specie. This is the argument for the standard.

Competing currency would be the only semi - organized way to get back to a precious metal standard of gold and most likely silver, also. There would still be quite an upheaval. Valuation would be considerably tough for nearly everyone who is not a scholar, as the contemporary notions of money, price and value have become synonomous when they are actually very different things. Most Americans do not understand what value, as a measure, is. That's why so many idiots have agreed to pay a half million dollars for a pile of lumber, sheet rock and nails, whose value, against a measure like gold, was a concept they could not grasp. If they could, they never would have agreed.

 

[Paulie]

I suppose it's theoretically possible to build a modern economy around the assumption that the value of money will have to fall while the value of gold (relative to money and what it will buy) is bound to rise.

The transition from fiat money to gold-backed money might be rather shocking for those who are currently in debt though, don't you think?

After all the modern borrower assumed their debts (and the interest they are paying on those debts) based on assumptions regarding inflation.

What is the solution to that massive transition problem which would quite literally bankrupt MOST people (as most people have some debts even if it's ONLY mortgages)?

So somebody in, say a 30 year fixed mortgage, who is paying 6% interest could easily find themselves underwater on his mortgage when the prices of RE crashed in order to align with the gold standards, continuous DEflationary pressure on the specie.

Anyone have any solution to that problem?

It would be the inevitable outcome of returning to a gold standard, after all.

Or does none of that matter?

One of the reasons our "libertarian and Austrian Economics world" will never happen< I don't think, people can't be patient enough to suffer the short term problems associated with such a drastic change, we could have a slower transformation though, starting with competing currencies.

That's true enough... anything is better than a fascist state with complete and utter control over our financial lives. I'd rather have laissez-faire over money and have competing currencies than a gold standard, to be honest. A gold standard can still be manipulated by the State to go to war or to bailout their buddies-- to a lesser degree than what is going on today, granted. But competing currencies would allow the most honest to be most widely used, and the least honest (i.e. the U.S. dollar) to die out. Banks would be forced to not leverage up more than they own, and so, they would be financially solvent and a crisis like this won't ever repeat.

One only need look at how the government responded to Liberty Dollar to understand its position on competing currencies. Never going to happen. Liberty Dollar was a clear and present threat that was dealt with.

We'll be using USD until the bubble eventually bursts. After that, all bets are off.

 

[Peejay]

One of the reasons our "libertarian and Austrian Economics world" will never happen< I don't think, people can't be patient enough to suffer the short term problems associated with such a drastic change, we could have a slower transformation though, starting with competing currencies.

That's true enough... anything is better than a fascist state with complete and utter control over our financial lives. I'd rather have laissez-faire over money and have competing currencies than a gold standard, to be honest. A gold standard can still be manipulated by the State to go to war or to bailout their buddies-- to a lesser degree than what is going on today, granted. But competing currencies would allow the most honest to be most widely used, and the least honest (i.e. the U.S. dollar) to die out. Banks would be forced to not leverage up more than they own, and so, they would be financially solvent and a crisis like this won't ever repeat.

One only need look at how the government responded to Liberty Dollar to understand its position on competing currencies. Never going to happen. Liberty Dollar was a clear and present threat that was dealt with.

We'll be using USD until the bubble eventually bursts. After that, all bets are off.

Unfortunately, you're right, the government went after Liberty at the earliest signs of success. However, if you have silver proofs, not a damned thing they can do about it. You can still make a pretty sure bet with coinage of gold and silver.

 

[Paulie]

That's true enough... anything is better than a fascist state with complete and utter control over our financial lives. I'd rather have laissez-faire over money and have competing currencies than a gold standard, to be honest. A gold standard can still be manipulated by the State to go to war or to bailout their buddies-- to a lesser degree than what is going on today, granted. But competing currencies would allow the most honest to be most widely used, and the least honest (i.e. the U.S. dollar) to die out. Banks would be forced to not leverage up more than they own, and so, they would be financially solvent and a crisis like this won't ever repeat.

One only need look at how the government responded to Liberty Dollar to understand its position on competing currencies. Never going to happen. Liberty Dollar was a clear and present threat that was dealt with.

We'll be using USD until the bubble eventually bursts. After that, all bets are off.

Unfortunately, you're right, the government went after Liberty at the earliest signs of success. However, if you have silver proofs, not a damned thing they can do about it. You can still make a pretty sure bet with coinage of gold and silver.

You're preaching to the choir about precious metals, brotha. I swear by them. It was just nice to be able to trade with PM's and use a paper certificate. Who wants to carry around a bunch of expensive coins, you know? Regardless though, Liberty Dollar was made an example of. It goes to show how authoritarian this country really is. They made prior statements about the complete legality of Liberty Dollar, and then ended up raiding them anyway when it became apparent that it was actually creating real competition against the Dollar.

 

[DavidS]

And in other news, gold closed down $25 today to $891/ounce. Down over $100 from its high.

 

[Peejay]

And in other news, gold closed down $25 today to $891/ounce. Down over $100 from its high.

Oh yeah, gold will come back down. The surge of the past couple years will recede. Not that the intrinsic value of gold has changed, just the medium used to vakue it has. Turn that scenario around and we get a bit more stability.

Either way, paper will always be paper and gold will always be gold. If you have both, you can always wipe your ass and fill your teeth.

 

[Paulie]

What's your point? People are buying equities. Gold is being liquidated for the time being. Don't worry, it won't be staying down, what with the inflation we're eventually looking at.

 

[Peejay]

What's your point? People are buying equities. Gold is being liquidated for the time being. Don't worry, it won't be staying down, what with the inflation we're eventually looking at.

I don't think gold will maintain it's hold against the dollar. The $1K values were on account of nerves. I'd guess it will hold around $700. But that has nothing to do with gold and everything to do with paper.

 

[Paulie]

I don't disagree about 700, but I think it will stay somewhere around there for the next couple years until the inflation we're all but guaranteed to get starts showing up. It's anyone's guess after that, but I think we'll certainly see higher than 1k.