Essential Economics for Politicians

Wez said:
I'm just curious if you have a full understanding of currencies and complex banking. We know your opinion on fiat money and fractional reserve banking, can you show us both the advatages and disadvantages?
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I can't show you any advantages to fiat money and fractional reserve banking. Currency and banking are not that complex.
 
Bruddah IZ said:
I can't show you any advantages to fiat money and fractional reserve banking.
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Than your ideology outweighs your desire for a balanced discussion of pros and cons. I'm not buying what you are selling, despite agreeing with you on many things.
 
Wez said:
Than your ideology outweighs your desire for a balanced discussion of pros and cons.
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Interesting choice of word, "outweigh". Isn't the practice of fiat money and fractional reserve banking a literal outweighing of too much paper money and not enough gold to back it up? And it's not like the Fed or our government had a balanced discussion, with citizens, of the pros and cons in 1913 when both the Fed and income taxes started, or in 2008 and beyond when the Fed started QE. I would be happy to hear your disadvantages to a commodity system given our current financial situation. After all, you're the one that started the thread about it feeling like 2008 again. Why does it feel like that....again!!! Perhaps our current system is outweighed with too much cash again.
 
Bruddah IZ said:
Interesting choice of word, "outweigh". Isn't the practice of fiat money and fractional reserve banking a literal outweighing of too much paper money and not enough gold to back it up? And it's not like the Fed or our government had a balanced discussion, with citizens, of the pros and cons in 1913 when both the Fed and income taxes started, or in 2008 and beyond when the Fed started QE. I would be happy to hear your disadvantages to a commodity system given our current financial situation. After all, you're the one that started the thread about it feeling like 2008 again. Why does it feel like that....again!!! Perhaps our current system is outweighed with too much cash again.
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I've already discussed the 2008 thread and the reasoning, it didn't come to pass. Google "problems with a gold backed currency system". We're in uncharted territory in economics. Nobody has ever tried to manage a multi trillion dollar economic system. To sit here and do nothing but complain about it and put forth zero effort to have a balanced discussion is what you and many other Libertarians love to do. I can't take to heart your complaints when there is no acknowledgement of the fruit our system has produced.
 
Bruddah IZ said:
Interesting choice of word, "outweigh". Isn't the practice of fiat money and fractional reserve banking a literal outweighing of too much paper money and not enough gold to back it up? And it's not like the Fed or our government had a balanced discussion, with citizens, of the pros and cons in 1913 when both the Fed and income taxes started, or in 2008 and beyond when the Fed started QE. I would be happy to hear your disadvantages to a commodity system given our current financial situation. After all, you're the one that started the thread about it feeling like 2008 again. Why does it feel like that....again!!! Perhaps our current system is outweighed with too much cash again.
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Coocoo.
 
Wez said:
Google "problems with a gold backed currency system".
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Top Ten Reasons Why Fiat Currency Is Superior to Gold (or Silver) Money

Number 10: There Is Not Enough Gold (or Silver) In the World to Serve as Money
Let’s begin with the obvious. We know that central banks the world over have printed money at exponentially growing rates for years. There is now so much paper and electronic money floating around the world that gold (or silver) cannot possibly be expected to keep up. You can’t print gold, after all, you need to find it, dig it out of the ground, refine it, etc., a hugely expensive and time-consuming process which practically ensures a stable rather than exponentially growing supply of the stuff.

Of course, we know that an exponentially growing supply of money is a good thing. How else can an economy hope to grow, especially one bearing in an exponentially rising debt burden! We need all that new money to pay all that new interest, don’t we? And don’t forget, most things keep getting more expensive, like food and fuel. Don’t we need more money to pay for all that too? What about government entitlements that keep growing in size? If we didn’t have a constant flow of new money, how on earth would we pay for all of that? It is essential that we keep the printing presses rolling.
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Are you okay with this explanation?
 
Number 9: Gold and Silver are Old-Fashioned, Cumbersome Money
Here’s another obvious one for you: Gold is HEAVY! Who wants to carry it around? It might be nice and shiny, but hey, it really belongs around your neck.

The more you think about it, in an age of electronic, plastic or internet money, the whole concept of coinage begins to seem a bit anachronistic. Who even uses small denomination coins anymore, except as household poker betting tokens? I suppose larger coins are still of some use, but let’s face it folks, even those are almost worthless anymore. Coinage is just so passé.

Sure, coins used to have some value. When I was young and I watched Little House on the Prairie and The Waltons I was amazed that at the general stores or other retail establishments a penny actually bought a range of items and with a few nickels and dimes you could purchase much of what was on offer!

But why bother with coins today? I use plastic or electronic money for almost everything. Sure, that money still references dollars, or euros, or sterling, or yen balances of a bank account. But hey, it would be just so barbaric to reference a gold or silver account instead, wouldn’t it? As if banks even hold enough cash on hand for large withdrawals anymore, much less gold or silver. Oh and an ounce of gold, a whopping $1,700 is just way too expensive for most commerce. So not only is there not enough gold in the world as per Number 10 above; what gold there is, is too expensive to serve as a useful money! Oh I suppose we could use fractions of ounces of gold instead of full ounces, but most people struggle with fractions, including me. Silver might be more useful, but at over $30/oz, it wouldn’t really work for making change now, would it?
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I can't believe this link made page 1 on the google search.
 
Number 8: Gold Restrains Growth
OK, this reason is a little bit wonkish, but if you’ll bear with me I’ll explain why gold-backed money would put the brakes on the healthy growth the world has been experiencing all through this prosperous modern period of an exponentially rising money supply and might even send us back to the poor house. We already touched on this in Number 10 but let’s go off on a tangent here. You see, back when gold was money, people were poorer. Way poorer. And economic growth was often much weaker.

I mean, before the industrial revolution, we didn’t even have machines to do basic work like farming, so people had to have loads of children just to get basic work done, resulting in a cycle of poverty. Sure, a handful of landed aristocrats held most of the wealth, and they did just fine, but really, do we want to go back to that sort of wealth disparity?

Oh and as for the industrial revolution, it was such a fluke. Sure it led to the most rapid economic growth in history in most of Europe, North America and Japan, but it would probably have been way more rapid had money growth been exponential instead of stable at the time. That said, inflation didn’t actually work out so well in France, where exponential money growth destroyed much of the economy in the late 18th and early 19th centuries. But hey, how else to finance that Revolution of theirs?

The American Revolution was also hugely inflationary, you know, those worthless continentals and all. But wasn’t it a huge overreaction for the US federal government to choose silver coinage as the inaugural US federal money? For that matter, had Napoleon just kept on inflating, rather than paying his soldiers in silver coin, he might have won the wars against those Brits and others who refused to inflate their currencies. And why did the Americans experiment with gold- and silver-backed money for so long? Imagine how much faster they would have industrialized had they just kept on printing continentals instead! Ah well, hindsight is 20/20.

Perhaps technology wouldn’t exactly regress if we went back to gold- or silver-backed money but you never know. Some people talk like that. And certainly most of the innovations of modern times would never have taken place had we been on gold-backed money. Think about all those green technologies that promise to solve our energy problems someday. Things were just fine before we started consuming all the carbon stuff and now we’ve got to get back on track. Only exponentially growing money can fund these programs that aren’t yet profitable. Imagine what would happen if money were backed by gold? We would be dependent on energy and other technologies that actually made fundamental economic sense. No, that would be a huge mistake.
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Is restraining growth bad?
 
Number 7: The Gold Standard Caused the Great Depression
This is related to the above but hugely important in its own right so I’m treating it as a separate critique of gold- or silver-backed money.

Milton Friedman is famous in part for blaming the Federal Reserve for causing the Great Depression. This runs contrary to what many believe, however, that the gold standard itself caused the Depression. Of course, they are right. We all know that WWI was hugely inflationary as Britain, Germany and other belligerents went off the gold standard in order to finance the war by printing money.

Following years of printing, in Europe prices for just about everything skyrocketed. It didn’t help, of course, that much industrial capacity was destroyed by the war, limiting supply. In Russia, most of the capital stock was seized by the government as part of their anti-capitalist revolution. So there was loads more money chasing far fewer goods in Europe, which is one way Milton Friedman and other so-called ‘monetarists’ like to explain inflation.

In some places like Weimar Germany, interwar Austria and Hungary, there was outright hyperinflation and currency collapse in the 1920s. Impoverished, these countries ended up with highly competitive labor costs, similar to various poor emerging markets today. Britain, however, had gone back on the gold standard in 1925 and thus had the strongest currency in Europe. This made British labor highly noncompetitive, resulting in persistently high unemployment and massive strikes, some turning violent.

In 1927, the Bank of England kindly requested that the US Federal Reserve stimulate demand for UK exports by expanding the US money supply. The Fed obliged. This contributed to a huge stock market bubble in the US which crashed under its own weight in late 1929, while Britain’s remained mired in a depression unknown to most Americans today.

Finally, in 1931, Britain decided to devalue its currency. The US was already slipping into depression at the time and suddenly found it had by far the least competitive wages in the world. It was now in a situation comparable to Britain in 1927, yet without another country to which it could turn for help.

The Federal Reserve had already accumulated a huge amount of gold from Britain but, as Milton Friedman observed, didn’t do as it was supposed to do and expand the domestic money supply in line with the swelling gold reserves. Why? No one knows. Perhaps the Fed was spooked by the stock market boom and bust that it had created in 1927-29 and didn’t want to risk a repeat. But whereas the 1927 monetary expansion was not linked to an inflow of gold reserves, in 1930-31 the Fed could have hugely expanded the money supply in line with growing gold reserves, thereby preventing many bank failures.

To make matters worse, President Hoover was advised by some prominent, proto-Keynesian economists of the day that a drop in aggregate demand had to be avoided at all costs and that the best way to accomplish this was to support wages, notwithstanding rising unemployment. As a result, US wages were by far the highest in the world by 1931, labor was noncompetitive, and unemployment was thus far higher than it would otherwise have been, had Hoover left things alone.

So, it is blindingly obvious that the gold standard was the cause of the Great Depression. Not WWI. Not the massive inflation to pay for WWI. Not the widespread destruction of European industry. Not the Russian Revolution and industrial collapse. Not the 1920s hyperinflations and revolutions in central Europe. Not the Fed’s stock market bubble of 1927-29. Not the Fed’s failure to allow the money supply to expand naturally with gold reserves in 1930-31. Not the artificial wage supports introduced by President Hoover and continued by FDR. No, the gold standard caused the Great Depression. Really. It did.
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Funny how this section is titled The Gold Standard Caused the Great Depression while it clearly documents the expansion of the money supply for the benefit of the UK who subsequently devalued their currency
 
Hüsker Dü said:
It seems you are desperately attempting to convince someone that you know what you are talking about, is that someone you?
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Speaking of desperation.

Number 6: Rules Can Be Broken
Returning to the obvious, this reason is so simple a child can understand it. Rules are nice on paper but we all know they can be broken. Just because a country is on a gold standard doesn’t mean it can’t just devalue. Britain and Germany did so in 1914 and inflated like crazy to pay for WWI as explained above. The US devalued the dollar some 60% versus gold in 1934 and left the gold standard entirely in 1971.

Let’s face it, if rules can be broken, what’s the point having them in the first place? The claim that gold-backed money is stable and prevents runaway inflation is just hogwash. Whenever governments choose, they can ditch gold-backed money, devalue and create as much inflation as they desire. They can even hyperinflate if they like. What’s to stop them? They set the rules. Gold advocates are just so naïve!
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Biting off a bit more then they can chew here
 
Number 5: Gold-Backed Money Favours the US versus the Rest of the World

Now for those of us residing outside the USofA, we’re sometimes concerned that the US has the largest gold reserves in the world. If the world went back on a gold standard, then the US would be even more powerful than it already is. It would throw its weight around even more, use that gold to pay for an even larger military and open up more bases abroad, including where they aren’t even wanted, like in Bulgaria. The US might even start more wars, as if it hasn’t started enough already, financed as they are with the Fed’s printing press.

Now history does suggest that war and inflation go hand in hand. Certainly this was the case in the 20th century. The French Revolution and Napoleonic Wars were hugely inflationary in continental Europe. The 30 years’ war was hugely inflationary too, ruining the previously prosperous Habsburg economies. Then there was the American Revolution, financed with those paper continentals. But today things are different. Really, they are. If the world were on a gold standard, there would be more wars, notwithstanding that these would be far more difficult to finance.

On another note, the US economy imports far more than it exports. Wonks call this a ‘trade-deficit’. Really wonkish types have a more expanded term called a ‘current-account deficit’. If the world went back onto a gold standard, then the US would need to use its gold reserves to pay for net imports, instead of just printing more dollars. And at current gold prices, the US would not even be able to cover one year of its current-account deficit!

Imagine, the US would be unable to keep importing more than it exported! It would be forced to become a more competitive economy and it would need to save and produce more and consume less! The horror! We all know that the US consumer is the only thing keeping the global economy afloat. To whom would China or others export if not to the US consumer? What a ridiculous idea!

Well, it’s just not going to happen. Keynesians like Paul Krugman know that there is just no other way to grow economies than with exponential money growth to finance consumption. Saving is the quick road to the poor house. Borrowing your way to prosperity has worked so well in the past, why would anyone possibly want to stop now? After all, savings is the four-letter word of Keynesian economics. Let’s just not go there.
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Coocoo
 
Bruddah IZ said:
Yes. Would you like to hear why for each and then provide some balance or are you in full agreement with each?
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I'm not arguing one way or another, I don't pretend to know what is the best way to run our multi-trillion dollar economy. I'm assuming the Gold standard was dropped for good reason...
 
Wez said:
I'm not arguing one way or another, I don't pretend to know what is the best way to run our multi-trillion dollar economy. I'm assuming the Gold standard was dropped for good reason...
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Not enough gold, and gold too good an industrial process element to be kept locked in a vault.
 
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