Topic: Economics
Dump the Dollar ? The reasons why dumping the dollar will not happen.by James Luko
(centrist)
Friday, October 9, 2009
The "dump the dollar" as a reserve currency campaign continues to grow legs in the media, but they [the media] are doing a terrible job of explaining some fundamentals about such an idea.
First, one of the biggest "facts" which makes the idea of dumping the dollar, at least as one of the "major" reserve currencies, highly unlikely, is that America is, by far, the largest exporter. America exported over 1.84 Trillion dollars (1) of goods and services which means, foreigners, NEEDED 1.84 Trillion DOLLARS to buy those goods and services from America. Therefore, as the "largest" seller of goods, requiring the "largest" amount of a particular currency- it is no doubt that, by dictat of market forces- the U.S. Currency would be the largest "reserve" and more importantly- "trading" currency in the world (also THE major settlement currency- which means the majority of international transactions are denominated in dollars no matter the currencies of the two trading partners).
Second, there is NOT a better "alternative" to the US dollar. Using another existing currency, like the Euro (currency of a trading bloc) the Yen or Sterling, offers no better guarantees of avoiding the pitfalls that the American currency finds itself in. And, those countries are suffering most of the same negative trends found in America. Currencies like China's RMB cannot be a "reserve" currency replacement because its NOT fully convertible. China's currency is 100% political fiat- the value can be changed tomorrow regardless of objective market indicators or pressures and it lacks any independence. The dollar is fully convertible, reacts to market forces and conditions- as it should, the dollar's value reflects the American economy, and the dollars administration (by the Federal Reserve) is "independent" of the American government. Let's not even consider the Russian "Ruble", or Brazilian "Real" being considered as a replacement reserve currency.
Creating a "supra-national" currency, like a new trading currency made up of a basket of values (money deposits, gold, international currencies, etc) will simply not happen. Such an artificial currency would pose enormous practical problems like the influence and inability to agree on its administration. And, we already have, basically, such a currency, its called the SDR (Special Drawing Rights) created by the IMF (International Monetary Fund in 1969) which has been actively around since the early 1980's specifically designed to move away from domination of the US dollar and allow countries to hold or use SDR's for trading or reserves, instead of the dollar. The SDR is a unit of value based on a basket of international currencies. The SDR has fallen flat, the very alternative the BRIC's are proposing already exists and there are few takers or users. In fact from 1981 until today, only 21.4 Billion SDR's have been created (equivalent value in USD is 31.9 Billion) which is not even one days worth of international trading (goods+forex). The idea of an international reserve or trading currency is a non-starter, proven by the complete failure and non-use of the SDR, full stop.
Third, the country making the most noise about the American currency, China (the author currently lives in Beijing China), has an alternate reason why it keeps such large reserves of US dollars. It's simply that China "holds" the US dollar back from re-entering the market place to prevent buying of the RMB, lest it put upward pressures on China to re-value the RMB. The RMB is currently at 6.8 RMB to the dollar, were it to rise in value to 3.5 to the dollar, for example, it would double the cost of Chinese exports- or in other words, possibly cut in half the amount that China exports to the US. Chinese exports are a much larger percentage of their GNP and overall trade volume than are US exports to China a part of the American economy (which means the issue is a lot more important to the Chinese than it is to us). Therefore, it's far more important for China to "keep back" all the dollars it earns from exporting to America, in order to keep the value of the dollar high- if China were NOT to keep those dollars- and instead sell them back on the market- it would put enormous downward pressure on the dollar- symmetrically putting upward pressure on the RMB. This is the PRACTICAL reason why China is certainly making "noise" about the Federal Reserve policies, but its more of a "rant" rather than any sort of a serious warning that China will "dump" dollars. China is NOT doing America any favors when buying US treasury bonds, they are simply mopping up the dollar liquidity THEY hold from all the goods they sell to America, and buying treasuries keeps the RMB undervalued- which is essential to keep low quality Chinese goods "competitive."
In sum, when you're selling 1.84 Trillion dollars of goods and services, there is no way to avoid having a handful of U.S. Dollars, and in that case, you can dump them, which would push up the value of your currency and weaken the dollar (which is not good for all the investments you have in America or holding T-bills) - or, you hold them- whether as reserves or treasury bonds. This remains the economic reality of 2009 and for the above reasons, will not change in the short term future.
Ignoring all the political intrigue and bravado of countries which have insignificant economies, if you sell the most goods in the world, your currency is the most needed, its that simple and there is no way around it. When the British Empire was in decline, the British economy did not contract, it simply became irrelevant as it was in decline- "relative" to other economies rapidly outpacing the UK. Therefore, as Britain's exports became a smaller percentage of world trade, obviously, people didn't need Sterling, therefore, although its value remained high- it was phased out as THE major reserve currency and replaced by the dollar. But, what is important to know is that event occurred naturally- by market forces- not by decree by a bunch of second rate semi-developed countries which ranted about "their" irrelevance in the world economy. And so it may be, in the distant future, that as the US economy and exports become "less" dominant in relation to others, its value and importance as a reserve currency may decline. However, the U.S. Still represents 23% of the entire world economy, only 2% less than it held since WWII. Therefore, reality shows that there is little real decline in America's world economic market share, and therefore, the dollar will and continues to reign supreme no matter what the BRIC countries (Brazil, Russia, India, China) rant and rave about. One should also note that the rich and influential people of those BRIC countries continue to keep the majority of their personal assets in dollars and gold, not their own currency- that alone tells you what the real bottom line is.
The point of this article is to illustrate the reasons why the media hype and BRIC rants about replacing the dollar is pure fantasy, and to supplement the poor job the media is doing of pointing out why the ideas of replacing the dollar is not realistic, plausible, doable, or about to happen in the least.
Endnote:
(1) 4th Quarter Estimate 2008 of the US International Trade Administration US Govt.
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Posted By: Walt Thiessen
Date: 2009-10-09 13:05:57
So you favor the continuation of legal but fraudulent practices, which is what comes with every fiat currency in the world.
As an alternative, why not consider allowing the private sector to create its own money supply (currently illegal under U.S. law) to compete with the official one?
I think Walt is too bought into an ideological perspective to appreciate this article's predictive value.
I believe you have created an accurate picture of how and why the dollar will be debased but not replaced near term.
The private sector already creates its own money supply, or alternate mediums of exchange. Currency is not the only form of money, and the two should not be confused as solely one and the same.
Walt, My article does not endorse the dollar at all, it merely explains why media stories about the "noise" of dumping the dollar are incomplete. The dollar, for reasons I point out in the article, for the short- to medium term, will undoubtably remain the global reserve currency. I agree with Ben's statement that the private sector already has alternative mediums of exchange so I do not see the "role" of a dual currency or even replacement of our currency. I believe that there can be "major" reforms of our currency, or the ideas of returning to the gold standard or based on a basket of values (gold, precious metals, international currences, etc) but I would not include a private sector currency replacing or existing alongside the dollar as a viable option. In this case it's of course, not just the government's role in "printing" money but also of the policies of the Federal Reserve as a second actor in this play.
Posted By: Walt Thiessen
Date: 2009-10-10 05:45:04
What alternative mediums of exchange are you and Bernanke talking about? When I go to the store to buy something, I have one currency option: the dollar. I have no other. When I want to save what little money I can save after Fed-driven pricing and government-driven taxes, I have no hard currency I can save it in. Sure, I can buy gold and silver, but they're not currencies. I can't even use a euro or a yen (not that I'd want to) as an alternative. The notion that people like you and me in the private sector have alternative currencies available to us is ludicrous. Perhaps multi-nationals have such alternatives (because of their size and scope), but not the rest of us.
Even a gold-standard is a bad idea, because the problem isn't private sector currency. The problem is public sector currency. Whenever the government controls a currency using monopoly powers, that's when the problems arise. They don't arise when there are true competing currencies.
That's why the secret to financial reform isn't to create some new government agency or to replace paper money with a gold standard where government can undermine its own standard (like it did 75-100 years ago) by tying paper to gold and thereby driving gold into hiding. That's where the basis of legalized fraud begins. Combine it with the fact that banks are still inexplicably allowed to lend money that doesn't belong to them thereby generating more money (via that money redeposited) to be loaned some more. Add in the fact that they lend it out long-term using funds that are promised to depositors short-term. Then, for fun, make the currency backed by nothing but broken promises and lies, as ALWAYS happens when the government grants monopoly status to ANY particular kind of money, and the results must always be disastrous in the long run.
That's the lesson we should be learning from the financial crisis.
Perhaps my answer wasn't adequate for you because I'm not really sure what the complaint is about our currency is ? I think the US dollar is a great currency, I think the Federal Reserve is a great institution - its both public AND private- the regional federal reserve banks ARE private banks- not government, and any monetary controlling agency would have to deal with dozens of concurrent factors which affect our complex financial system. Perhaps, if you made clear what the problems of our currency is, rather than just saying "its fraudulent" and "the problem is public sector currency" - what is that "problem" ? I think the "currency" itself is irrelevant if its NOT gold, since any other medium of exchange is going to be controlled by someone- if its a private sector currency I would question its ability to be responsible to the public good as a whole- therefore, I think there is NO question that it MUST be a public or semi-public institution as the Federal Reserve is today. In addition, we have one of the most independent systems of currency in the world, which is responsive to our financial system as a whole as well as the needs of banks and government stability. I think the structure of our currency and Federal Reserve have little culpability for current financial crisis, but rather, the poor oversight being done by the Congressional banking committees. We had and have the proper rules to prevent the crisis we are experiencing- they were overlooked and not applied by the Congressional banking oversight committees. So, I humbly ask that you explain "what" is the problem of our currency- or more importantly- the Federal Reserve ? And, how would some other - private institution possibly do any better in dealing with the complexity and "independence" of market conditions, which are IMPOSSIBLE to predict in full- otherwise, we would be able to pick stocks perfectly if any of us could possibly predict the economy. Why can't we predict the economy- because its incredibly complex. Therefore, I don't see where a "private" sector currency- would have "any" affect in our complex economy.
In terms of alternate "mediums of exchange" I don't think I or even Ben Samuel were speaking of dollars that you use at the corner store, we're talking about alternative financial instruments which are used in the economy such as stocks, derivatives, bonds, 1031 exchanges, and yes- holding of forex. This is on a macro-level and not refering to physical currency on hand- like M1 which is anyway- the smallest amount of value in our economy- I mean- you realize- by far- the dollars in your hand- is a tiny portion of our financial system, therefore, other mediums of exchange- M2 and M3 are much larger than the paper currency in hand for which you are describing. The economy as a whole 93% of it, does not run on dollars in hand, it runs on paper--- stocks, bonds and MAINLY valuations of assets (notes, derivatives, long term demand deposits and debt). (you do realize that the US dollar- our "currency" is used only by 7% of our ecnomic activity). So, I think this makes the ENTIRE discussion of "private" sector currency- almost completely irrelevant. Paper currency in hand represents about 7% of our economy.
But in all sincerity, I would like to address your comments in earnest and am just trying to understand "what" the problems are about our currency and how and who would run a "private" sector currency. As I mentioned already, the Federal Reserve is an independent unit of our government and the Regional Federal Reserve banks are ALREADY private sector ... so ?? Where's the problem ?
I think the problem with the Fed is their continuously robbing my savings account via inflation. The object of money is to be a convenient storage of wealth. That hasn't been the case for a hundred years, has it?
I think "money" has not been a "convenient" storage of wealth for even "more than" a hundred years. As I commented previously, I think there is no way around at least moderate inflation, even with a 100% gold standard/backed currency- you would have moderate inflation due to other factors in the economy.
Inflation is something we must control and keep at a moderate level, but to eliminate it would be much more detrimental than controlling it at a low rate. For example, holding a "fixed" currency (whose value would have to be regularly adjusted downward to compensate for other causes of inflation) and "fixed" prices- Zero effective inflation- has "always" led to mass shortages of goods as well as the creation of "massive" black markets. Zero inflation could only be achieved with a downward adjusted fixed currency and wage and price controls- leading- to continous disaster of shortages and black markets (many historical examples- Soviet Union and even Cuba today.)
What you do with moderate inflation, and since the Carter years the Fed has done a wonderful job in keeping inflation moderate, is hedge against inflation- that is why your checking and savings accounts offer you positive interest rates, so, in the last 10 years- the money you keep in your checking and savings accounts lost little to no value in reality. So, Daddysteve- my word to you is Hedge ! You can also hedge against inflation with CD accounts or other investment vehicles, even bonds if you wish to be safe, which will prevent the "robbing" of your savings account.
Remember, as I said above, "debasement" of currency has happened since even before Roman times, so I think the inflation discussion is a bit silly- it's here to stay because even if you could- in theory- calibrate growth in money supply to "perfectly" coincide with economic growth, there are still other factors like velocity for example, which would still lead to moderate rates of inflation, or shortage of good, or shortage of labor, etc. so we can't get rid of it, the Fed has been doing the NEXT best thing, keeping it moderately low, under 5%.
My second answer is that "moderate" levels of inflation is desirable for many reasons, first, it helps equilibrium in labor markets, second, it helps debt relief which a lot of people need right now, third- its an essential policy tool for the fed to prevent "deflation" or when interest rates are already at zero- you can inflate money supply to stimulate the economy, and lastly there is the important Tobin Effect- wherein moderate inflation greatly encourages "capital investment projects" - real jobs- bricks and mortar creating real growth and jobs, as investors will shy away from pure monetary investments which are being eroded by inflation.
So, Daddysteve, open a CD, open a money market checking account, don't hold cash, and you'll be able to preserve most of the value of your dollar.
When you mention total export value, remember it is 1.84 Trillion USD in equivalent value. Note many of our exporters defer the income of their offshore subsidiaries for tax purposes. The value that has been exported isn't necessarily paid for with US dollars, and only must be accounted for in dollars when the income is repatriated. Even then, only enough USD needs to be bought to cover the income tax liability. What are federal reserve notes if not federal tax anticipation coupons?
Further you skip over the fact just because foreigners accept dollars to cover our trade deficit, doesn't mean they will continue to recycle them by buying new issuance from our Treasury. I think that that is the whole meat of the "dump the dollar" story-- our federal government budgets to spend far more than the tax base supplies or that our foreign trade partners will continue to underwrite. They'll buy assets that matter to them, as the domestic holders are plowed under by lack of income, oppressive regulation, and uncompetitive taxation.
This is a very serious situation. Authors have compared our economic position to Japan post '89, America post '29, America circa the 70's, but these are all false analogies that break down when scrutinizing more than a couple of dimensions to our problem.
The dimension most relevant to your article pertains to the corrupted governance of the Federal Reserve wherein the largest member banks of the Federal Reserve Bank of New York receive preferential treatment. We have a national banking system in a near state of compleat insolvency and certain member banks are extended existential largesse on the supposition that they are too 'systemically important' to allow to go bankrupt. Hogwash.
The next dimension relevant to your article presumes that the Federal Reserve System acts transparently in the marketplace when nothing could be further from the truth. How much gold are they leasing out, and to whom? What agreements do they hold with other central banks on coordinating excursions into the forex markets? Who actually gets to borrow at 0.25% or less, and for how long, how much?
Finally, the Federal Reserve System is responsible for enforcing a ridiculous number of banking regulations, from Reg A to Reg EE (see list here http://www.federalreserve.gov/bankinforeg/reglisting.htm) yet somehow some of their biggest member banks had leveraged their capital 30+ times right under the nose of legions of bureaucrats. Not to heap all of the blame on the FRS, the Office of the Comptroller of the Currency was also asleep, as was FDIC. Point being that once people wise up to a street-side three card monte game, they're not likely to trust the same perps again.
So, yes, the federal reserve note will continue to be important in trade, but the perception of the dollar as a relatively constant store of value has been shattered. After a decade of 1% insanity, as more middle class savers in the US become desperate for yield, they'll discover they can open up foreign accounts and hold their balances in any currency (or combination) they desire. What happens when the serfs of the system learn they can earn 6% in India and watch the underlying currency appreciate vis a vis the dollar and commence to drain their deposits from our fractional reserve banking system? Our yield curve is artificial to the benefit of the powers that be and drives real capital *out* of our system when we are in dire need of quite the opposite.
Smallbankscion, thanks for your comment, always good food for thought.
I would respond by saying,
Regarding your first comment, about the 1.84 Trillion USD, sure, that goes for any of the exporters, and their currency too, that wasn't my point, the point is with being the largest exporter, no matter the final detailed amount, its the large amount required- dollars that is, for trade, and no one, can ignore the US dollar just because they don't like America or our levels of debt (which again, remember our debt scare scenario is comparing debt levels to our GNP level , but let's face it, thats amateur economcis right- you compare debt level to your asset level to get your net asset level- our asset level before the current crisis was about 140 Trillion- now its 100-120 Trillion- so really- our debt is nowhere near the disaster purported to be and commented on Nolan Chart- it is if you use amateur economics and compare debt levels to our GNP- but thats not how economists or even accounts analyze stability of debt- only journalists selling headlines use that method).
In addition, as the worlds largest importer- or- the biggest single customer to many nations, they can't ignore if their biggest buyer- us, wants to pay in dollars, they are going to accept it (China, Middle East, et).
So that's the point right, you can't ignore the currency of the economy which represents 23% of the world's economy and which by itself is larger than, China, Japan, Germany, France, UK, Canada, Russia COMBINED !
We are NOT in a state of decline relative to the British Empires' decline in the post 1900 era, as of yet, there is no comparison with the US and the British post-Victorian slide to irrelevance.
Foreigners will continue to buy T-bills when dollar liquidity remains the highest in the world, and it is, that's what I said, and I said, if dollar liquidity shrinks- than so too will the influence of the dollar- right. Foreign trade partners “underwrite” our debt because we are the best show in town, do you think they are avoiding better investments just to help us out ? We have no problem to cover our treasury sales with domestic funding- valued at over 100 Trillion dollars, even with the current economic crisis, if rates are high enough. Domestic investment flocks to better rates of return in America than T-bills offer, but if foreigners reduced their purchases of our debt, our interest rate would rise until domestic capital turned back to T-bills, we have NO shortage of funds available in America to cover our debts. How would you think that economies like China or Japan with only 3 Trillion collectively in dollar reserves could compete with America's 14 Trillion dollar economy and over 100 Trillion in assets and derivatives in providing funding ?? That's just easy math that my seven year old can do.
Supposition that certain banks are too important to fall ? YES, but that is correct, Exactly, proven by the fact that when we let Lehman Brothers fall it triggered a financial squeeze ! So, I don't get it, its not supposition- its what happened ! I also don't see where there is “corrupted” governance of the Fed, I mean, so the big banks get preferential treatment- well, that's called life, the big guys get a better deal, of course.
I don't "presume" that the Fed system acts transparently, I know there are many actions which are not fully transparent, especially the Fed's FOMC, but that hasn't hampered the financial stability the Feds have given us, so I don't care about that. My bank is solvent, and throughout the crisis, the dollar /China RMB rate barely moved- so- what's the big deal, my savings are intact, I pay the same amount for Chinese goods, McDonalds didn't raise prices, I mean- the Fed, even with this enormous crisis is covering the faults of the Congressional banking committees, so I think the Fed did its job.
I have had this question for awhile and you alluded to it in your article. why the chinese buy american securities etc., at extremely low interest rates when the chinese rates are much higher?
I was told once that chinese debt just wasn't available, as they service their debt much better than ours. you mentioned they "hold" dollars to keep their exports at desirable prices. who is it that holds these dollars? is it a government mandate?
what i am getting at, is it would seem they would be collecting a lot of foreign currency from their exports, yet they just pour it back into dollars. what is stopping them from doing what we did during the fifties and sixties, plowing it right back into their own country?
Hi Gene, thanks for your comment,yes, good question.
There are few reasons why- and what they are doing with all that cash: first, of course, all that cash is hoarded at the expense of people here not having health care, govt pensions (limited) and any infrastructure in the "other" China- comprised of the abject poverty that 600-800 million chinese live in who are outside the large cities and other economic zones. So, a price is being paid by the majority of "have nots" here. The China you see on CNN, Time Magazine, Yahoo- is the China I live in, the cities, where about 300-400 million people now live. The other China is one that you rarely see in the press, and you need to drive around China yourself to see it.
second, if you think we had/have toxic debt during this meltdown, it makes ourselves compared to China look like a gold swiss bank ! The non-performing loans and bad debt in China is so large that even the govt admits- due to lack of transparency and bankers covering up their dirty deeds- that they (the govt) don't really know just how bad it is, but bankers in Beijing tell me that it could be anywhere from 1.0 Trillion USD to 3 Trillion USD in bad debt and nonperforming notes- so, another reason that they keep such large reserves is to, and wisely so, prepare for a coming banking collapse when and if liquidity slows down or dries up. So, they can't really put alot of that back into the economy- such as infrastructure- they need that large nest egg to cover their own toxic debt.
However, I would note, that at least in the cities, first and second tier, they are indeed putting billions into infrastructure, i mean the big cities here are beautiful, clean, new roads, city services- and for most of the last 10 years they've had budget surpluses (thats not really true according to western accounting methods- but according to their methods) that have allowed them to re-invest in massive infrastructure projects. But as we've discussed, for them to plow those export dollars domestically would super-heat their real estate and stock markets- as well as put enormous pressure to re-value the RMB, so, that's why they can't chose that option.
Yes, the government "holds" those extra trade dollars and decides where to place it, and of course, their proceedings are so confidential, it makes the US Federal Reserve look like a Sunday afternoon open house ! I mean, this is one of the problems economists have in China, no one really knows the true numbers and bad news is covered up and buried, and financial mistakes are just paid for quietly by the government, thus, from the outside- it's like the shiny office buildings of ENRON, looks great, smells good, seems all in order- and enormous profits, but,.... on the inside are lurking some pretty scary monsters.
Posted By: Walt Thiessen
Date: 2009-10-12 07:29:07
So, getting back to your comment that you think the dollar is wonderful, I take it, then, that you don't think that the dollar and its management by the Federal Reserve has played any role in the current financial crisis?
Also, you mentioned that inflation would exist under a 100% gold currency. How would that happen?
Did I say "wonderful" ? :) about the dollar, its' done it's job overall, and sure, some bad Fed management can cause problems, no denying that. The problem with 100% gold currency- or- commodity money- is that once your economy grows through trade or population, and you reach physical quantity limits of gold, you're going to have to re-adjust gold's price- so you get inflation there, and also, with fixed price gold- in today's world, you create a black market in gold, etc. So, that's how you would inevitably have inflation. In principal im not against gold, wish it could work. But forcing prices down to adjust to a "constant" money supply doesn't work when your economy grows. so, with a fiat currency, you can "try" to have the right amount of currency according to the size of your economy. I mean, gold didn't prevent massive panics and 8 depressions during our 'guilded" years, so, I wouldn't want to go through that.
I don't think the dollar per se or it being a fiat currency has NO role in the current financial crisis,- but its' not significant to the cause- certainly bad oversight from the Fed and even Greenspan admitted to reading things wrong, was coupled with whom I blame much more- and more directly responsible- the banking oversight committees in congress who let banks loan to people who would not otherwise qualify, and the spread of low-doc and no-doc loans which fed the real estate bubble. that's what i think and at that time, during 2000 to 2005 I was in the middle of all that bad speculation, so, I was myself aghast at how the banks were throwing money at speculators in real estate as myself. It was "weird" when I had to say NO to my bank- usually its the other way around when it comes to borrowing. So, yes, bad management played a big role, but, I think its not systemic or structural problem, its about following the established rules- which , if they were followed- then, the structure and system of the Federal reserve and dollar was not a cause.
Mr. Luko has great faith in government and the FED. In fact the FED has too much power to manipulate the money supply and feed their friends and favored institutions. Corruption doesn't exist. Corporations, government and the fed conspire to hold power through regulating the money supply.
Do you not think this financial breakdown was foreseen, maybe planned, maybe still being played ?
J.F.Kennedy by Executive order in 1963 (EO 1110) issued silver certificates to compete with the federal reserve note, because he understood this dangerous process of money creation based on nothing. He lasted about 5 months. Coincidence I expect.
The fed is fighting transparency because they will not allow people to see where the money went.
A year from now will decide your faith in the fed and this endless supply of $$$$$. Good Luck.
Posted By: Walt Thiessen
Date: 2009-10-12 14:01:50
James, you wrote:
"The problem with 100% gold currency- or- commodity money- is that once your economy grows through trade or population, and you reach physical quantity limits of gold, you're going to have to re-adjust gold's price- so you get inflation there, and also, with fixed price gold- in today's world, you create a black market in gold, etc. "
Besides the fact that you wrote that run-on sentence so quickly that it's almost unintelligible, you also blithely ran through some assumptions in it that make no sense. Let's break it down into segments to see what meaning, if any, we can glean from it:
(1) "The problem with 100% gold currency- or- commodity money- is that once your economy grows through trade or population you reach physical quantity limits of gold...
So what? You say that as if it's a bad thing. Actually, physical quantity limits are good. They keep inflation from happening.
(2) "...you're going to have to re-adjust gold's price.- so you get inflation there,.."
Why does gold's price need to be adjusted? How does this cause inflation? And who do you see doing the adjusting (other than the market)? That's one of the more indecipherable parts of your comment.
(3) "...and also, with fixed price gold- in today's world, you create a black market in gold, etc. "
Who said anything about fixed price gold? I presume you refer to making gold $20.65/ounce like it used to be. As I said, I'm against a gold standard because it only allows governments to engage in legal-but-fraudulent behavior. The biggest mistake they made under the gold standard was forcing gold to be exchangeable for paper dollars at a certain price. If they'd allowed the price to float, the paper inflation would have showed up much more quickly, thereby dooming paper. It was only the forced price-fix that sustained paper and allowed the government (and the financial pundits) to claim that the gold standard's failure was gold's fault. In fact, it was the fault of the Fed and the government.
I really think you need to reexamine your assumptions.
The main problem with our currency is printing the supply of it chasing a false valuation of assets priced in it. Inevitably the supply overwhelms true exchange requirements and allows those that deal in exchanges of hard assets (not good will) to demand more of them.
I didn't find my statement ridiculous. Well, since 1981, the Feds have kept inflation below 5% year in year out, so, that's what the statement is predicated on. However, I know that many here on Nolan Chart point to a different set of parameters, so, if you use your own goal posts- any statement can be made to look ridiculous. I happen not to believe those other goal posts which tell of rampant real inflation and enormous losses in our purchasing power because it doesn't jive with reality. Since 1960 the American middle class have increased their lifestyles materially as well as living longer, healthier in bigger homes with more cars, etc. The official poverty rate went down from 20.3% in 1960 to 10.3% in 2005. It simply doesn't match the reality that (I know we now have “two” persons as the breadwinners instead of one as we did in the 1950's) the majority of the American middle class live better, longer, with many more things and that DOES jive the with Department of Labor Statistics which show clearly that since 1981 the Fed's have kept inflation below 5% which means- you haven't been losing much of your purchasing power.
Walt,
I shall endeavor to improve my writing style. It was not my intention to ruin your day with a run-on sentence, I apologize.
Walt, regarding #1, physical limits of money: yes, you're right- it limits or prevents inflation, the only problem is as your economy grows, and as the Austrians say, prices must “adjust” to those quantitative limits of currency in circulation. Do you know what that equals ? Deflation, which, don't we all agree, is much worse than some bouts of moderate inflation. Deflation 'destroys' productive capacity and takes out the incentives to produce and invest. It sucks the life blood out of your economy and is very difficult to correct. We can just take a look at Japan, since the early 1990's it's economy has barely moved in real terms. That country, since its deflationary downward death spiral, is barely ever in the headlines as it used to be. I mean, deflation has basically thrown Japan to the sidelines for the past 20 years. So, that is the much bigger problem of physical limits- or quantitative restraint on money supply. Pretty bad eh ?
#2: Well, right, if you are using physical gold coins as money- or commodity (representative money) you needn't change the price of gold- that is, if you don't mind the deflationary downward death spiral for your economy. As more money is needed, due to increased production and capacity- and let's say population, and you DON'T increase your money supply- how do you avoid deflation ? I mean, its a central tenet of the Austrian school, prices adjust (downward) to match the supply of money- which in this case would remain constant. So, five people have one dollar each, and lunch costs one dollar- everyone gets to eat lunch and the lunch producer is happy to get a constant profit without worrying about inflation eroding his profits, nor the consumers needing to work more to earn more to buy ongoing inflating lunch prices (or end up eating less). Now, after baby is born, you have six people, but only five dollars, so, since baby can't get a sixth dollar- cause- the money supply is “constant” to avoid inflation and erosion in your purchasing power, there is only one way baby is going to eat ! It means the lunch price must come down to approximately 83 cents (6/5) right ? Which is what ? DEFLATION. So, it means you must constantly seek more gold- until even the earth's physical supply runs out, OR, you change the value of the gold so you can create another dollar (inflation) represented by that same amount of gold. The deflation tells the lunch producer, the greater economic activity expands, the less money he's going to make per unit produced- so what does he do ? Gets out of the lunch business. We use fiat currency because it works- not because it's a conspiracy of control, the gold standards- simply don't work well and create more problems than does fiat currency. The simplest and most obvious answer is usually correct.
I mean, I'm not a supporter of inflation, the council on foreign relations, rockefeller, the bilderbergers, etc. However, one of the big problems, among many, that prevents the Austrian school from being the dominant theory used in application of our economic system, is that it's a great analytical application to view economics, as is marxism, but, does not provide practical usable alternatives that work in the “real world.” (was that a run-on sentence ?)
But I surely accept your invitation for me to reexamine my assumptions, I'm always eager to learn more and become enlightened.
Institutions produced structured investment vehicles (SIVs) priced on money loaned with an assumed return. The stated value of the SIV was false as the presumption of the return of the underlying principal and the continuation of interest on the principal failed. However, currency creation was accelerated to cover exchanges of these instruments at their assumed worth. It was mega amounts.
The underlying assets deflated, and those who benefited from the early transactions (the sellers of the SIVs) have converted to other assets. Voila, a new bubble in world stock markets, and a rush to hard assets for cover against the faith lost in the expanded currency creation of all nations.
Those who produce with little or no leverage hanging over their head, have the advantage of being able to produce at the rate that best returns against the demand for their goods. With no faith in monetary instruments, goods will draw the excess currency created to accomodate false valuation of prior assets. So now price inflation of tangible goods that can be traded or otherwise consumed, in competition with others, should soon commence.
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