Response to Rebuttal to "Reserve-Based Currency vs. Precious Metals-Based Currency (Part 1)"
Perhaps we should call this "Part 2"? This is my response to Walt Thiessen's Rebuttal on my original column. by Bill Gee
(centrist)
Monday, February 14, 2011
Let the fun continue! Quotes by Walt are indented.
Reserve vs. "counterfeit"-based currency
Calling Reserve-based currency by another name, in Walt's case, "Counterfeit" and a host of other frightening terms is an example of what we in the academic world call "Loaded Terminology". That is, terminology designed to show bias and to instill bias in the reader. I could make a similar euphemism by calling precious metal-based currency "Dirt Money", or "Sand Dollars" or "why don't we just start trading in painted rocks?", but I will refrain from using such language and instead stick to the terminology that is generally accepted by economists.
The Value of Money
First, it is not the government which maintains (or fails to maintain) the value of money. The Federal Reserve is a private organization, owned by the commercial banks, with most profits going to the federal government. The President of the United States appoints all of its members, who serve for terms of varying lengths. Typically, members of the Fed's Board of Governors are ex-bankers, pro-counterfeiting economists, and pro-counterfeiting financial planners. Thus, the Fed has a quasi-public face, but it's true nature is that of a private agency whose role is to control the money supply. Still, I think it's fair to say that while the privately owned Fed is responsible for having failed to maintain the value of money, the U.S. government, which granted the Fed that authority in 1913, actually bears the lion's share of blame for that loss in value because Congress has steadfastly refused to take the power to debase the money supply away from the Fed.
No argument here except the use of Loaded Terminology. This is why much-needed reforms are necessary at the Fed. Bankers are the primary members of the organization because they are the ones with the right level of expertise in the field of banking. Would you appoint a school teacher to design a bridge?
Second, as noted above, the value of money is not maintained at all under the counterfeit money system. Even by the government's own measurements, since 1961 (50 years ago) the dollar lost 86.7% of its value, according to the consumer price index as measured by the Department of Labor's Bureau of Labor Statistics. Since the Fed was founded in 1913, the dollar lost (by BLS measures) 94.5% of its value. I personally think these figures understate the actual loss, which I would put at over 95% since 1961 and closer to 99% since 1913. However, either way, these are extremely serious losses. Bill might counter that while the dollar has indeed lost a tremendous amount of value, wages have also increased during this same period to offset those losses. It's hard to find a single table that measures wages during the same period. However, I think we can safely say that wages haven't kept up. A fair estimate would be that wages have risen at less than half the rate that the value of the dollar has fallen. Thus it is more than twice as expensive to keep food on the table, a roof over one's head, and clothes on one's back than it was 50 years ago. No matter how we look at it, counterfeit currency has clearly failed to retain its value.
I could say that wages have kept up but I would be wrong. For too long the banks have been pushing the rate of inflation beyond the Fed's control and they have done nothing to counter it. Meanwhile, wages have remained static. The lag of Real Wages was countered by the insane increases in real-estate values during the housing boom, but now that housing prices are still declining in most markets, it has become clear that wages have failed to keep up with the devaluation of the dollar. All of that inflated currency has gone into the pockets of the "too big to fail" banks as they take home obscene bonuses and continue to take insane risks with our money.
But again, that is not to say that we need to "throw the baby out with the bathwater". What we need is to break up the gigantic banks (Sherman anti-trust style) and make serious reforms to the Fed so that they can do the job they were supposed to do in the first place.
But even if we accept the idea that increased wages have to some degree offset the loss of the dollar's value, there can be no denying the fact that savings can never recover from the loss. Any money saved during that period is money lost. Bill might argue that the saver could always invest his savings at interest or in the stock market in order to offset some or all of the loss, but I counter that this suggestion ignores the principle of money. Money, by definition, is supposed to retain its value. Requiring people to be savvy investors (a ridiculous notion by itself, since most people have neither the time nor inclination to learn to become savvy investors) should not be a factor in that definition. Money should retain its value regardless of whether people invest.
There is no rule that money is supposed to retain its value. In fact, standard accounting practices use what are known as Present-Value (PV) tables in order to estimate how much a single dollar will lose its value over time when evaluating possible investments. Certified financial planners provide assistance to everyday consumers, and yes, with the help of one of these individuals, you can be a savvy investor and thus enable you to maintain the value of your savings. By following Suzie Ormond's advice of "pay yourself first" and use a financial planner to make the right investment decisions, you should have enough money put away for your kid's education or for your retirement.
Unemployment
First, I think we can all agree that the counterfeit money system has failed utterly to promote full employment. Between the Great Depression, the various recessions of the 20th century, the millennium recession, and now the Financial Crisis of 2008 and its aftermath, the goal of full employment continues to take hit after hit. In fact, has there been even a single year during this period when the country experienced full employment, even if only briefly?
No one said that "full employment" is the goal. Unemployment is a natural part of the business cycle and would be with us no matter what currency we choose to use. The three unemployment types are: Frictional, Structural, and Cyclical.
Frictional: These are people that are "in between" jobs. These include those who have taken time off work to earn an advance degree or have voluntarily quit a job that was not a good fit and are now looking for a new one.
Structural: These are the people that are unemployed due to shifts in the demand curve for their particular skill set or due to increased efficiencies in production.
Cyclical: These are people that are unemployed due to changes in the business cycle. When times are hard, these people usually find themselves out of work. The reason why the unemployment rate has remained stubbornly high is because the last recession lasted too long and those who were laid off for "cyclical" reasons are now finding themselves in a "Structural" unemployment situation. This is why the President wants to increase funding for education of these workers so that these individuals can adapt to the new structure of the employment landscape.
On "Price Stability"
Second, I submit that the goal should not be price stability. It seems good on the surface if you don't think about its ramifications, but look deeper and the impact changes to monstrous. A sound money supply which retains its value must, by definition, be of limited quantity. The kind of elastic money supply Bill advocates (and which we currently have) cannot retain its value on a per-unit basis. If the money supply were limited in quantity, we'd have a mostly stable, little changing money supply lubricating and financing an expanding economy as the supply of goods and services regularly increased over time. Such a system should provide steadily decreasing prices, not prices at a stable level. Consider where our price levels would be if our money supply were honest. Everything would be dirt cheap and plentiful. Much more even distribution would have reached the whole world by now, not just the "developed" world. The "rat race" would not exist because people would no longer have to work long hours at progressively lower wages relative to prices in order to survive. Government sanctioned monopolies would be hard-pressed to maintain their market advantages, being constantly at risk of losing market share to more efficient producers. Thus, price-level stability is a terrible goal. It's little more than a thinly veiled justification for continuing to rip off people who are forced to use counterfeit currency as if it were good money.
Again, the problem is not that money should not decrease in value over time, the problem is that the system has evolved into something where the banks, drunk with power and political influence, have shown little to no regard for price stability and instead have used the system to line their own pockets with riches. It is an age-old maxim that the "rich will rob the poor". How will having a static money supply change this?
Measuring Growth
Third, I ignore traditional methods of measuring "growth" because they are so misleading. GDP "growth" for instance is dominated by Wall Street profitability and government spending. It has almost nothing to do with Main Street financial health. Thus, the GDP tells us that the recession ended in June 2009, but most of us know how big a lie that is by simply looking at our own pocketbooks and livelihoods.
We should all ignore traditional methods of measuring "growth". GDP is rife with statistic manipulation, which makes it a useless measure. But again, must we "throw the baby out" just so we can get an accurate measurement of growth. Are we not more likely so have stagnant growth by limiting the amount of currency we can use?
Look at what we get with counterfeit money, and I think most of us would gladly risk Bill's unlikely scenario. Under the elastic, counterfeit money system we have today, the money supply has increased to nearly 1800 times its original size (an increase of roughly 180,000%) since 1913 when the Fed was first created. Even the most optimistic critic of gold or silver as money could not possibly imagine an increase in precious metals through a gold or silver strike that would come anywhere near that amount of increase. This point is a clear win for precious metal money and a clear loss for counterfeit money.
That is called "economic growth"! If we had to wait for Gold or Silver to increase the value of our economy we would still be paying for bread with half-pennies and American inventiveness would have been stopped dead due to the inability to obtain enough "seed money".
Only under an elastic money supply does a ceasing of increase in the money supply result in recession and unemployment. I'll address this point more closely in my next article. For now, suffice to say that a precious metal currency does not experience the same kind of rip-saw effect that elastic currencies experience because precious-metal currencies do not induce malinvestment like counterfeit currency does. Bill will probably point to times in history under the gold standard when there were economic expansions and contractions, but I counter that those expansions and contractions happened because the government permitted the gold and silver supply to be debased by counterfeit paper money or legal-but-fraudulent banking practices, and that these increases and decreases in the paper money supply or in bank deposits via fractional reserve banking caused those expansions and contractions.
So what Walt is saying is that should the business cycle continue to occur under his model, that it will because of government corruption, and not by the natural cycle of boom and bust that has been occurring for thousands of years! No man or woman can hold back the tide and no currency can stop the business cycle!
Currency "Monopoly"
The only thing that holds the current system together (apart from chewing gum and baling wire) is the fact that the government gives the market no choice in the matter.
I can see it now... a customer walked into their local grocery store. At the checkout they take out their debit card and the cashier says, "I'm sorry, we don't take US dollars here. You need to go to the bank and exchange your dollars for silver before we can process your transaction!"
Currency competition would generate horrible uncertainties in the market, which would result in severely interrupted commerce. You talk about the need for a consumer to be a savvy investor in the market today, in your nightmare scenario each consumer would need to be a currency exchange expert.
Banking Reform
Make it illegal for everyone, bankers included, to invest other peoples' money without their permission while simultaneously promising to return their money to them on demand, and the whole point about "inflation control" becomes moot. In fact, it would also end the possibility of bank panics of all kinds in the future, including the kinds of panics that led to both the Great Depression and the Financial Crisis of 2008.
I agree, and if Congress can stop "sucking on the teat" of Wall Street for their reelection funds, perhaps such a reform is possible.
Back to Keynes
And as for Keynesian stimulation, in Bill's words, "A true Keynesian economist would argue that in times of recession, governments need to spend more than they collect in taxes and then pay off the debt by raising taxes when times are good." The problem with this isn't just the fiscal policies Bill cites. It's also that the debt never gets paid off! Under a counterfeit currency system, to pay down government debt in a major way is highly dangerous because it is also highly deflationary. This is true because another term for counterfeit currency is debt-based currency. When your currency is debt-based, paying down debt on a large scale reduces the size of your overall money supply for repayments that are made to banks who hold the government bonds. (Repayment to private investors does not have the same effect.) Thus, government doesn't dare to ever pay down debt in a significant way. The debt just keeps growing and growing, moving us closer and closer to economic disaster.
Walt is almost right here. True, paying down the debt would be deflationary, but we have reached a point where the very confidence in the US Treasury Bond Market may be at risk unless the debt is brought under control. Just because the government has stopped running up deficits, does not mean that they will stop issuing new Bonds. As the debt is drawn down, matured bonds will still be replaced by new ones and as the debt is rolled down to zero, investors will need to look elsewhere for investment income. Ideally, with a stronger overall economy, there will be other investment vehicles that will be just as lucrative.
Sudden? Gradual? Same Difference!
Who said anything about sudden abandonment? There's no need for that. All we have to do to transition is make it legal once again for people to use precious metals as money, this time in competition with the dollar. After the new currencies take hold in the market, we should also make fractional reserve banking illegal.
I agree that fractional banking should be reduced or eliminated, but even a gradual transition would be a disaster for the reasons cited above.
Bye-Bye Baby!
In the end, what Walt is able to do in his rebuttal is to attack the very system we have come to depend upon to promote the rapid economic growth we have experienced in the past 100 years by calling its very legitimacy into question. Granted, the banking system is full of obvious corruption that has had the explicit and tacit approval of the Government. To make matters more difficult, the bond market has turned our overall economy into a house of cards that may collapse at the slightest bit of uncertainty brought into the market.
What even a gradual shift to a precious metal-based currency would do is to create that instability that is likely to collapse the entire tower. If consumers and businesses start to favor a different currency within the same market, the bonds, which are locked into a specific currency already, would begin to default and lose value. This would make it impossible for corporations to innovate, increase production and protect jobs.
A better plan is to reform the system we already have. Bring back the Fed to its original role as the protector of a scarce currency and to keep economic growth in check. Strip the banks of their power and influence on Wall Street and in Washington and make them as accountable for their actions as the rest of us. Unwind the National Debt through a combination of taxation and fiscal austerity without sacrificing our children's future or our national security. Criminalize many aspects of the Bond Market and unwind the use of leveraged liquidity in corporate finance.
After all that is done, then let us have a discussion about changing what backs our currency. By then however, the conversation would probably be moot.
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Posted By: Walt
Date: February 15, 2011 01:34:47 PM
I haven't had a chance yet to write my promised follow-up article on the advantages to a competing precious-metals currency. I still intend to do so.
However, I don't want to let a number of incorrect points remain unchallenged in this article.
What you call "throwing the baby out with the bathwater" I call "opposing organized-but-legal crime". Placing emphasis on breaking up the big banks really misses the point entirely, that allowing banks to leverage their depositors' money for their own profit is what causes the problem. It's not like it was only the big banks that engaged in all the foolishness of the mid-2000s. In fact, more small banks than big banks have failed as a result of all the malinvestment, by a very large margin. As much as I personally can't stand the big banks, I really think we should place the blame where it belongs...on the entire banking structure, rather than just the big banks.
There is no rule that money is supposed to retain its value.
Say what? Better re-check your first article where you quoted that econ textbook:
By not backing the currency, the government avoids this constraint and indeed receives a key freedom - the ability to provide as much or as little money as needed to maintain the value of money and to best suit the economic needs of the country (emphasis mine)
Besides, what's the point of having money if it doesn't retain its value? Money actually has a number of characteristics that make it money. Money must be:
1. a medium of exchange
2. a store of value
3. divisible into smaller units
Perhaps you don't call that a rule for retaining value, but I do. In fact, it's the crux of the whole issue. If not for the fact that our current money supply fails to hold its value due to bank lending practices, the Financial Crisis of 2008 would not have happened, and neither would the Great Depression have happened. You can't have bank panics without this practice, which I call legalized fraud. Nor would any of the other legion of depressions and recessions over the decades have happened. They all occurred precisely because the money supply's quantity kept changing due to bank manipulations, both at the commercial bank level and at the central bank level.
It doesn't matter what financial planners do. They are irrelevant to this topic. Making investing a requirement for one's monetary survival is despicable and unconscionable. The argument that it's okay to manipulate the money supply because people can try to offset it through investing is an immoral argument. After all, what if people guess wrong with their investments? Then, not only were they harmed by the money supply, but now they're harmed by their financial planners! It's a double-whammy! All investing is risk taking, and mistakes get made. What you're arguing is that people should have to take financial risks just to break even. Good God!
Your contention ignores the tremendous harm that it attempts to justify. Don't you realize the practice you advocate is why the rat race exists? Don't you realize that's why poverty can't be eliminated? (I can't help but notice that there are no almost financial planners in the third world...go figure.) Don't you realize that that's why there's such a huge gap between the rich and the poor? Your contention is like dangling a carrot from a stick in front of a horse, tempting him to keep walking after it, knowing full well that he'll never catch up to it, all for the purpose of making it possible for the bankers to make a killing by using the value created by the masses in order to enrich the big corporations with the biggest credit lines.
No one said that "full employment" is the goal.
On the contrary, you're the one who said that it was the goal. Or, more precisely, your textbook said it. Need I remind you?
...to provide the amount of money needed for the particular volume of business activity that will promote full employment, price-level stability, and economic growth. (emphasis mine)
Your discussion of "cyclical" unemployment leading to "structural" unemployment, while certainly doctrinaire, is also ridiculous. The vast majority of people who got laid off didn't get laid off because their skills are no longer needed. They got laid off because the business cycle created malinvestment, which led to bank failures, which led to business failures. Again, this is something I plan to address in more detail in my upcoming article.
It takes awhile, but you eventually get to an important point:
Again, the problem is not that money should not decrease in value over time, the problem is that the system has evolved into something where the banks, drunk with power and political influence, have shown little to no regard for price stability and instead have used the system to line their own pockets with riches. It is an age-old maxim that the "rich will rob the poor". How will having a static money supply change this?
Let me be clear. It is impossible for the banks to get drunk with power without the power to leverage depositors' money. Do you dispute this? Well, at least you ask the right question. How will having a static money supply change this? The answer is simple. If the money supply can't be manipulated by leveraging deposits, then it becomes impossible to destroy the value of money over time, and more importantly, it becomes impossible for business to go on a wild, drunken, easy-credit-induced spending and investing spree that makes it as expensive as humanly possible for people to live, thus leading inevitably to a crash. It becomes impossible to use credit to explode the money supply and thereby drive prices in one or more market segments (this time, real estate) before they come screeching to a halt. That, my friend, is boom/bust in a nutshell.
I distinguish between two forms of capitalism. Up until now, I've called them "old" and "new" capitalism.
Old capitalism is where you produce some good or service in a small quantity, earn a profit, then reinvest it back in your business so you can produce more goods and services and earn more profits.
New capitalism is where you bypass old capitalism entirely and simply corner a market from day one using the biggest credit line you can command. New capitalism is only possible under an easy-credit monetary system.
Old capitalism cannot compete with new capitalism.
You say that competing currencies would "generate horrible uncertainties".
I can see it now... a customer walked into their local grocery store. At the checkout they take out their debit card and the cashier says, "I'm sorry, we don't take US dollars here. You need to go to the bank and exchange your dollars for silver before we can process your transaction!"
Frankly, I can't blame the store. I wouldn't want to accept the dollar either. On the other hand, we have cards that handle both debit and credit transactions. It's not difficult for a bank to issue a card that can handle both dollar and silver transactions.
More importantly, have you noticed how you just undermined your original argument that money must be based on faith? In reality, you don't trust faith. Faith implies being able to choose whether you believe or not. You don't want people to have any choice at all where money is concerned.
What you call a horrible uncertainty, I call a healthy rejection of institutionalized fraud.
And then...you surprised me. In response to my comment about making legalized fraud illegal, you wrote:
I agree, and if Congress can stop "sucking on the teat" of Wall Street for their reelection funds, perhaps such a reform is possible.
Ignoring the last bit of colorful imagery, I'm going to focus on the first part. You agree. Of course you do, because it makes sense. The monetary system you argue in support of provides the faucet that makes the corruption possible. In other words, you recognize the issue, but since fixing it is challenging, you decide to side with the perpetrators. What does that make you?
Then, you go off the deep end.
I agree that fractional banking should be reduced or eliminated, but even a gradual transition would be a disaster for the reasons cited above.
No, a gradual transition, by definition, would not be disastrous, because it's transitional. You sound like the subject of the late science fiction author, Robert Heinlein's little ditty about panic:
When in peril
Or in doubt
Run in circles
Scream and shout
The goal should not just be reduction in fractional banking. It should be eliminated. Here is the greatest failure of mainstream economists. They all know that fractional banking should be eliminated, but they all lack the guts to advocate it, let alone map out how to do it. So they become apologists for the corrupt system instead. Their amoral stance is morally reprehensible.
I still plan to write my full article on the benefits of precious metal currency. Watch for it soon.
Posted By: Bill Gee
Date: February 17, 2011 08:11:22 AM
Perhaps we should have come up with some clearer rules of this debate?
(Just for the benefit for readers who may think that this debate is getting personal, just note that just because I'm "advocating" for the mainstream view, doesn't necessarily mean that I fail to recognize its contradictions nor do I necessarily swallow everything it says.)
That said, let's dance!
When I said that there is no rule that money is supposed to retain its value, what I meant was that while theoretical economists may believe that it should retain its value, accountants have recognized for years the impossiblity of this condition, which is why they use PV Tables when evaluating investments. Also note that the textbook I originally quoted is provided a very generalized theoretical overview for the benefit of those who are just being introduced to the concept of money. More advanced textbooks utilize PV Tables just the same as Accounting Textbooks.
Regarding the three "rules" for money, these are seen more as guidelines for the Fed. Money has a "store of value" as long as the Fed can maintain stable prices by controlling inflation and economic growth.
The same goes for the "full employment" argument. You could say that the textbook contradicts itself by first claiming that full employment is the goal and then goes on to describe why full employment would be a disaster, but you would be wrong. The definition of "full employment" is an unemployment rate below 5%, and yes, that has been achieved many times since the 1940s. The reason why 100% employment is a bad thing is because that type of full employment suggests that there too many jobs for too few workers, which would lead to an overworked workforce and economic stagnation. Only by allowing a certain level of unemployment, are we providing flexabiltiy and innovation in our workforce to allow for real growth.
Traditional economics fails to recognize the validity of the "old" and "new" capitalism argument. Credit is available to anyone with a strong credit history and therefore, anyone can compete in the marketplace. Credit became tight after 2008 because banks were extending credit to individuals who did not deserve it and then they transferred that risk to the bond market. That was unethical and should have been illegal and we are now in a "market correction" cycle.
Regarding the ability to switch currencies on a debit card - what happens if your employer will only pay you in dollars and refuses to pay you in silver? As the owner of the account, I could convert my balance to silver, but if what you say will happen happens, I'll see the value of my transfers go down with each paycheck! My "real wage" will go down to the point where I couldn't pay for my groceries! Meanwhile, my employer's abilty to pay me goes down because so much of its bank reserves are also in dollars (due to the long-term bonds they own) eventually driving them out of business.
In the end, the very notion of illegalizing fractional banking and making a transition to a precious metals-based currency would be enough to keep anyone in the banking and insurance industries up at night if it had ANY chance of coming about. Elected officials on both the State and Federal level as well as at the International Monetary Fund have been sold on the idea to the point where they would rather remove parts of their own bodies than to even consider getting rid of it. Therefore, our only choice is to REFORM the current system with all of its inherent contradictions.
