Ron Paul's Strange New Respect
Brian Doherty | October 17, 2008, 12:54pm
Over at the reliably lefty Salon comes praise for the most recondite, yet now seemingly most vital, aspect of the Ron Paul message: fiat money has catastrophe baked right in. An excerpt:
[Paul's] prediction of doom makes a heck of a lot more sense now....
"This system that we've had since 1971 is nonviable," he said. "and it's coming to an end."
That's what this whole story is about, the end of a monetary system that we've had since 1971. And something has to give. You just can't create more money out of thin air and propping up everybody.
It's an immoral system. You're asking the poor people to bail out the rich. You're asking the innocent people to bail out the guilty. You're asking people to just totally defy the Constitution because there's no place in the Constitution that says that we can do these things.
And, besides, economically, it's a disaster. This is going to cause a great deal of harm. It's like a drug addict taking a strong fix, and he feels better for a day or two. But believe me, we're going to kill the patient. And the patient here is the dollar system and our entire world economy.
1971 was the year in which Richard Nixon abandoned the gold standard codified in the 1946 Bretton Woods agreement, thereby launching the modern era of freely floating national currencies. From Ron Paul's point of view, government economic policy ever since has been a futile attempt to avoid economic downturns by, in essence, pumping more "fiat" currency into the monetary system. The piper has come calling, says Paul, and current efforts to increase liquidity and bail out the banking system will only make things worse.
So if things do get even worse, was Ron Paul suggesting that he's ready for another run at the gold ring in 2012?
But right now there's a fight going on in this country. Our numbers are growing. We're not the majority, but our numbers are growing. And as this situation deteriorates, more people are going to say, "Hey, maybe it's right. Maybe limited government and freedom works. Maybe freedom is popular, and maybe freedom really works." And this idea that we have to depend on government for all these programs is an illusion.
It will almost certainly not be Paul waving the flag for these ideas in 2012; I might guess given the very presence of pieces like this at Salon that any anti-fiat money politician, if we have any in 2012, will more likely be from the Left than the traditional Right.
My reason feature on the Ron Paul Revolution, from our February 2008 issue.
Hat tip: Faithful reader known as "the innominate one."
domoarrigato | October 17, 2008, 6:17pm | #
Damn, walk away from the thread for a couple hours, and when I get back you kids have ripped up the pillows, peed in the closets, and dunked your little brothers head in the toilet.
some of my favorites of the last few hours:
in response to how to stop deflation
"1. Get pan
2. Find River
3. Shake"
so tight monetary policy requires backbreaking, ecologically damaging effort to to alleviate vs. inconveniencing some electrons. brilliant. sorry if my humor button is off - I am posting as a robot after all...
"I have never seen any coherent arguments against deflation of 0.5% per year (say 1.5% increase in the gold supply combined with a 2.0% increase in wealth per year), but there are lots and lots of coherent arguments against the 18% y-o-y M3 inflation we're seeing now,"
inflation is not = to increase in money supply. excess of the latter causes the former, but not equal.
"Fiat money kicks ass! Inflation kicks ass!!"
gotta go there. The same people that seem to love deflation of .5% (for a number) seem to equate 3-5% inflation with hyperinflation. Zimbabwe has something like 11.2 million % inflation. not a typo or exaggeration. So, the fed clearly is not zimbabwe - lets all just calm down on that point.
concerned observer said:
"inequality from the market can be tolerated is that it produces better overall results,"
hot damn, now that sounds like a libertarian argument. we will tolerate inequality of outcome because rigging a system so everyone remains poor and equal is offensive to liberty.
tacos said:
"Ironically enough, the gold standard had the same effect - benefitting bankers and the government."
right on. perhaps surprisingly, under most monetary systems you can imagine rich people tend to have a lot of power and benefits. capital accrues wealth to it's owner regardless of weather its paper or gold backed. I think i'm ok with that as a libertarian too.
domoarrigato | October 17, 2008, 6:48pm | #
"Inflation is defined as an increase in the money supply."
you can define any variable you like, any way you like - but no one seriously uses that definition. you are saying that monetary supply as defined by M1 or M2 (maybe?) expanded 7-10%. 15-50% - I have no idea where you get that from. really I don't.
"what you are referring to is an increase in consumer prices---misleadingly called 'consumer price inflation'"
No, actually that is the definition that is used in all the literature. We could have an argument whether we should use CPI, PCE, or GDP deflator, but then we would be quibbling.
"resulting from each dollar being worth less, something that eventually always follows actual inflation. (More dollars chasing the same number of goods => goods command more dollars.)"
you, of course, are quite right that more dollars means higher prices all other things being held equal.
"Rest assured, we will get plenty of consumer price inflation over the next several years."
The problem is that all other things never are equal. I view this conclusion as totally unwarranted based on your argument, and highly unlikely. I do worry that we will get inflation down the road, which is why I own TIPS. But despite my concern, it is very very easy for the fed to remove the money from the system once it's replaced by credit. if they do the right thing in 12 months by taking it back - ill be out of those TIPS and on to better investments in a heartbeat.
My point: you simply cannot simplify inflation to be increase in money - there are too many other variables in real life.
Koblog | October 17, 2008, 9:43pm | #
I like gold, but this particular financial crisis was caused by a government policy--the Community Reinvestment Act Program (or CRAP, for easy memory) not monetary standards.
Created in 1977 by Carter, expanded by Clinton in 1993 and 1999 with Barney Frank, Maxine Waters and Chris Dodd and supported by Compassionate Conservative George W. Bush, CRAP went beyond fiat currency directly to giving houses away to unqualified "owners."
Literally TRILLIONS of dollars (fiat or not) were loaned to people who could not make the payments and then those bad loans were packaged and sold as "securities" that simply "could not lose value" because the government backed the bad loans and would pay if they failed.
When you are dealing with TRILLIONS of dollars, no government guarantee can possibly make good when prices go down and bills come due.
CRA is bad policy no matter how you cut it. If we were operating under a gold standard and still made unsecured loans in this manner, the system would still fall in.
Apparently, this kind of boom/bust cycle has happened six times since the Civil War -- and we were on the Gold Standard during that time.
Bad policy leading to massive bubbles in the name of bad risk people who "deserve" the American Dream has nothing to do with the money system, seems to me.
Irrational price inflation is strictly a function of the "greater fool" monetary theory: keep selling the same thing until the price cannot go up any further.
What's sad is that one party can create a policy that doesn't blow up for 15-30 years, when the authors are long gone. Whoever is in office when it all falls in is left holding the bag.
And if you think this CRAP crisis is bad, just wait until Medicare and Social Security (not to mention the proposed universal healthcare) blow up....
BrianMacker | October 17, 2008, 11:32pm | #
Domoarrigato and Tacos,
Both of you have no idea what you are talking about. You are both mostly ignorant about monetary mechanisms.
As an example, this statement:
"... since they accept that deflation due to contraction of the money supply is bad for economies (as opposed to deflation due to a drop in prices from increased efficiency, which is good)."
Which is absolutely false. Austrians actually believe it is good for the economy.
"Currency is hoarded instead of invested, and capital decreases"
Errr... currency isn't capital, it's a medium of exchange and a claim against capital. Hoarding gold actually increases capital. You have to produce more goods than you consume in order to obtain the gold. Saving gold frees up that capital for use by other people.
In order to withhold the gold I have to inject goods into the market equal in value at current prices to the withheld gold. That is NOT deflationary at all.
Price levels are determined by the amount of goods vs. the amount of currency. The hoarder is injecting more goods at the same time he is withdrawing money. It's a wash.
What is deflationary is using the saved capital in a way that increases the production of goods. Thus increasing the amount of goods in the market that the money is being exchanged against. But the hoarder isn't doing that. That's the job of the entrepreneur.
Hoarding doesn't stop anyone else from saving gold and then loaning it out for increased profits, and yes, over and above what can get by hoarding gold. Of course with increased risk.
Furthermore, it's not called "hoarding" it's called saving. Your choice of a derogatory term shows quite a bit of bias. You've built in your economic misconceptions right into your language.
"I have to point out that no one is preventing alternative moneys from arising."
Errr... yes they are. The way the do it, legal tender laws, were pointed out in this thread yet you still persist in your ignorant statements. If they didn't outlaw alternative currencies then Gresham's law would wipe out the fiat dollar.
"It is a *fact* that so long as the population of workers grows and resources are discovered the economy is expanding and it is necessary to represent that increased wealth with currency."
It's not a *fact*. It's a misconception. A fairly ignorant one. It shows a complete misunderstanding of prices and money. It reveals a kind of monetary intrinsicism. There is
no "right" quantity of money.
It's quite apparent all this economic talk is over your heads. You too "Concerned Observer".
domoarrigato | October 18, 2008, 12:16am | #
"It's quite apparent all this economic talk is over your heads."
Not remotely, Brian. A brief rebuttal of the statements I made and some issues I have with yours:
"Austrians actually believe [deflation] is good for the economy"
I'm not, er, an Austrian school economist. Nor are most other serious economists - but to each his own. The problem with deflation has been adequately explained by others on this thread.
"currency isn't capital"
I didn't say it was - that might have been someone else - and you are right here. capital ISN'T currency, it is machines for production.
"Hoarding gold actually increases capital."
alas this is wrong. Capital is not any goods you inject - it's means for production. If you sell lemonade for gold, you are not trading capital for currency.
"In order to withhold the gold I have to inject goods into the market equal in value at current prices to the withheld gold. That is NOT deflationary at all."
No one said it was. Population growing combined with real GDP growth and money supply held constant gives you deflation.
"...over and above what can get by hoarding gold. Of course with increased risk."
I alluded to this myself in a previous post when I said interest rates would be high. This is not in and of itself a problem - it's all relative. But the point was made by Philip Hornsby above that if I wish to borrow to purchase a house for 2000 oz of gold and certain deflation means it will be worth only 1500 oz in 10 years - at what interest rate would I borrow? If I agree to pay interest, I will be paying deflation as well as interest - very high. Moreover, if I am charged 0% interest, I still pay deflation. No one would lend to me at a negative interest rate, because they could do better by the "mattress savings plan." So then, the deflation rate acts as a lower bound on real interest rates in the economy. subsequently, when significant deflation occurs, lending becomes impossible, and more deflation occurs. It becomes unstable.
"If they didn't outlaw alternative currencies then Gresham's law would wipe out the fiat dollar."
Hoe-kay... most of the alternative currencies that I can find ran afoul of anti money laundering laws, and exacerbated the situation by failing to cooperate as real banks would do. I really do wish that a reputable company would introduce a real currency alternative and abide my banking laws and poke some holes in the dollar - but so far they charge outrageous conversion costs, and surround themselves with maniac ideology.
"its a fact"
your issue here is answered by the zero interest rate bound explanation above. I assume you understand why. There is a minimum increase in money supply that will prevent nominal interest rates from becoming 0. failing to maintain than can result in deflation that is then destructive to credit, and difficult to get rid of.
Brian Macker | October 18, 2008, 11:28am | #
"I'm not, er, an Austrian school economist. Nor are most other serious economists - but to each his own."
"Serious" economists? Who, like Alan Greenspan, the guy who got us into this mess? The guy who coined the term "New Economy". You aren't qualified to judge who is a serious economist.
Alan Greenspan is the guy who put a price ceiling on interest rates, which is a price control, during his entire term. Meanwhile next to no serious economists were complaining about this behavior. The Austrians were.
Here's some economics for you: "Price Controls Bad. Free markets good." Something the "serious" economists seem to have forgotten in this particular instance.
If you actually bothered to read what Austrian economic theory has to say on the subject you'd see that the theory predicts exactly the outcomes we have been experiencing. Put a ceiling on interest rates below the market rate and you will experience: Low savings, over borrowing, a boom, trade deficit, increased commodity prices, manias, overinvestment in long term projects, etc.
The "unserious" Austrians predicted both the Great Depression and stagflation. Their theories are also doing a great job modeling what is happening right now. But you wouldn't know that since you listen to "serious" economists.
"The problem with deflation has been adequately explained by others on this thread."
No it hasn't. What has been discussed is a bunch of nonsense. That "adequate" explanation didn't even cover the differences between monetary deflation, fractional reserve deflation, and price deflation. It also failed to cover deflation caused by trade. How could it possibly have been adequate?
"Hoarding gold actually increases capital."
alas this is wrong. Capital is not any goods you inject - it's means for production. If you sell lemonade for gold, you are not trading capital for currency.
Goods are a lot more fungible than you believe. You are in fact wrong about lemonade. It can act as capital, both by itself, depending on circumstances, and in combination with other goods, like all capital products.
For example, I might be in the business of producing lemonade in my desert village. I might "hoard" the lemonade directly until I have enough to allow me to cross the desert and back in trading with the next village over. In that case it is acting as a capital good.
It can act in combination with other goods also. For instance, I might save up lemonade, hotdogs, ketchup, etc., enough food to feed myself for three months. I can then use that saved capital to proceed on a project. I can use the time I’ve bought myself with my saving to, for example, collect fibrous plants in the jungle, beat that fiber out of the plants, twist together string, and weave a net. I've just transformed one form of capital into another. Now with the net I have a means for increased production of fish.
Also, producers always produce more of their product than they ever consume. What matters is that on the whole they are also not consuming all the other goods they could be trading for. My production of lemonade allows others to concentrate and specialize in the production of other goods.
When I save I'm NOT really postponing my consumption of lemonade but all the other goods that I would have normally used the gold I "horded" to trade for.
The market naturally will generate a mix of goods proportionate with what people are consuming at the time. What the community as a whole has decided they need to "get them through time".
So what I've saved is not lemonade per se. What I've saved is a mixture of goods at all stages of production that people need in order to produce. You've forgotten that people can't live day to day eating machinery. Food is as valid a component of the capital structure of an economy as any other good.
That even includes goods you may think are frivolous, but that is a harder concept to grasp and I don't have the time to waste explaining it.
"Population growing combined with real GDP growth and money supply held constant gives you deflation."
It gives you price deflation, which is a good thing. Not the kind of deflation that gets everyone’s undies in a twist, fractional reserve deflation.
Price deflation over time is just in fact the market prices seeking the proper level for the amount of money in circulation. There is nothing wrong with that.
Every good economist should know that prices are the mechanism by which the market sends signals. Bad economists (and amateurs) are obsessed with suppressing these signals via price controls.
You show an example of this mindset with this comment:
“I do worry that we will get inflation down the road, which is why I own TIPS. But despite my concern, it is very very easy for the fed to remove the money from the system once it's replaced by credit. if they do the right thing in 12 months by taking it back - ill be out of those TIPS and on to better investments in a heartbeat.”
To illustrate why this is silly let’s consider if you were talking about price controls on say a farm product like oranges. You might have well have stated.
“I do worry that we will get overproduction of oranges down the road, which is why I own Tropicana stock. But despite my concern, it is very very easy for the government to remove the price controls from the system once it's replaced by increased production of oranges. if they do the right thing in 12 months by taking it back - ill be out of those Tropicana stocks and on to better investments in a heartbeat.”
It’s as if you think the government should be in the business of determining market prices, and that the screwups caused by price floors are easily remedied by price ceilings.
The problem with all this is that there are effects outside of what is obvious to you. That is one of the important lessons of economics that is stressed by Hazlett. Price floors this year cause over production of oranges that rot this year, and consume capital to produce this year. The damage was already done to the market by the original overpricing of oranges. Lowering prices next year to below market prices doesn’t make up for that. It merely causes underproduction of oranges given current market conditions. Oranges should be cheaper because they are now more abundant.
For example, the prior price floor may mean that there are many more orange groves now than before so market prices should be much lower than before given the extra production capacity caused. The market will want to send the signal that there are too many orange trees planted for normal demand. Merely sending prices back to where they were will not generate that signal.
There are all sorts of bad effects to lowering interest rates below market and raising them above market that I am not going to discuss in detail. I will say that you are totally clueless of these problems.
What is especially stupid about “serious” economics is that they actually believe that the cure to price ceilings when it comes to every other price in the market is to remove those price controls, however when it comes to the time cost of money, interest rates, another price in the system, they thing that the answer is more of the same, or increased levels.
Thus the “serious” economists answer to market disruptions caused by artificially lowered interest rates is more artificially lowered interest. As if pumping money into the system increase the actual level of underlying capital in the system.
Lowering interest rates below market levels has exactly analogous effects as other price ceilings. If you cap gas prices then you get lowered production and increased consumption resulting in shortages. Same thing with low interest rates, less production, less savings, and increased consumption, more borrowing. You also get a shortage in true capital. That’s the underlying problem and that is the true reason why fractional reserve deflation is associated with “bad”. Everyone was tricked by the new money into thinking they were getting rich when in fact the underlying actual capital, the goods, were not increasing as quickly as the cash.
Now although interest rates are a price, like any other, there are some unique things about both money and interest, that make the behavior of the shortage different. Money is a medium of exchange and therefore effects all prices. Interest rates are a price signal about time, about what you are willing to forgo now in order to consume more in the future, as a saver, vs. what someone else is willing to pay in the future to consume more now.
Thus interest rates are intimately tied up with time. This is something that the “serious” economists fail to grasp. They also fail to grasp the structure of production and that short term goods like lemonade are just and important to production as long term ones such as machinery. That mix of goods is determined by the market, and when you have too much machinery and not enough lemonade then you get into trouble.
When you lower interest rates you make long term projects appear more profitable. That sends a signal that OVER TIME causes problems. Entrepreneurs overinvest in long term capital goods and underinvest in short term ones. This causes, for example, commodity prices to rise faster and higher than shorter term goods during the boom.
I could explain exactly how this unfolds but there are plenty of places online where you could read about it yourself. So I will not bother writing any further. It is enough for you to know, at this point, that you are in fact, despite your belief, extremely ignorant on the subject of economics.
”I alluded to this myself in a previous post when I said interest rates would be high. This is not in and of itself a problem - it's all relative.”
Yes, I read that and it’s just another misunderstanding you are suffering from. This is what you wrote:
“With deflation, you get paid to sit on cash - so you need a very high interest rate to induce you to lend it. Deflation pays you to be risk averse and hoard cash - which induces chrinically tight money, and stifles the risky ventures upon whose success technological progress is made.”
Which is exactly wrong. If there is deflation you do not, I repeat do not, need high interest rates at all. You are not only wrong theoretically but also empirically. Interest rates were very low under the gold standard. Why on earth would I need higher interest rates if the underlying asset I am being paid back in is already increasing in value?
Interest rates have three components that you get paid for by lending out. 1) Risk 2) The Time Cost of Money 3) Inflation. So when inflation is high the portion of interest needed to compensate for inflation needs to be higher. I’m not going to lend you a dime at 5% interest if the rate of inflation is 10%. You’d be paying me back with money worth less than what I lent you. Not only wouldn’t you be paying me back less but I would not be paid for the risk that you wouldn’t pay me back at all, nor the benefits I could have by having my money now vs. the future, the time cost of money.
So you have things exactly in reverse. In an environment of monetary deflation lenders are willing to lend for less interest.
The reason that you are confused, and plenty of economists also, is because you mistake monetary deflation for fractional reserve deflation. These are, in fact, two entirely different beasts.
Fractional reserve deflation occurs because of the exposure of an error introduced into the economy by fractional reserve banking. When banks borrow from depositors they borrow short term, and when they lend they lend long term. This scheme, to put it politely, results in a mis-coordination of plans and a price for interest below proper market rates. Short term loans and long term loans are different goods, yet banks sell them as if they are the same good. It is this mis-coordination that is at the heart of the business cycle.
When I put money short term in the bank that means I plan to pull it out short term, for needs like food, clothing, etc. I don’t plan to wait for fifteen years to get my money back.
Not only does fractional reserve banking mis-coordinate different individuals plans but it also disrupts price signals. It disrupts interest rate signals and other general price signals throughout the system. Not only does having the my deposit book make me think I have short term money that in fact has been lent out, but the general increase in market activity lures me into believing I’m making a better income via more money. That is, however an illusion that
over time will become exposed.
Such illusions can be generated in other ways. For example, a counterfeiter could move into town and start spending money like mad. Everyone at first would see a business upswing and things would go just swimmingly. Until it is realized that the actually underlying goods have not increased as prices rise.
It’s the price rise of the boom that lures people into even further mistakes. The price rises are not even and thus there is an overproduction of long term capital goods. Too much machinery and not enough lemonade. It’s the price rises that reveal the mistake and that is when businesses start loosing money. With time, iron is expensive because so many are bidding it up to make the machinery, thus the plans that at the start of the boom looked profitable with low iron prices are no longer profitable. Worse yet the consumers really weren’t interested in future increases in long term production. They wanted that iron invested not in a long term capital project like a bridge, but a short term one, like a can to ship their lemonade in.
Now with the exposure over time of all this misallocation, malinvestment, and over borrowing the borrowers have trouble making profits and paying back the loans. Meanwhile the diversion of capital from short term goods to long means that consumer prices start to rise ever so slowly, and everyone is a consumer. What do consumers use to pay for unexpected rises in consumption costs, oh yeah, short term savings. So they start drawing down those saving exactly as the debtors are having trouble meeting their payments.
Ta da, bank runs, and deflation.
The bank runs themselves however are not the cause of the problems but only the symptom. Nor is the deflation a cause, but a symptom. There really is a problem with the structure of the economy. Prices for goods are too high for the actual amount of money that exists. The actual amount being far lower than what they banks have inflated on top with notes and bank balances.
With a reserve rate of 50% the amount of money people actually think they have, the amount circulating is twice the actual amount. Shifting reserves to 25% increases the amount of cash people believe they have to four times the actual amount. It is the shift in reserve levels that causes fractional reserve monetary inflation and deflation. This is an entirely different creature from the deflation caused by increased actual production of goods, due to whatever reason, from increased productivity to increased population levels.
The less reserves banks hold the less coordinated individual people long term vs. short term plans are. At 100% reserves the plans are perfectly coordinated. No short term money is lent out for long term projects, all long term projects are funded by long term notes. At a level of 2-4% reserves there is an enormous mismatch.
Fractional reserve deflation happens to coincide with the exposure of the fraud inherent in fractional reserve banking. The fraud of borrowing from your friend Peter promising to pay him back soon while lending the money to your girlfriend so she can go to college and pay you back in four years. Then telling Peter the next day you can’t pay him back till your girlfriend pays you back.
That fraud on the economy is more extensive that this simple example. Everyone has been tricked by the new price structures. The increased lending at lower interest during the boom fooled people into making too many houses, fool people into following the increased wages in carpentry and real estate, fooled lumberjacks, fooled timber investors, etc.
So this deflation, fractional reserve deflation, is indeed associated with a bad thing, the exposure of economy wide errors. That does not however mean that the deflation itself is bad. It is in fact good. It is in fact the readjustment of money supplies to proper uninflated levels.
Sure it pains Peter to finally discover that you aren’t paying him back for four years but it is in fact information that he needs to know to take proper action. If instead you told him, I don’t have the cash today, but see me tomorrow, you would in fact be compounding his error. He might buy a new bike with what cash he has expecting your payment the next day to provide him with cash to meet his rent.
So, in fact, the deflation must be allowed to occur, otherwise the error will be compounded. Not allowing fractional reserve monetary inflations to deflate results in first inflation, and then hyperinflation.
You said in one comment above that you were not expecting inflation. Well you are exactly wrong. All the actions that the Fed is taking now to prevent the fractional reserve deflation from occurring will actually result in fiat money inflation, which will cause permanent price inflation. Again, each of these things types of inflation are different beasts, one from another, which you and others conflate.
Paying out on FDIC insurance is inflationary, bailouts are inflationary, lowering interest rates is inflationary. All three are being done.
Furthermore, once the inflation starts the large foreign holdings of cash flowing back to the US is going to compound the situation.
All the signals of what is occurring are plain to see. The fall of socialism because of the Reagan/Thatcher revolution was deflationary, in a good way, due to increased production by populations who were oppressed by confiscation of capital. Alan Greenspan saw the dropping prices and with the knee jerk reaction of a “serious” economist tried to muffle that market signal by increasing the money supply, instead of allowing the markets to do their thing. Furthermore, every time any market errors were exposed, instead of allowing the market to punish the players, he bailed them out with fresh cash.
This is what distorted the markets, and lead to the obvious signals that are expected by correct theory under these circumstances. Again the exactly wrong thing was done. The opening of foreign markets in which capital was scarce and labor cheap because of that was sending a signal to move some capital overseas and reduce labor wages here in the US. Captialism is fair after all. But Greenspan took this signal as wrong and tried to muffle it, which in fact
increased the signal beyond what the market would have produced. He did exactly the wrong thing.
“But the point was made by Philip Hornsby above that if I wish to borrow to purchase a house for 2000 oz of gold and certain deflation means it will be worth only 1500 oz in 10 years - at what interest rate would I borrow?”
You are indeed an intrinsicist. Perhaps it never crossed your mind but perhaps you shouldn’t be borrowing in this case, and the other guy shouldn’t be lending. If the house is worth less than the money stream then don’t borrow.
Sometimes the supply and demand curves just don’t cross. Like the supply curve for Mother Teresa’s prostitution services and the demand curve for having sex with her. There is no correct price for that.
Of course, your example is just a hypothetical worry accepted by you, and invented by some piss poor economists. Empirically this situation doesn’t occur with monetary deflation caused by increased production due to productivity or population increases. People have always lent gold regardless of this.
You are confusing climate with weather. You don’t run inside the house to get out of global warming but you do to avoid the rain.
There is decreased lending during fractional reserve deflation, which would result in your house falling in value, precisely because it is a storm worthy of heading for shelter. Yet people still lend and borrow all through these situations. When it makes sense.
It certainly doesn’t make sense for a bank to lend money when it doesn’t have any reserves, to lend during a run on banks. Part of the problem with the fractional reserve system, especially when backed by a central bank, is that it coordinates our errors. Instead of randomly making bad loans, and over lending individually the increase in money supply provides a strong price signal that causes everyone to act in the same way at the same time.
Monetary deflation due to having a stable underlying money like gold does not coordinate errors in this fashion. Which allows people to make lending and borrowing decisions based more on personal need than on false profitability. People who borrow money to buy a house
always pay more money back than the house is “worth”. If you borrow at five percent interest you are already paying double or triple the price of the house in final payments.
What matters with regard to the transaction is not any
intrinsic value, which doesn’t really exist, but relative value. Does the borrower value the present use of the house over the future monetary stream, and does the lender value the future monetary stream over the value of using the cash in the present.
Whether they trade or not depends on their subjective valuations. As time passes and as I age and save my future valuation of the revenue stream to support me while I am too old to work, becomes relatively more attractive. For a younger person, the immediate need for shelter may outweigh the increased future cost of borrowing to provide for that shelter.
So what’s the difference if I pay 1% interest for a house in a deflationary hard currency environment and in the future the house is “worth” half the payments I made due to deflation, or that I paid 12% interest in an inflationary environment and ended up with a house worth half my payments due to inflation. When we adjust and calculate intrinsic payments, and prices both look like losing propositions. Meanwhile neither is. Why? Because there was more value to the buyer than the supposed intrinsic costs.
The whole reason people trade is because of differences in valuation. If I inherited a book on anatomy from my dad but decided to become a computer programmer, then the book may have only value to me as a paper weight or to prop up the leg on my desk. Likewise some other individual may inherit a book on programming and may be interested in sculpture. He hates computers and is highly likely to throw the book out or chuck it in the fireplace for warmth. We both benefit by trading our books.
Total value in the economy increases as if by magic without any change in anything intrinsic with either book. The valuation is subjective and taking advantage of those subjective differences requires trade.
The reverse trade, if we had each had the other father, does not make any sense. Therefore it should not happen because it does not add true value to the economy.
Likewise there are subjective differences in the valuations of the borrower and the lender in the example that always make it appear as if the borrower is getting less for his money than he really is. That will always be the case because the lender is being paid for subjective values that are invisible, like the risk of not being paid back, inflation, and the alternative uses he could have made for his money over those long years it takes to pay it back.
” If I agree to pay interest, I will be paying deflation as well as interest - very high.”
Actually if the situation was as you described it would have to be due to an imbalance in the economy. Both gold and houses act as a store of value and you have describe a situation in which the value of houses as a store of value is not only zero but negative. In that situation the price of houses on the market should be immediately dropping. You should thank your lucky stars you can’t get a loan to buy it. Move into a tent (if your government allows you the freedom) and wait. Especially if you value the money more.
Besides you assumption that interest will be “very high” is exactly wrong. Empirically and theoretically you are wrong. The fact that “serious” economists theories are empirically wrong, are self contradictory, fail to have functioning mechanics, fail to predict, and are based on mathematical fallacies never stopped them. So why should it stop you?
Hell one of them just got the Nobel Prize, just like Arafat. Are you going to start bombing civilians to promote peace?
” Hoe-kay... most of the alternative currencies that I can find ran afoul of anti money laundering laws, and exacerbated the situation by failing to cooperate as real banks would do.”
No most of the alternative currencies ran afoul of Legal Tender laws. Alternative currencies like gold, and silver.
Money has been demonetized by law. What we are left with is fiat currency. These other schemes are NOT alternative currencies. They don’t meet the criteria for considering them currencies precisely because those criteria have been outlawed. The qualities of precious metals that make them naturally become currencies are not present in this other schemes. Precious metals are easily divided, transported, stored, assessed, ownership easily transferred, etc. Financial instruments backed by gold do NOT have these qualities. Precious metals themselves no longer have these advantages by law.
No one ever had to track the increases in the value of their gold before it was demonetized, by law, when doing transactions. Now days if I tried you use gold coin to trade for other goods then on each and every transaction I would need to keep paperwork on how much the gold went up and down in “value” verses the fiat currency in order to follow the law. Otherwise I’m charged with a crime.
Plus, because of legal tender laws anybody can welch on a payment using the fiat currency at any time. Do you think alternative products like computers would work in the market if I could sell you a computer but instead deliver a rock painted to look like one?
Likewise, your ridiculous belief that these money laundering charges are anything but a ruse.
”… and surround themselves with maniac ideology.”
I guess that depends on perspective doesn’t it. To me the idea that the government is going to allow privately minted coinage, when in fact it’s against the law, is a no brainer. You are quite a dreamer to think that isn’t going to be quashed. I imagine you think it’s nutty for very different reasons. Reasons that to me make you appear like the nut.
What’s nuttier than Keynes’ belief that dropping money out of helicopters could be good for the economy under certain circumstances? Absolutely loony and yet he was quite serious about it, along with his comment about us all being dead in the long run. He was the “serious” economist at one time. Even though actual good economics had already exposed the fallacies inherent in his theories before he even constructed them.
That’s because they were based known fallacies already being proposed by laymen. Just print money and everything will be fine. Yeah, sure. Not when the underlying problem had nothing to do with “not enough money” and everything to do with “too much money”.
” your issue here is answered by the zero interest rate bound explanation above. I assume you understand why. There is a minimum increase in money supply that will prevent nominal interest rates from becoming 0. failing to maintain than can result in deflation that is then destructive to credit, and difficult to get rid of.”
No, in actually, the zero interest rate fallacy is just as embarrassing as Zeno’s paradox. It’s based on confusing different types of deflation, having a bad theory of value, not understanding money, etc.
… and with that I have no more time to explain to you what you do not understand. Hopefully, you and the others will reflect on your gaping ignorance, and pick up a book by one of those non-serious economists you disparage.
Read that Rothbard book I linked to. Skoukens books on the structure of production are also must have reading if you are to understand how micro and macro economics are really one unified whole, and not some mystery.
The reason why “serious” economists still teach in terms of macro and micro is precisely because their theories are not self consistent, nor universal in scope. It’s as if biology didn’t work by chemistry, and organic chemistry was ruled out as a possible topic. Austrian economics doesn’t suffer from such problems because its theories are both reductionist, emergent, self consistent, and universal. Just like biochem, chemistry, and biology are.
Current “serious” economics suffers from a discontinuity. If microeconomics were analogized to chemistry, and macro to biology then the serious economists would be claiming that biology didn’t run on chemistry. No. They would be claiming mysterious theories like Vitalism. They’d be claiming a sickness caused by overeating, was caused by a lack of vitality and trying to stuff the patient full of more food to increase his vitality. After all, living things contain vitality. Just like serious economists are trying at this very moment to stuff more money into a patient that suffers from too much money, too fast.
Witchdoctory it is.
Sam Grove | October 18, 2008, 8:20pm | #
Thanks for putting that out there.
Funny how economists are considered "serious" because they are able to recommend either expanding credit/money or contracting same, much as foreign policy pundits are considered "serious" because they are willing to call for killing people in far off lands.
___________________
Money is funny. Money is a function.
When someone borrows to start a business or work on an invention, what they are doing is arranging to handle costs, like eating, until they are able to generate enough income to cover operating costs and pay back lenders.
Even with a gold standard (which is not required, making it a standard, that is) there is no reason to suppose that extension of credit must thereby disappear.
Also, with deflation due to productivity increases, it takes less gold to buy stuff, so all that has to be done to extend the function of gold as money is to divide it down to smaller denominations or use less valuable substitutes.
The way to get around the deflation problem regarding the house is to buy it for a weight in gold. If the house retains its value, then you will get the same quantity of gold back when you sell. If it has increased in value, you will get more.
The reason fiat currency fools us is that people tend to forget that it is a floating rather than an absolute reference.
Think gold has gone up in price? Certainly, but has it gone up in value?
The value question is: what you can buy with it?
Link
It is unfortunate that mercantilism has left us a legacy that gold is wealth.
True wealth in the modern market lies in the ability to produce value.
Brian Macker | October 19, 2008, 6:39pm | #
When I said "I did not cover every aspect of the myth that hoarding money is bad for the economy. So it could have been a lot longer." I was also thinking about something Sam Grove pointed out. What he says here is precisely correct and bears repeating.
"Devaluation means lower prices thus enabling people to buy more with their money, hence the money won't be hidden, it'll be used. People won't stop investing, they'll always want more than deflationary returns.
There is no way that people will stop consuming because their money is increasing in value. They'll consume more. When money increases in value it's equivalent to having more money."
The counter-argument he was addressing fails to take into account why people save the gold. It's NOT to hold it till they are dead. They just want to have cash on hand for future consumption. 1) Had the prices been lower at the outset they may have consumed more in the first place. So the lowering of prices is going to trigger that decision. 2) Future consumption is important in and of itself. The theorist is in no position to decide that saving for future consumption is neccesarily bad and therefore should be labeled with the derogitory term, "hoarding".
I also think it is very important that the poor, the less than intelligent, the old, are allowed the option of a 100% safe investment, like holding hard currency during a deflation driven by productivity increases, or population growth.
If you are stupid it's easy to imitate others and save hard money for a rainy day. You get to participate average increases in productivity without risk. No decision making required.
If you are very old and living off your savings then your rate of return matters much less than safety because of the short time horizon. Over the short span of an average retirement a difference in return between 4% and 8% isn't a big deal. However a drop in stock, bond, or a bank failure can mean you don't get to eat.
Poor people also get at least some return on their cash holdings. They get the liquidity they need for emergencies with their cash on hand, while at the same time not experiencing a drop in value.
It's much much harder to pick the right bank, stock or bond.
At the same time the very fact that the hard money is appreciating in value is an incentive to save.
Not to mention the valuable fact that it allows savings to occur outside the prying eyes of greedy politicians.
It's a win, win, win, win, situation.
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