Gold standard = no investment?

[msl]

I was arguing with my roommate and he said that investment requires one to be able to borrow money, and if we had the gold standard we wouldn't be able to borrow money (or something), and so there would be less investment.

Does anyone know much about these types of issues and what I can read to learn more about this?

Thanks.

[angrydragon]

Yes you would still be able to borrow money with other people's money in the banks, which banks loan out.

[murrayrothbard]

In order to borrow money, someone has to SAVE money. Under a 100% reserve system all funds available for loan are the result of someone else's decision not to consume, i.e. to save. Thus all investment is backed by real savings and all growth of the economy is sustainable.

[Cleaner44]

Investing does not require borrowing at all. Certainly one can invest more if they borrow and that is also how people can over extend and go bankrupt.

[Fox McCloud]

you would still be able to, but it would be considerably lessened....and Praise the Lord if that happens!

as the current model stands, loans are encourage for nearly anything, from purchasing a candy-bar because you're $1.00 too short, clear up to a near million dollar home, despite the fact the family only has 1-2 children.

a gold standard would discourage frivolous loans, but would still be enticing enough for serious investors.

actually, there'd still be investment, but it'd be more serious investment (less stock speculation, and more true investment)....so, your friend is really really misled.

[OReich]

Yes, it means less investment, but it means the market-determined right amount of investment. The right amount of investment is however much money the people can set aside for the long-term, either by directly investing it or putting it in bank accounts (and then banks invest it). When the Fed prints money and the banks invest that new money, it triggers the devaluation of the dollar, until (when all prices adjust to the higher amount of money in the economy) your purchasing power is lowered. Imagine that instead of the Fed printing the money, whatever proportion they printed was instead taxed from you. Its effectively the same thing, only no one pays attention. We had investment and steady, consistent growth throughout the 2nd half of the 19th century, UNTIL the Federal Reserve and the boom/bust cycle it gives us.

[ClassicalLiberal]

When we were on the gold standard people could borrow money.

When people decide that they have more capital than they need or want to spend they will save it or invest it. This makes money available for business expansion, home mortgages, whatever. Being on the gold standard, or having some other form of "hard money," would encourage savings because people wouldn't lose the value of what they have saved to the inflation caused by expansions of the money supply and credit based on nothing.

[DRV45N05]

Growth does require investment, and investment does require borrowing. But investment also depends on SAVING and EXPECTATIONS about the economy. In a sound economy, assets that are borrowed are PERSONAL SAVING. The problem right now is that under our current fiat system and deficits, investment is primarily being driven by two things: creation of credit out of thin air, and foreign capital. This is fine for investment in the short-term, but what ultimately happens is:

* The erosion of the value of assets by price increases, thus inhibiting saving long-term with increased expected inflation and influences people to substitute saving for consumption;
* The collapse of foreign investment as the value of the currency on international markets collapses;
* The absorption of private savings by the government;
* The collapse of fiancial markets under too much debt, which worsens economic expectations long-term and discourages investment;
* And on and on.

In a sound economy with sound growth with a healthy financial condition long-term, you need high private saving to finance investment, you need the government to maintain balanced budgets, and you need a monetary system that isn't exclusively government-run and in which a central bank does not try to steer the economy by manipulating credit and bring about all of the negative consequences that come from it.

[mleclerc]

msl,
There are many web sites and videos that will help you to begin learning about money. You can quickly learn that changing our money system back to a gold standard is not complicated. The change would not limit investment so much as it would limit speculation, wild risk taking, and inflation. The money in circulation would retain value over time, limited to approx. 2% max growth as new gold is mined from the earth. As the economy grows, this limited money supply would grow in VALUE with it, not become debased as the fiat system ensures today and it would be possible to allow some fractional reserve adjustments as the needs of the economy demanded, which directly addresses your friends point. The key is that the reserve requirement would not be controlled by the private Fed Reserve Bank but by congressional order.

"Money Masters" and "Money as Debt" are two good threads to search on with many associated videos. Also kitco.com has many contributing writers that address hard money policy and the mess our fiat money supply has created.
Also, MANY great books are available; "The Creature from Jekyl Island"; by G. Edward Griffin is one... if you read this book, you will discover our world and money as viewed by those who control it. First published about 15 years ago, it predicted the financial crisis of today and provides the history behind how these bubbles are INTENTIONALLY created, and why our government colludes to maintain it.

With the gold standard, a bank would not be able to create new money on the spot and call a loan you promise to pay an "asset" against which they can immediately digitally create even more new money for the sole purpose of charging interest thereon. This is known as our current system of fractional banking and there is currently NO LIMIT on rolling this practice forward exponentially until it collapses, so long as they can get new borrowers on the hook... like right now in the CREDIT CRUNCH... Completely predicted and what was always occured with every fiat money system ever conceived in world history... it is the nature of its design to boom and crash while the inflation rapes those who save and rewards the ones who create the cash as they then buy up the mess they create on the cheap.

[Unspun]

He is confused. We won't be able to PRINT money to borrow, but we will still be able to borrow.

[redpillguy]

Right now the corrupt monetary system confers a HUGE subsidy on the entire financial industry. This subsidy ultimately comes from the middle class and the poor. Inflation recently has been 8-12% because of the debt-based fiat money system and the ministrations of the Fed.

Here is a good explanation:
http://fskrealityguide.blogspot.com/2007/11/ron-paul-federal-reserve-and-gold.html

Given the high inflation, one would have to invest his savings at >12% in order to get ahead. Most people do NOT have the skills to do this. Even if you had SOME skills, you are still at a disadvantage vis a vis the insiders and other professional money manager types.

The idea that you can leverage money (i.e. borrow at a certain rate and invest at a higher return), is one way to get ahead if you have the skills. However...

You have uncertainty from the boom/bust cycles; your investment decisions are addled by this uncertainty; you can be wiped out in one bust cycle, more easily if you are leveraged, and you start from zero again. The insiders know when the bust cycles are and therefore profit from them.

With a sound money system, inflation would probably be zero, and any boom bust cycles would be very mild if not non-existent. There also wouldn't be an unfair advantage conferred on large corporations that can borrow money closer to the Fed's rate. You and companies can plan much farther in advance, and there is no unfair subsidy on the financial industry. Money wouldn't be as easy to borrow, but I don't see why you wouldn't be able to leverage money if you had the necessary skills.

[Hancock1776]

With sound money, bad investments are more costly. Since the money is a real asset and not just digits printed out of credit, there's more risk to investing. You can invest your own savings, or you can borrow someone else's savings through their bank.

This also means that when people make bad investments, there's no guarantee of getting bailed out by the Fed.

The practical upshot of this is that yes, the capacity for investment narrows, but investments become necessarily SMARTER, and the market is permitted to make corrections for "irrational exuberance" which, while painful, is necessary to keep an economy sustainable and healthy.

Consider it a "Sustainable monetary policy."

--

I should also add that under sound money, investors and speculators are forced to be very smart and conservative, lest they lose all their money. This turns them into a very valuable part of the economy, since successful investors are people who are good at seeing potential, and funding it.

[braumstr]

The system we have now encorages people to live beyond their means. They borrow money printed by the fed and use it to buy mostly foreign made goods, these folks are thus far willing to accept our funny money.

Individuals that borrow like no tomorrow and get in over their heads land in bankruptcy court like every 7 years where a virtual credit reset button is pushed and they start the cycle all over again.

So far, this has worked to enrich off shore manufactures, disassemble our own manufacturing base and artificially prop up our standard of living.

Anyones guess how long this can be sustained, but it seems risky to assume it can continue forever.

We back up the whole shabang right now with the barrel of a gun.

[hrdman2luv]

This is from a poster at The Truckers Report . com who continues to say that going back to the gold standard would be a disaster. Thsi is what he posted. Can anyone give me a rebuttle to his claims?

One year's worth of GDP for the USA (+/-) 14,000,000,000,000 [14 trillion]


All gold ever mined in history approx. 145,000 tonnes
All gold ever mined dollar value 3,451,000,000,000 [$3.4 Trillion]

one tonne of gold equated to a value of U.S. $23.8 million in September 2007 ($739/troy ounces

U.S. Gold Reserves 8,133.5 tonnes
U.S. Gold Reserves 8133.5 tonnes X $23.8 million= $193,577,300,000.

Makes no sense to go gold people

[user]

Less malinvestment.

hrdman2luv, that's not how anyone would want to go to a gold standard.

Anyway, this is all moot. For now, Ron Paul just wants to legalize competing currencies.

[fsk]

Anyone who says "going back to the gold standard would be a disaster" is a fool, troll, or propaganda artist. My attitude is "I don't waste my time on fools".

If you want a good analysis, as redpillguy said, go visit my blog.

[hrdman2luv]

Anyone who says "going back to the gold standard would be a disaster" is a fool, troll, or propaganda artist. My attitude is "I don't waste my time on fools".

If you want a good analysis, as redpillguy said, go visit my blog.

That maybe true, and really not worth the debate with this guy. But, I am not going to give up on this until I can explain Ron Pauls reasoning for returning to the Gold Standard. I myself, cannot understand it. Gold is only a metal, and other than it's beauty, hold no value to me. As in Oil. Which is needed. Gold is not needed. It only makes jewerly. Whether on your fingers, necks or (in some cases), teeth. But paper money pays my bills, allows me to drive to town instead of walking or riding a horse. It allows me to heat and cool my home for me and my kids. paper money allows me to do anything I want to do. I can't go to the store and buy groceries with gold.
I understand thats not exactly what Ron Paul is talking about. But if it's based on gold, then it means the same.

Is anyone else having a problem with this "Gold Standard" theory? In the concept of the USA having more money than we have gold to back it?

[Enoch]

Anyone who says "going back to the gold standard would be a disaster" is a fool, troll, or propaganda artist. My attitude is "I don't waste my time on fools".

If you want a good analysis, as redpillguy said, go visit my blog.

Well that's a pretty good open minded opinion to have and you're such a fine representative of your viewpoint. How anyone could not agree with you I don't understand. Your charm and humility exudes from your words and we have nothing to fear from the fascist mongrels we've come to know with you blogging the gospel.

Ya know, I follow the words of One who warns about calling people "fools" so I'm not going to return stone for stone. But how returning to the gold standard doesn't enslave us to the World Bank, as Europe is and was during even the days of the Roman Empire and later under the Knights Templar, eludes me.

There's 2 large separate sides working to monopolize us, yet I believe they work for the same purpose.

We are free in this country under congress to issue debt free greenbacks at any time and don't need gold nor funny electronic barcodes, or stock or anything but the power of the law to back it. The filthy lucre stained hands of the gold bearers or the oil barons cannot get involved and it's the simplest idea in the history of man. We've done it in the Revolutionary War and the Civil War but then the Central Bank crept in and now we are slaves.

Furthermore, if there's enough gold in the world to back even our debt alone, then someone has figured out how to make it from mudpies and it's as worthless as a mudpie and hardly "rare" at all.

[Enoch]

Here..

http://209.85.173.104/search?q=cache:lB7SB5X1dyUJ:hexagon.physics.wisc.e du/teaching/2007f_ph448/interesting%2520papers/zeilinger%2520large%2520molecule%2520interference% 2520ajp%25202003.pdf+%2BAustria+%2Bquantum+%2Bmole cule+%2Bexperiment&hl=en&ct=clnk&cd=13&gl=us&lr=lang_en
http://www.media.mit.edu/physics/publications/papers/98.06.sciam/0698gershenfeld.html
http://www.uibk.ac.at/exphys/ultracold/?http://www.uibk.ac.at/exphys/ultracold/projects/rubidium/dark/index.html
http://www.dhushara.com/book/quantcos/qnonloc/eraser.htm
http://www.lifesci.sussex.ac.uk/home/John_Gribbin/quantum.htm
http://www.uibk.ac.at/exphys/ultracold/?http://www.uibk.ac.at/exphys/ultracold/projects/rubidium/dark/index.html
http://www.space.com/businesstechnology/technology/quantum_teleportation_010926.html

I suggest you take a break from you blog and read those links and understand the advancing world we live in today. To base any full blown new world economy on the molecular structure of a metal only insures the future dismantling and reassembling of said flimsy standard. I find it very hard to believe the master minds of the world's economy are not aware of the future advancements of science and the fable of turning lead into gold, is on the horizon of reality. Unless you are telling us these experiments are not real and these scientists are part of a secret propaganda machine with nothing better to do than foil your blog.

[DamianTV]

Section 8 - Powers of Congress

The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States;

To borrow money on the credit of the United States;

To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes;

To establish an uniform Rule of Naturalization, and uniform Laws on the subject of Bankruptcies throughout the United States;

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures; ...

Personally I would like to go back on the gold standard but I can understand that if taking 20 DOLLARS and making that equal to ONE OUNCE OF GOLD, well, that would kind of create a bit of a problem as gold is something insane like $800 for an ounce. What that means to you and me is taht the dollar in your pocket is worth about 40 TIMES LESS than it was when we were on the gold standard.

So if gold doesnt work, or the associated value of it does not work, congress does have the power to REGULATE THE VALUE THEREOF, and can set, hopefully statically, a different value to it. A standard or something to back the dollar is absolutely needed but it need not be gold. Kennedy tried to put us back on a standard with SILVER as the standard. A standard is designed to regulate BANKS, not the government. And the absolute worst thing we can do is to take one step backwards and have a FRACTIONAL RESERVE. That doesnt work either because the money is over printed and run out, causing the same problem that we have right now.

A standard is needed, and currency is the ultimate law of the land.

Couple of interesting videos on the problems with money that is not backed:

http://video.google.com/videoplay?docid=5232639329002339531 Google Video: Fiat Empire
http://www.youtube.com/watch?v=_dmPchuXIXQ

Fix it by having a standard and congress issues the money interest free.


“The Colonies would gladly have borne the little tax on tea and other matters had it not been the poverty caused by the bad influence of the English bankers on the Parliament, which has caused in the Colonies hatred of England and the Revolutionary War.”


"If the American people ever allow private banks to control the issue of currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered."

(also)

"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a moneyed aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."




The Refusal of King George the III to allow the colonies to operate an honest money system, which freed the ordinary man from the clutches of the Money Manipulators was probably the prime cause of the Revolution.

Benjamin Franklin

We need an honest money system.

[jon_perez]

I was arguing with my roommate and he said that investment requires one to be able to borrow money, and if we had the gold standard we wouldn't be able to borrow money (or something), and so there would be less investment.You would be able to borrow money (gold, iow), but because the supply tends to be lower (or cannot be increased at will according to 'demand'), interest rates will tend to be quite high.

Remember that even in an era of fiat money, interest rates were able to shoot up to 20% during the Volcker period.

[Bradley in DC]

You would be able to borrow money (gold, iow), but because the supply tends to be lower (or cannot be increased at will according to 'demand'), interest rates will tend to be quite high.

Remember that even in an era of fiat money, interest rates were able to shoot up to 20% during the Volcker period.

Jon, Jon, Jon....whatever misguided ideas you have in your head you get the theoretical understanding wrong which leads you to create an historically counter-factual understanding of the real world. Just for kicks, try to illustrate with real world examples to make your case over a longer period of time.

Volker: The experience in the 1970s was a direct result of several factors with Nixon "closing the gold window" in 1971 severing the international tie of the dollar to gold. Because of the irresponsible spending policies of the Vietnam War/Great Society, the monetizing of the government's budget deficits by the Fed created too many dollars (inflation) that forced interest rates to rise accordingly--the opposite of what was happening under the partial gold standard.

Volker, with Reagan's approval, actually contracted the money supply the last year of the Carter Admin after double digit growth previously. That action, more than anything else (along with Reagan's early attempts to cut the deficit, but that's another story where the Fed is the culprit of course) brought down real interest rates. You need to keep in mind real v. nominal interest rates. During the long years with gold and without a central bank monetizing debt, real interest rates were generally relatively lower in the long run than with your fiat sweetheart. ;)

[Tom228]

I wonder how many people here are aware that there are many downsides to a gold standard.

[jon_perez]

Volker: The experience in the 1970s was a direct result of several factors with Nixon "closing the gold window" in 1971 severing the international tie of the dollar to gold. Because of the irresponsible spending policies of the Vietnam War/Great Society, the monetizing of the government's budget deficits by the Fed created too many dollars (inflation) that forced interest rates to rise accordingly--the opposite of what was happening under the partial gold standard.Why would too much money cause interest rates to rise? The most basic law there is, is that of supply and demand. And as one can look at interest rates as the "cost of money (or of borrowing it)", the more supply of money there is relative to demand, the cheaper it should get. I don't see how it can be otherwise.


Volker, with Reagan's approval, actually contracted the money supply the last year of the Carter Admin after double digit growth previously.And how did Volcker contract the money supply? By targeting higher interest rates of course.


You need to keep in mind real v. nominal interest rates. During the long years with gold and without a central bank monetizing debt, real interest rates were generally relatively lower in the long run than with your fiat sweetheart.Okay, all the explanations aside, this is an interesting assertion and I'm going to keep this in mind.

[jon_perez]

You need to keep in mind real v. nominal interest rates.The distinction between "real" and "nominal" interest rates is contingent upon accepting the definition of inflation as being the rise in nominal prices.

If you claim to stick to the classical/austrian (or whatever) definition of inflation as being [nothing else but] the rise in the money supply (an ideologically driven definition if you ask me), it would be rather disingenuous to try to make a distinction between the two.

[therealjjj77]

I was arguing with my roommate and he said that investment requires one to be able to borrow money, and if we had the gold standard we wouldn't be able to borrow money (or something), and so there would be less investment.

Does anyone know much about these types of issues and what I can read to learn more about this?

Thanks.

Over-investing is bad. We saw this happen with the housing market. There is a "right" amount of investing and that should be determined by the market. If there is no manipulation of the money supply(Fed creating money and adjusting rates), you don't have bubbles and busts. The bubbles happen because of too much investing.

It's a bad idea for the market to build too many houses. Then you have a great deal of wasted resources in houses that will not be lived in for many years to come(just one example of this).

There is a right amount of investing and that is not for you or me to determine. The beauty of free market money is the markets will determine this.

What your roommate is referring to is fractional reserve banking. This is something that regular banks engage themselves in. It is a fruadulent practice but is being allowed. Suppose 10% is the amount they need as a "reserve". So if you deposit $1,000 of your money in that bank at 5% return, and that bank had a 10% reserve amount, then they would be able to loan out $10,000(most transactions are checking transactions and electronic transaction that do not use paper cash). Suppose they loan the money out at 9%. Due to the extra money in the market there would be 10 times the buying power. This would cause for a lot of spending which would be interpreted as a booming economy. So what happens to the price of "widget A"? If they max out their loaning ability the price of everything would tend to increase until it reached ten times the amount it was before. And then when the loans were paid back the prices would have to decrease because less money was in the economy and you would have a recession. Ultimately the bank made out big on your meager $1,000 and you lose, the economy loses, and the people they loaned to lose.

At 9% they would have made profit of $2,454.80 if all the loans were 5 year loans. That's like 49% APR. In other words, you really lost 44% since your buying power declined.

[jon_perez]

There is a right amount of investing and that is not for you or me to determine.Or rather, if we left it up to you or me or even someone with access to gargantuan amounts of economic data such as the Fed, none of these parties would still be able to come close to doing a proper job of determining the proper interest rates compared to the market as a whole.

This, at least, is the serious (as opposed to fanciful conspiracy theories) premise behind wanting to abolish the Fed.

[jon_perez]

Volker: The experience in the 1970s was a direct result of several factors with Nixon "closing the gold window" in 1971 severing the international tie of the dollar to gold. Because of the irresponsible spending policies of the Vietnam War/Great Society, the monetizing of the government's budget deficits by the Fed created too many dollars (inflation) that forced interest rates to rise accordingly--the opposite of what was happening under the partial gold standard.By the way, can you give the source where you got the above?

[Bradley in DC]

By the way, can you give the source where you got the above?

HA!

Like all of my other posts, it was my writing. In deference to your criticisms, I didn't hyperlink my comments with references. (not really, I was just a bit lazy, but you are certainly welcome to research it yourself if you're still in your mindless habit of just trying to refute what I say. :p :D)

[Bradley in DC]

The distinction between "real" and "nominal" interest rates is contingent upon accepting the definition of inflation as being the rise in nominal prices.

If you claim to stick to the classical/austrian (or whatever) definition of inflation as being [nothing else but] the rise in the money supply (an ideologically driven definition if you ask me), it would be rather disingenuous to try to make a distinction between the two.

No, if you could understand how economists think and talk rather than popular misperceptions, these discussions would be easier.

Inflation (the loss of purchasing power of the monetary unit) is the cause of the symptom of a rise in nominal prices. Just for the sake of argument here, let this one go for now. The questions on interest rates will be more productive for us and the thread, me thinks.

[Bradley in DC]

Why would too much money cause interest rates to rise? The most basic law there is, is that of supply and demand. And as one can look at interest rates as the "cost of money (or of borrowing it)", the more supply of money there is relative to demand, the cheaper it should get. I don't see how it can be otherwise.

Excellent question, my boy! Now we're getting somewhere. You're on the right track but not following it all the way through. Good to ask questions rather than just "dastardly" attacks. S & D, yes. Interest rates are the P in the S & D graph yes (and don't worry, we Austrians aren't that big on the crazy false empiricist equations so this won't get too complicated). So...

Holding the supply of money constant for this part of the theory, would you also agree that interest rates (the price of money/cost of money) are an expression of a ratio of savers' willingness to lend relative to borrowers' willingness to borrow? This would be the natural price level of money (interest rates) in a market economy. (your "time preference" for money, but we'll work on these terms later--and the importance of the inter-temporal aspects of money prices)

Now introduce the villain in this story, the Fed. Suppose for the sake of argument (and really stretching your limits of imagination here ;)), the Fed increases the supply of money artificially (definition of inflation, but we're having that discussion on another post). By "artificially" I mean that the Fed is increasing the supply of money beyond what savers are willing to lend freely. Put yourself now in the mind of that saver who has money to lend and consider S & D & P. In order to get the same REAL return on your investment under the new villainous scenario, you'd have to add an inflation premium to offset the loss of value of the purchasing power of your lending dollars. Thus, one always, by economic law, finds NOMINAL interest rates much higher in an inflationary environment. It's worse actually, especially for longer-term investments, because of the introduction of the added uncertainty there is a marginal increase in that nominal money price to compensate for that uncertainty. (Yes, this is a very simplified explanation.)


And how did Volcker contract the money supply? By targeting higher interest rates of course.

Okay, all the explanations aside, this is an interesting assertion and I'm going to keep this in mind.

The relative importance of the tools of the Fed has evolved over the years. I suspect your insights are a bit dated. For example, no one talks about reserve requirement ratios anymore because of the "sweeps" software (banks, justifiably, "sweep" the affected accounts offshore to the Cayman Islands overnight for a higher rate of return and to avoid the cost of the regulation and then "sweep" it back again the next morning), currency controls (anti-money laundering regulations aside, the breakdown of the Smithsonian Agreement put an end to this as an effective tool of monetary policy here--not in China, North Korea and other places though--I hope you're not arguing for their policies!); etc.

Because of a variety of reasons, the interest rate setting tools are similarly less relevant than Keynes envisioned. Market forces always seem to find a way of working around stupid regulations and other governmental interventions. The same is true here. The relaxation of capital controls, sweeps software, increases in communications technology, increased globalization of finance ("money goes where it's welcome and stays where it's well treated," as the saying goes), and a variety of other factors continue to change the debate.

In short, yes, the Fed has some direct control over (an increasingly irrelevant) set of interest rates. The marginal effect of that control has been severely limited for about half a century. In practice, the Fed affects interest rates by the FOMC's interventions in the supply of money. That is how Volker did it even back then: he CONTRACTED the money supply to combat inflationary price rises--the effect of which was a rise in interest rates. Yes, though, you're right, the real increase in market interest rates would, for the reasons I've outlined, be a natural and rational RESULT of those Fed interventions.

[Bradley in DC]

Or rather, if we left it up to you or me or even someone with access to gargantuan amounts of economic data such as the Fed, none of these parties would still be able to come close to doing a proper job of determining the proper interest rates compared to the market as a whole.

This, at least, is the serious (as opposed to fanciful conspiracy theories) premise behind wanting to abolish the Fed.

I'm not sure what you're saying here. The importance of letting the market set prices rather than artificial governmental/Fed interventions is paramount, yes. Prices tell information, or send "price signals" for savers and borrowers and investors. It is when the Fed falsifies those price signals that we get the cause of the artificial booms and busts in the economy.

[jon_perez]

Now introduce the villain in this story, the Fed. Suppose for the sake of argument (and really stretching your limits of imagination here ;)), the Fed increases the supply of money artificially (definition of inflation, but we're having that discussion on another post). By "artificially" I mean that the Fed is increasing the supply of money beyond what savers are willing to lend freely. Put yourself now in the mind of that saver who has money to lend and consider S & D & P. In order to get the same REAL return on your investment under the new villainous scenario, you'd have to add an inflation premium to offset the loss of value of the purchasing power of your lending dollars. Thus, one always, by economic law, finds NOMINAL interest rates much higher in an inflationary environment.But who would borrow from you at the higher nominal interest rate you desire when they can get it from the Fed (and their minions) at their lower targeted rate?

[Bradley in DC]

But who would borrow from you at the higher nominal interest rate you desire when they can get it from the Fed (and their minions) at their lower targeted rate?

Good observation. For those few special interests, you're right (the purple pocketed). But I thought we were talking about the real world where people mattered too! :p The Fed is much less relevant than you realize...and less so each day.

As I said, it was a very simplified explanation. There are, of course, myriad interest rates for different time periods (general yield curve would look like a flattened "U" since there are higher relative fixed costs for short-term loans and greater uncertainty--especially with the Fed's uncertainty premium factored in--for long term loans). There are different loan types with different qualities of assets with or without collateral, etc.

Do you get the reasoning and theory behind my explanation generally first? (after that we can differentiate the real world examples--but first we have to see if we understand each other and agree on the fundamentals. It has been clear you've not understood mine)

[jon_perez]

Good observation. For those few special interests, you're right (the purple pocketed). But I thought we were talking about the real world where people mattered too! :p The Fed is much less relevant than you realize...and less so each day.

As I said, it was a very simplified explanation. There are, of course, myriad interest rates for different time periods (general yield curve would look like a flattened "U" since there are higher relative fixed costs for short-term loans and greater uncertainty--especially with the Fed's uncertainty premium factored in--for long term loans). There are different loan types with different qualities of assets with or without collateral, etc.

Do you get the reasoning and theory behind my explanation generally first?Inflation means people will only be willing to lend their money out at a higher interest rate, but the Fed tries to combat this by creating more money in an attempt to drive the rates down to their target level. But given that they can create as much money as they can, how can they not win everytime?

[Bradley in DC]

Over-investing is bad. We saw this happen with the housing market. There is a "right" amount of investing and that should be determined by the market. If there is no manipulation of the money supply(Fed creating money and adjusting rates), you don't have bubbles and busts. The bubbles happen because of too much investing.

In Austrian-speak, it wasn't a problem of "over-investing" but "malinvestment"--resources being shifted from their highest use value based on time preferences because of the corrupting of the market price signals by the Fed.

[Bradley in DC]

Inflation means people will only be willing to lend their money out at a higher interest rate, but the Fed tries to combat this by creating more money in an attempt to drive the rates down to their target level. But given that they can create as much money as they can, how can they not win everytime?

Too many pronouns, sorry. What?:confused:

[jon_perez]

Inflation means people will only be willing to lend their money out at a higher interest rate, but the Fed tries to combat this by creating more money in an attempt to drive the rates down to their target level. But given that the Fed can create as much money as they need to, how can the Fed targeted interest rate not ultimately prevail?

[Bradley in DC]

Inflation means people will only be willing to lend their money out at a higher interest rate, but the Fed tries to combat this by creating more money in an attempt to drive the rates down to their target level. But given that the Fed can create as much money as they need to, how can the Fed targeted interest rate not ultimately prevail?

I'm not totally sure I understand you point, so here goes (if it seems I'm off, sorry): interest rates are set by the market (ok, not the ones the Fed directly controls); Fed interventions, yes, do affect the factors determining interest rates, as we've discussed. The Fed under Nixon/Carter had a "loose" monetary policy and interest rates were sky high (20% mortgages, if I remember that right). Beyond this, I'm not sure what you're trying to say.

[jon_perez]

I'm not totally sure I understand you point, so here goes (if it seems I'm off, sorry): interest rates are set by the market (ok, not the ones the Fed directly controls); Fed interventions, yes, do affect the factors determining interest rates, as we've discussed. The Fed under Nixon/Carter had a "loose" monetary policy and interest rates were sky high (20% mortgages, if I remember that right). Beyond this, I'm not sure what you're trying to say.I would've thought a "loose/easy" monetary policy is heavily associated with lower interest rates and not the opposite. Greenspan after all gets blamed for creating the mortgage crisis by keeping rates at 1% for along time.

[gaazn]

velocity of money

money has to move to create wealth. the gold standard would make money move less. but in any case, someone has to stop the federal reserve from printing a lot of money at will.

[Bradley in DC]

I would've thought a "loose/easy" monetary policy is heavily associated with lower interest rates and not the opposite. Greenspan after all gets blamed for creating the mortgage crisis by keeping rates at 1% for along time.

There are, of course, different interest rates for different things, and importantly there is the inter-temporal issue (Hayek's triangles, Prices and Production), and there's a delay in effects of monetary policy, generally around two years for full effect according to the monetarists (Friedman and Schwartz seminal book) that isn't really refuted by anyone.

But, no, think about it logically and historically and by observations around the world: look at countries with very loose monetary policies producing hyperinflation and tell me that you would think they'd have low interest rates...;)

[jon_perez]

There are, of course, different interest rates for different things, and importantly there is the inter-temporal issue (Hayek's triangles, Prices and Production), and there's a delay in effects of monetary policy, generally around two years for full effect according to the monetarists (Friedman and Schwartz seminal book) that isn't really refuted by anyone.

But, no, think about it logically and historically and by observations around the world: look at countries with very loose monetary policies producing hyperinflation and tell me that you would think they'd have low interest rates...;)So how does one define "loose" monetary policy then if not by looking at the interest rate (set by the central banks)?

My understanding so far is that central banks create money not directly but by setting/targetting interest rates and it is the mechanism of non-central banks borrowing from the central bank at such rates which accounts for the injection of new money into the economy.

I get the idea that high inflation means that lenders will demand a higher rate of interest, but your way of looking at it seems to be putting the cart before the horse. I am guessing also that we are talking about 2 different things here, you are talking about long-term interest rates and/or other rates not set by the central banks, whereas I was talking about looking at the Fed rates as a way of describing whether their monetary policy was easy or tight.

[Bradley in DC]

So how does one define "loose" monetary policy then if not by looking at the interest rate (set by the central banks)?

My understanding so far is that central banks create money not directly but by setting/targetting interest rates and it is the mechanism of non-central banks borrowing from the central bank at such rates which accounts for the injection of new money into the economy.

I get the idea that high inflation means that lenders will demand a higher rate of interest, but your way of looking at it seems to be putting the cart before the horse. I am guessing also that we are talking about 2 different things here, you are talking about long-term interest rates and/or other rates not set by the central banks, whereas I was talking about looking at the Fed rates as a way of describing whether their monetary policy was easy or tight.

Ah, there's the rub. "setting/targeting" are two VERY different things.

The Fed "sets" very few rates that have increasingly little relevance in the real world. This is just the way the economy, regulations, technological innovations, Fed rules, laws and financial innovations bring us. About $2 trillion dollars is transacted on the forex markets everyday (huge variations there of course) while DIRECT Fed actions on the SETTING of interest rates is comparatively nothing.

TARGETING interest rates is another matter. The FOMC's daily and multiple interventions in the bond market (increasing/decreasing the money supply) is the main issue. Simplistically, it is the Fed's monetizing of government debt that is the main problem (causing inflation and the resultant price increases of goods).

I'm referring to the "natural rate of interest" that there would be set by the market without artificial interventions by the Fed. It is a "loose" or "tight" policy when compared to what the real world would do without their shenanigans. In the real world, people are smarter than that and make accommodations. It is you, I believe, that is putting the cart before the horse.

[jon_perez]

Ah, there's the rub. "setting/targeting" are two VERY different things.

The Fed "sets" very few rates that have increasingly little relevance in the real world. This is just the way the economy, regulations, technological innovations, Fed rules, laws and financial innovations bring us. About $2 trillion dollars is transacted on the forex markets everyday (huge variations there of course) while DIRECT Fed actions on the SETTING of interest rates is comparatively nothing.

TARGETING interest rates is another matter. The FOMC's daily and multiple interventions in the bond market (increasing/decreasing the money supply) is the main issue. Simplistically, it is the Fed's monetizing of government debt that is the main problem (causing inflation and the resultant price increases of goods).

I'm referring to the "natural rate of interest" that there would be set by the market without artificial interventions by the Fed. It is a "loose" or "tight" policy when compared to what the real world would do without their shenanigans. In the real world, people are smarter than that and make accommodations. It is you, I believe, that is putting the cart before the horse.Sure. But when someone uses the term "loose" or "tight" in the context of the Fed's monetary policy, they mean lower and higher interest rates (those that the Fed sets) respectively. I get what you're trying to say here, but to try to reverse the meanings of the terms that people generally use is to confuse people.

[hrdman2luv]

This whole gold standard thing is one reaon why people aren't turned on to Ron Paul. We, the average joe's of the country couldn't care less about what the money is backed by. We don't understand it, and don't want to. We want to have a job, pay our bills, take care of our families, and save as much as we can save.

Ron Paul needs to get off the gold standard. After doing some checking, I found that he has a huge amount of stocks in Gold. Gold is a good investment. But, to be a member of congress and have this much interest in Gold, doesn't look good.

[AceNZ]

We, the average joe's of the country couldn't care less about what the money is backed by. We don't understand it, and don't want to.

Yeah. That's the problem.



We want to have a job, pay our bills, take care of our families, and save as much as we can save.

And those are exactly the same reasons why you should care what your money is backed by. Some of the issues related to not having a gold standard include:

-- inflation (which pretty much doesn't happen on a gold standard) causes the business cycle, which means you can lose your job and be unable to pay your bills and care for your family when a recession happens
-- inflation is a hidden tax that steals from everything you save
-- inflation raises your taxes faster than your income goes up
-- how much did your income increase last year? if it was less than about 12%, you are losing ground to inflation
-- how many things do you buy to care for your family that are imported? the prices of those things are going up even faster than inflation because of the destruction of the dollar (a gold-backed dollar would be a very strong dollar)



Ron Paul needs to get off the gold standard. After doing some checking, I found that he has a huge amount of stocks in Gold. Gold is a good investment. But, to be a member of congress and have this much interest in Gold, doesn't look good.

Sorry you feel that way. So it's not OK to own gold stocks, but it is OK to own stock in companies like Halliburton? On what basis does owning gold stocks not "look good"?

[kyleAF]

Growth does require investment, and investment does require borrowing. But investment also depends on SAVING and EXPECTATIONS about the economy. In a sound economy, assets that are borrowed are PERSONAL SAVING. The problem right now is that under our current fiat system and deficits, investment is primarily being driven by two things: creation of credit out of thin air, and foreign capital. This is fine for investment in the short-term, but what ultimately happens is:

* The erosion of the value of assets by price increases, thus inhibiting saving long-term with increased expected inflation and influences people to substitute saving for consumption;
* The collapse of foreign investment as the value of the currency on international markets collapses;
* The absorption of private savings by the government;
* The collapse of fiancial markets under too much debt, which worsens economic expectations long-term and discourages investment;
* And on and on.

In a sound economy with sound growth with a healthy financial condition long-term, you need high private saving to finance investment, you need the government to maintain balanced budgets, and you need a monetary system that isn't exclusively government-run and in which a central bank does not try to steer the economy by manipulating credit and bring about all of the negative consequences that come from it.

You also need to realize that the rampant consumerism cannot survive under this sort of system. Some people just can't live with that conclusion. I can, and think that in reality, we must.

[kyleAF]

Here..

http://209.85.173.104/search?q=cache:lB7SB5X1dyUJ:hexagon.physics.wisc.e du/teaching/2007f_ph448/interesting%2520papers/zeilinger%2520large%2520molecule%2520interference% 2520ajp%25202003.pdf+%2BAustria+%2Bquantum+%2Bmole cule+%2Bexperiment&hl=en&ct=clnk&cd=13&gl=us&lr=lang_en
http://www.media.mit.edu/physics/publications/papers/98.06.sciam/0698gershenfeld.html
http://www.uibk.ac.at/exphys/ultracold/?http://www.uibk.ac.at/exphys/ultracold/projects/rubidium/dark/index.html
http://www.dhushara.com/book/quantcos/qnonloc/eraser.htm
http://www.lifesci.sussex.ac.uk/home/John_Gribbin/quantum.htm
http://www.uibk.ac.at/exphys/ultracold/?http://www.uibk.ac.at/exphys/ultracold/projects/rubidium/dark/index.html
http://www.space.com/businesstechnology/technology/quantum_teleportation_010926.html

I suggest you take a break from you blog and read those links and understand the advancing world we live in today. To base any full blown new world economy on the molecular structure of a metal only insures the future dismantling and reassembling of said flimsy standard. I find it very hard to believe the master minds of the world's economy are not aware of the future advancements of science and the fable of turning lead into gold, is on the horizon of reality. Unless you are telling us these experiments are not real and these scientists are part of a secret propaganda machine with nothing better to do than foil your blog.

Ouch, man. Settle down!!

You may be correct in the philosopher stone prediction, but you've missed the point. There's no problem there. There's the solution.

Gold's got its worth owing to its natural properties. But its not the only thing that can work.

The question is this: what's the one thing that can never be created, nor destroyed...the same thing that is the principle behind the philosopher's stone. That's the source of wealth in this universe...as wealth can only be conceived of in the context of life. Life requires this one thing to keep living. Money (including gold) is a method of transferring it in an orderly and social fashion. Gold transfers it rationally, and prevents unsustainable excess, or "bubbles". Limitless paper money does not.

(Energy)

[kyleAF]

Human society has been an exercise in determining the best medium and context of exchange. Once we figure out how to counterfeit (and thus debase) gold, we'll have taken the next step toward the "real" money of the world.

[kyleAF]

That's (IMO) a good way off yet. And we've got MUCH more pressing issues at the moment: the crap paper and digital entry money that's threatening to sink us.

[spudea]

With the current inflation cycle, everyone is forced to spend now, borrow now, because a dollar today is worth more than a dollar tomorrow.

With the gold standard, we wouldn't need as much loans, because our money retains value. We would be able to SAVE tremendous amounts more. This saving capital is what would be used for loans. Loans are supposed to come from saving capital. But our current system is totally screwed up by the fed printing billions per day.

[spudea]

This whole gold standard thing is one reaon why people aren't turned on to Ron Paul. We, the average joe's of the country couldn't care less about what the money is backed by. We don't understand it, and don't want to. We want to have a job, pay our bills, take care of our families, and save as much as we can save.

The average joe NEEDS to care about their standard of living going DOWN! As inflation rises and prices increase, your average joe income is staying the same! Meaning you save less and less, so you are forced to work 50 hrs a week just to make ends meet...