Without Stable Money, There Can Be No Trust
John Tamny, 07.21.10, 06:00 PM EDT
If you can't trust what a dollar is worth, what can you really trust?
"Imagine being contacted by a real estate agent about a 5,000-square-foot house, only to show up and find a home half the size. Off the bat, the prospective purchaser would have very little trust.
Of course the above scenario is purely hypothetical given that a foot is a foot. Since its definition is unchanging, 5,000 square feet means the same today as it did 20 years ago. Whatever the level of trust home buyers have in their real estate agents, square footage will never be a factor; that is, unless the length of the foot is allowed to "float," and its length declines. Suddenly, 5,000 square feet could very well mean 2,500 square feet in "real terms," and trust in real estate agents will plummet.
this is the case with the world's currencies. Debased currencies without definition are what the world has suffered since August of 1971, when President Richard Nixon severed the dollar's link to gold. No longer defined in terms of the most stable commodity on earth, the dollar has been left to fluctuate without a golden anchor, its value changing minute by minute, hour by hour, and day by day."
Sully/If that’s what he’s arguing I agree with him completely. Where I have an issue is his (I assume based on your piece and the foregoing discussion) belief that an “independent” group of bureaucrats can be expected to be more trustworthy and wise in managing the money supply than the market will be if the fiat currency has to be backed up with reserves of a commodity ala the gold standard.
Gold gets my vote over human oversight,based on 5000* years of Currency manipulation by those that could(Why does a Dog lick his Genitals?)
CK/"No market can work efficiently without basic rules. Buchanan argues that the stability of the unit of account should be one of them – that the entire system would function more efficiently if everyone’s financial calculations weren’t subject to radical aggregate revaluation"
CK,Let me show you two approachs to revaluation,A more Conservative approach but still way above JB's tolerance level would be FDR who left the Gold arrangement at 22$s Oz,and returned to it at $35 OZ
Nixon left Gold at 35$ Oz/115$ Oz,and took it to 0$s/115$Oz,
The depreciation of the Dollar based on Market prices,from 1971 to 2010\ is approx. 25% per year average decline, based on Gold's appreciation. In terms of overall inflation,a Dollar in 1970,would buy 95$s* worth of mixed goods and services today. I have never met a proFiat defender that is able to explain how that level of Inflation was generated,or why that level of Inflation is a benefit.
*Based on a CPI that includes Housing,Food,Energy,and Clothing(And why should a CPI exclude those items that 95% of the population must buy daily/weekly/monthly. )
SULLY/than by the impersonal market; but the market keeps on keeping on biting them in the rear.
Silver $18 Oz
Gold $1200 Oz
something he should have been impeached for.
What would the charge be?
The “bad” thing about the gold standard was/is that it prevented all wise and all just governmental experts from playing money value games. We’ve long been off the gold standard; but there it (gold) is still, inhibiting governmental experts from playing money value games, it’s trading price serving as a check on the real value of fiat money
Bullseye,When a Government runs an actual Gold Standard,the Gold Dollar Ratio has to stay equiviliant to the actual market price for Gold. Before we went Fiat in 1971,the market price of Gold went to 115 Oz(Fixed Price was 35 Oz)because of Lyndon Johnson Debt. That movement in Gold exposed the Game we had been playing of going into debt to pay for war and welfare without raising taxes,and forced Nixon's hand. (BTW,as a direct result of Fiatism,OPEC 4xed the price of oil to adjust for the flimsier dollar,and so it goes.
I don’t see why you attribute bad faith or cowardice to him
I don't,I see him peeking at the Fiscal Universe made possible by Computerization as an older man,and thinking,I'll hand my sound general principles off,and watch where they go.
The question that JB partially answered, inasmuch as he had the stomach for it,was that the innovations of 1971,evolved into the causes of the current crisis, remember,he avoided directly opposing the 1971 program,he offered general common sense type caution,but stayed away from controversy. Even as the Derivatives Beast grow big enough to Bankrupt the World Economy,JB was not present on that one. He had no desire to be a Pariah.
For those of you that depend on Larry Kudlow for their Financial analysis,here's some Kudlovian follow-up.
"They seem unaware that China is slowing and the US is tipping into a second leg of the Long Slump. Last week's collapse in America's ECRI leading indicator to -9.8 marks the end of the V-SHAPED REBOUND. If this means what it normally means - recession within three months - Europe must take immediate action to prevent being drawn into a deflationary vortex. Spiralling public debt precludes further Keynesian spending, so this must come from central bank stimulus. Tight fiscal policy offset by ultra-loose money is the only option for Europe, the US, and Japan."
Ambrose Evans-Pritchard: more comment
No student of Milton Friedman is surprised by the US relapse. The Fed has allowed M3 money to contract at a 10pc pace for much of this year - the Great Depression rate. The economy has hit the wall with the usual lag. Textbook stuff. Never ignore the quantity theory of money.
The US Conference Board's indicator is not yet flashing a red alert, but that is because it gives weight to "yield curve inversion", where long rates fall below short rates. This indicator is meaningless in a Japan-style bust where policy rates are zero.
I suspect that Fed chair Ben Bernanke knows the economy buckled around the Ides of June, but is stymied by hawks at the regional Feds. All he can do for now is to talk down credit costs through hints of more quantitative easing, or QE2. In this he has succeeded. The yield on two-year Treasuries fell to an all-time low of 0.5765pc on Friday. It's Weimar, all right: circa 1931, not 1923."
"The implications for our tax structure would eventually be immense, too, even if we didn’t go all the way to Mike Hudson’s neo-progressivism – my term, not his. Hudson probably counts as a market socialist in conventional terms – though I’d be curious to hear how describes himself."
He describes himself as a Free Market Capitalist who understands that the economy was hijacked by the FIRE segment in terms of tax incentives. Factor in the Carry Trade with the triumph of the Fiat,and the FIRE segment displaces the entire manufacturing segment. FIRE/FINANCIAL INSURANCE REAL ESTATE/or the Financial,Governmental Complex.
BOB/If Buchanan means anything, he means a fundamental change in our financial system. Otherwise, what’s the point
We did a fundamental change in our financial system in 1971,and most people today don't know/care much about what happened before 1971,they think it's been the way it is today forever,39 years is forever.
I could take you on a tour of the carnage done to our economy since 1971,but you would think I'm a lunatic. I do have a lot of "FACTS" at my disposal,but I admit,it's not easy to figure it out. I always thought that everybody saw it clearly,but I now realize that
most just don't get it. But I'll give you a hint,in order for us to get out of this malaise,the Debt Overhang,has to be written off,and that's a hard reality for those that loaned too much to too many that can never pay it back. The way out of this mess is to reloan to everyone possible,but in order to do that,we have to clean up the liability side of the individual balance sheets. Long term,we have to stabilise our Currency.
" But this seems to me not a silver bullet, but a can of worms"?
It's a GOLD Bullet,and can you imagine a bigger can of worms than our economy is right now?
I guess I’m assuming that Buchanan’s proposal is intended as a back door method for Rex’s view. Otherwise, what’s the point?
Rex's View/Views have been on a variety of Conservative/NeoConservative forums for over ten years,and to say my views were mightily disagreed with in those forums is understatement. Lately,as the crisis may be deepening,many of those who lately opposed my opinions,are now more open to them. At ZC,and Contentions,everyone jumped me at first. So nobody is offering me a back door,or needs to,I've been coming through the front door for a long time,uninvited. Also,I have made avaliable to my Zombie colleagues,many viewpoints by well known journalists and academics that tend to support my contrarian views, I was invited by the Financial Times and The Huffington Blog to be interviewed,which I agreed to,but I never saw either interview in Print. My track record in examination of the effects of Fiat Money,Floating Currency,Toxic Derivatives,Shadow Banking,Off Balance sheet Liabilities,perverted Government/Banking Accounting Practices,and other areas of concern,are gaining credibility,I am knocking the Front Door Down.
Exactly – I was just responding to the idea that the Constitutional Value Squad would have to bend the rest of the world to its will in order to act to guard the dollar’s value.
I like what you're saying. However,as you know,I prefer the CVS to be Gold,which would bend the entire World's economy to ITS will.
" And, as the limited and ultimately ineffectual constraints exercised by the gold standard, as it OPERATED IN REALITY, were allowed to disappear, the RAVAGES OF MONETARY ANARCHY became visible for all to see."/JB
"As we know, at least since 1971, there has been no commodity
basis for money. Instead, the commercial world has been
described as embodying a pure paper or fiat unit of exchange and
account, which has essentially become the United States dollar.
And this unit retains value only to the extent that the effective
aggregate supply is kept within limits by the issuing authority, in
this case by the Federal Reserve Board. Because money, as such,
has no intrinsic value and because it is nearly costless to produce
(printing paper), there is no economic reason for economizing on
usage, as would be the case if money were defined in terms of a
designated commodity, which has nonmoney use value and which
requires resources to produce.
Recognition of this elementary but crucial difference between
commodity-based and fiat (paper) money has profound implications
for institutional-constitutional design and operation. Since,
under a fiat system, there is no efficiency logic for economizing on
money, as such, there is no justification for traditional banking that
allows for the generation of multiple account values from fractional
reserve bases. The central logic of leverage banking, of any
sort, is absent under the operation of a pure fiat money system."/JB
BOB/ In fact he does not refer to globalization directly at all. The large and growing interdependence of the national economies of the world is a fact that can’t be simply brushed aside. Without some discussion of this, this idea seems incomplete at best.
Here's some discussion,the only reason that we are dependent in any way on China,and the only reason China is pushing for a change in the Primary Reserve Money* is that we need to borrow from them to finance our Balance of Trade shortage and General deficits,and they hold Trillions of our dollars that they rightly worry might shrink. AND The only reason we have such Gargantuan Balance of Trade problems and deficits is the Floating Fiat system.
*Russia is pushing hard to make Gold the Primary Reserve Currency(Guess Why? Duh?)This issue was at the heart of the recent Spy story that hit the news big.
CK/" That doesn’t mean it would be perfectly successful at all times, and anyway you couldn’t run a moment to moment adjustment of currency in circulation ensuring that the theoretical exchange value of every single dollar was exactly the same permanently."
There are only three options a Government/Central Bank has with its Currency(1)Devalue It-Inflation(2)Overvalue it-Deflation(3)Keep it as close to the same as possible. #s1&2 are always negative eventually,so #3 is the only rational policy,unless you prefer short term advantages like Bubbles and Boom Bust Cycles.
Roosevelt then closed the gold window, but that was the least of his offenses
Please talk to Professor Black about Roosevelt's "Offenses"
NARC/Rex’s conscripted army of mostly foreigners fight
an infinite number of battles on distant shores
No deferrments for my Draftees. If we're going to have infinite battles,we're going to shed infinite American blood in order to appease the wet dreams of the War Lovers.
@ Rex Caruthers:
(1)Clearly it is controversial. Otherwise that’s what we would be doing.
(2)My point is that ” stable predictable money” is possible only in a trivial sense. Yes we can order that a dollar is worth a specific quantity of silver, or whatever, but the real economy will accomplish the effect of fiat money through other media of exchange. Except such a system produces higher highs and lower lows with less predicability.
(2)In any event, I guess I’m Troskyite about this, ie I don’t think “stable predicable money” is possible in one country. The globlalized economy depends on fiat money and the US no longer has the critical mass to bend the world economy to its will.
(1)It is not controversial in the sense that given a choice,everything else being equal,no one would choose paper money over gold backed money,so why,in this free market we love so much,,don't we have competitive currencies, answer,everyone would choose the Best currency,because of stability. One dollar =s 1/35 oz gold in 1970,one dollar =s1/1200 oz gold in 2010,which would you choose in 1971,gold backed or paper dollars,the point is you can't choose,and the other point is that the constitution mandates the government maintain not destroy the value of its currency.
(2)Please check the buying power of our dollar in 1944 and compare it to 1970. Then compare 1971 to 2010. (If you compare 1944 to 2010,you'll need a barf bag)
We don't need and are not required to bend the world economy to our will,we are required to have a monetary and fiscal system that functions. BTW,who is the biggest buyer in the World Market,doesn't the biggest buyer get the best terms,and the sellers have to kiss the buyers ass. I've been selling all my life,has the global economy changed that dynamic?
Bottom line here Bob,there is no credible argument left to justify the Fiat money/ international floating currency system in terms of what is good for America,it's been great for China,and India,and Japan* and the EEC*.
"Until like us,they wrecked their economies on Fiat Debt.
The title of JB's article should have been"The reconstitutionalization of money." As long as our quarters were 100% Silver,we were operating within the Constitution,when the market price for the Silver in a quarter was 75 cents and we reacted to that by eliminating most of the silver in that quarter and replacing it with base metal,that was "Unconstitutional" literally. Reconstitutionalizing could be as simple(and as complex)as putting the Silver back into the quarter. Removing the all Silver half dollars & dollars from circulation was another unconstitutional Tactic.
@ Rex Caruthers:
What you do with Valuable stable money is put it in long term investments like new corporations that grow,and make one rich for a lifetime,not a few years or months.
Like tulips or cornering the gold market
A dollar should have the same purchasing power tommorow,next month,next year,or in a hundred years,just stable predictable money;is that in any way controversial?
JB understands the following but is too much a gentleman to discuss it. The devaluing of our currency created a large predator class that was no longer particularly interested in the prosperty of their nation,because all nations became their nation of eternal fiscal transactions. However,a byproduct of this process,was,by historical standards,the predator class became much stupider. The predators assumed that 0 interest loans presented little risk,for three reasons(1)They could get up to 18% or more on their 0% debt,and (2)Inflation would eat up any additional risk,and(3)the dollar continued to devalue. But Three unexpected things occured(1)The Japanese carry trade was interrupted for over a year(2)Lack of Liquidity Deflated their obligations,and the Sheep(Debtors)started defaulting. Part of #3was due to an unintended effect of the new bankruptcy laws the banks wanted so badly,and got(Don't Wish),which was the inability of millions of high earners to declare bankruptcy and thus proceed into a new round of profitable/high interest new debt. This was one of the important ways that we escaped recession in the past,now cut off.
JB understands that "Consistent High Value"currency is not something that the Capitalists can just throw around say in Toxic Derivatives that they don't even understand. Cheao,unstable money is what allows the kind of Crap investments we have seen for decades. What you do with Valuable stable money is put it in long term investments like new corporations that grow,and make one rich for a lifetime,not a few years or months.
Where has all the greatness gone?
THIS column wishes respectfully to propose a temporary ban on references in political debate to both American greatness and American exceptionalism. This is not because Lexington denies that America is great and exceptional. It is. The case for the ban is that both terms have been emptied of serious meaning, converted into slogans and pressed into service, especially by the right, as a club with which to bludgeon political opponents. They should be put aside at least until America emerges from its present economic crisis, and perhaps for longer.
Implementing this ban will not be easy. Greatness is part of America’s birthright and lexicon. Its 18th-century founders had no doubt that they were embarking on a daring experiment inspired by the highest ideals of the Enlightenment. In the 19th century came Manifest Destiny, great migrations and the push to the West, civil war and the end of slavery. The 20th brought titanic struggles and famous victories against fascism and communism.
Even today, battered by recession, deep in debt, mired in war, Americans remain proud of their country, and justly so. America still towers over rivals in scientific virtuosity, military power, the vitality of democracy and much else. Polls show that Americans are still among the most patriotic people in the world. This summer 83% told Pew that they were “extremely” or “very” proud to be American.
But taking pride in one’s country and wittering on about its greatness are different things. Glenn Beck, a conservative broadcaster, ended a recent interview thus: “Do you think this is a country of divine providence? A country of American exceptionalism? If you believe those two things to be true, that means God has a special purpose for this land and freedom.”
Talk like this is tiresome. Mr Beck is not advocating piety so much as claiming a divine imprimatur for his own prejudice against big government. Just think what a relief it will be, once Lexington’s ban comes into force, to be able to debate the role of government on its merits, without bringing providence into it.
The ban will also liberate America’s politicians to speak like normal people. At present, failing to lard their speeches with God and greatness can get them into serious trouble
Is it the number that matters or the socio-economic effect?
Part of the Socio-Economic effect is,of course, the Residential Real estate Overhang:Here's the latest on the $4Trillion imbalance/ This is another subject that "We" are "Happy" with as is short term:
Is it to the Republicans' advantage to attack Obama on the basis that he is using Deception of every sort to claim an unemployment rate of 9.5%,when it appears to be much higher,or do they feel that a high unemployment rate makes them look bad,or whatever? Anyway,the unemployment rate is much higher than 9.5,it is Depression high,and here are two articles on this:
In my lifetime,!00% Silver Dollars were commonly used,.50 cent pieces were 100%Silver,quarters were 100%Silver,Nickels were !00% Nickel,and Pennys were !00%Copper. We also had Mills that were plastic,A Red Mill was 1/10th of a penny,a green Mill was 5/10ths of a penny,mills were used to pay sales tax,that is how valued our money was,does anyone think it's a bad thing to have 100% Silver coinage? Why would that be a problem? In my Father's time,there was all kinds of Gold Coins used for everyday transactions,and paper money was a Gold or Silver Certificate,again,what is wrong with having that kind of money.
The constitution says coin money and maintain its value,what happened to that Silver Dollar?