[hrothgar]

 blackshoe, on 2011-July-13, 17:17, said:

Ridiculing one's opposition is a common tactic — one usually employed by those who have no other recourse.

There is very little point in doing anything else when dealing with Austrians, Libertarians, Gold Bugs, and the like...
None of these disciplines are reality based...

• There are no representative examples of societies organized arround Liberatarian principles. The closest examples that we have are failed states like Somalia. As such, discourse with Libertarians always involves comparing reality (warts and all) with some kind of idealized theoretical construct
  
• In a similar vein, I'm not aware of any significant economies that currently maintain a gold standard. A lot of them tried very hard to do so. However, one by one they were forced off this standard because it doesn't work. Here, once again, trying to debate these topics involve comparing reality to some kind of a bizarre counter factual.

As a practical example, consider your own (recent) contribution to this thread:

Quote

One thing I'm sure of: statements that "if we had kept a 100% gold standard, we would be in worse trouble now" or, for that matter "if we had kept a 100% gold standard, we would be in better shape now" are of no value, since there's no way to know which one is right.

It's pointless to involve these individuals in any kind of serious policy discussions and the suggestion that their opinions should be accorded much respect is down right silly.

[kenberg]

I have a friend, call him Phil since that's his name, who thinks the creation of the Federal Reserve in 1913 was the beginning of our downfall. Well, that was some downfall.

We have our discussions but I have largely regarded them as intellectual exercises since it seemed unlikely that we would be abolishing the Fed, or going back to the gold standard, or any of these things. With the rise of the Tea Party, I guess all such bets are off.

About gold: This has always seemed to me to be the classic example of something being worth a lot because someone is willing to pay a lot for it. What's the current price? $1600 an ounce or some such? Why? Because people are willing to pay it on the assumption that people will be willing to pay that much or more in the future. Sort of like a painting by Warhohl, or by Picasso for a less nutty example. Or the housing market. Gold will work as a standard only as long as people believe in it. In any practical terms it cannot possibly be worth $1600 an ounce, and if the world comes to decide they have better uses for $1600 than to buy an ounce of gold, the price will collapse.

Until recently, people pretty much believed in the dollar, more or less. Perhaps a Picasso was a safer asset, but dollars were considered good. Eric Cantor and friends are doing their best to put a stop to this and there is a fair chance that they will succeed. They have already done plenty of damage, check with Moody's.

[blackshoe]

Gold has two uses: as a money, and as a, hm, "trade good", I guess. It's useful for things like jewelry, fillings (although we have cheaper and, I think, better materials for that now), electrical connectors, and probably other things. As a money, it's worth what it is. IOW, an ounce of gold is an ounce of gold. As a trade good, it's worth whatever the market will bear.

A "dollar" (the word has an interesting etymology) was, at one time, arbitrarily set to some fraction of the value of an ounce of gold. Now it's set to... I dunno, nothing. It's "fiat money", worth whatever people believe, and the government says, it's worth, I suppose.

In discussing a return to a gold standard (and I agree it's not likely to happen any time soon, if ever), Rothbard suggests one approach (that he did not particularly like) is to set the value of a dollar arbitrarily to $35 a gold ounce, as it was just before 1933. This would cause deflation, of course, but he seemed to think that's not necessarily a bad thing. Me, I don't know. The other approach he suggested was to figure out how many dollars there are, and divide that by the number of ounces of gold available to back it. He said back in the 60s that doing this would raise the value of gold (in dollars) by at least a couple of orders of magnitude (he was not, that I have found so far, specific). There wouldn't be deflation then, but I suppose there might be other problems. Anyway, if his estimate is accurate, or even close, $1600 an ounce is not absurd; it may even be too low. A third possibility, says Rothbard, is some combination of these two extremes. He didn't give a specific combination, he suggested it needed study (a point with which I agree). However, given he suggested that in 1962, and no one has done such a study yet (AFAIK), we're back to "ain't gonna happen".

One of the problems we (humans) have always had with money is that we do things like mint a coin, call it a "dollar" or a "quarter" or whatever, and then when the coin wears down, losing some of its metal, we want to "revalue the dollar". Or do what governments used to do, and by fiat rule that a "quarter" was worth whatever, no matter how much silver was actually in it. Wrong way to do it. Instead, label it as what it is by weight and accept that as the weight changes, so does the value. A one ounce silver coin will buy whatever one ounce of silver will buy. A 0.9 ounce silver coin, whatever it's labelled, will buy 0.9 what a one ounce coin will buy. I dunno, makes sense to me. All this stuff with the bankers arbitrarily telling us what a "dollar" is worth, and setting of interest rates, and telling the Treasury to print another billion dollars or whatever, strikes me as smoke and mirrors.

[hrothgar]

 blackshoe, on 2011-July-15, 10:15, said:

In discussing a return to a gold standard (and I agree it's not likely to happen any time soon, if ever), Rothbard suggests one approach (that he did not particularly like) is to set the value of a dollar arbitrarily to $35 a gold ounce, as it was just before 1933. This would cause deflation, of course, but he seemed to think that's not necessarily a bad thing. Me, I don't know. The other approach he suggested was to figure out how many dollars there are, and divide that by the number of ounces of gold available to back it. He said back in the 60s that doing this would raise the value of gold (in dollars) by at least a couple of orders of magnitude (he was not, that I have found so far, specific). There wouldn't be deflation then, but I suppose there might be other problems. Anyway, if his estimate is accurate, or even close, $1600 an ounce is not absurd; it may even be too low. A third possibility, says Rothbard, is some combination of these two extremes. He didn't give a specific combination, he suggested it needed study (a point with which I agree). However, given he suggested that in 1962, and no one has done such a study yet (AFAIK), we're back to "ain't gonna happen".

One of the problems we (humans) have always had with money is that we do things like mint a coin, call it a "dollar" or a "quarter" or whatever, and then when the coin wears down, losing some of its metal, we want to "revalue the dollar". Or do what governments used to do, and by fiat rule that a "quarter" was worth whatever, no matter how much silver was actually in it. Wrong way to do it. Instead, label it as what it is by weight and accept that as the weight changes, so does the value. A one ounce silver coin will buy whatever one ounce of silver will buy. A 0.9 ounce silver coin, whatever it's labelled, will buy 0.9 what a one ounce coin will buy. I dunno, makes sense to me. All this stuff with the bankers arbitrarily telling us what a "dollar" is worth, and setting of interest rates, and telling the Treasury to print another billion dollars or whatever, strikes me as smoke and mirrors.

Just to be clear:

The gold standard describes the situation in which a group of "bankers" specifies the value of a dollar (in this case, pegging it to an ounce of gold)

In our current situation, the value of the dollar is completely unpegged, meaning dollar is pretty much set by the market. (In this case, but whatever someone is willing to trade you for a dollar). Admittedly, governments often intervene to affect the value of a dollar in the market. However, this pales in comparison with the amount of machinations which were necessary trying to maintain an appropriate gold reserve.

Moreover, its not like governments don't involve themselves with precisely the same set of actions with respect to the gold supply, even to the extent of removing enormous amounts of gold from the world market.

[kenberg]

I have vague and probably not totally reliable memories from my youth of gold being pegged at thirty some dollars an ounce. Maybe thirty-five. I think the main reason for abandoning this was that it was untenable. It's always a problem for bankers or governments or anyone to set a price and enforce it. As Richard notes, there were various maneuvers most of which I was only vaguely aware of. The bottom line was that gold resisted being pegged.

I have had various friends with various positions. When I was in grad school a friend ran for governor on, I believe, the Socialist Workers Party ticket. Minnesota was not a Socialist State will not become one. Neither will they, or we, adopt the Libertarian agenda. Much more to the point, our national leaders either will or will not address the looming default crisis responsibly. It's looking more and more like "will not" will be the way we go. Charles Krauthammer this morning has some idiotic column about how Republicans are being "set up" to take the blame for this. Set up my eye, they have eagerly sought it. Michele Bachmann says all this talk about how bad it will be is just scare tactics by our evil President. And of course by Moody's. And the Business Roundtable. And by a wide range of economists.

[PassedOut]

 kenberg, on 2011-July-15, 11:21, said:

Charles Krauthammer this morning has some idiotic column about how Republicans are being "set up" to take the blame for this. Set up my eye, they have eagerly sought it. Michele Bachmann says all this talk about how bad it will be is just scare tactics by our evil President. And of course by Moody's. And the Business Roundtable. And by a wide range of economists.

And by anyone else who has a clue about the risks of default.

[blackshoe]

 kenberg, on 2011-July-15, 11:21, said:

I have vague and probably not totally reliable memories from my youth of gold being pegged at thirty some dollars an ounce. Maybe thirty-five. I think the main reason for abandoning this was that it was untenable. It's always a problem for bankers or governments or anyone to set a price and enforce it. As Richard notes, there were various maneuvers most of which I was only vaguely aware of. The bottom line was that gold resisted being pegged.

The problem with this view is that it's backwards. It's not the "dollar" that's important under a commodity standard, it's the standard itself. When you set the "price" of gold at $35 an ounce, you're not saying that an ounce of gold is worth $35, you're saying that a dollar is worth (actually, represents, it's called "representative money," 1/35th of an ounce of gold.

Gold only "resisted being pegged" because people wanted to be able to change the money supply, arguing that the money supply needs to fluctuate. Under a free market commodity standard, it doesn't. Or so I've read (remember, I'm still learning).

Krauthammer produces a lot of idiocy. As for Congress, well… "Suppose I were a Congressman. And suppose I were an idiot. But I repeat myself." - Mark Twain

Any particular state (or all of them) is/are unlikely to "go Libertarian" (or any third party - that's why they're called third parties, isn't it?) any time soon. But there is a growing libertarian (note the difference in capitalization) sentiment in this country.

It occurs to me that I'm going to have to devote as much study to other schools of economics ("mainstream", at least) as to the Austrian. Then (and only then) can I make up my own mind as to which one is "right". I'm disinclined to accept the pronouncement of some authority on that just because he is an authority.

[hrothgar]

 blackshoe, on 2011-July-15, 12:47, said:

Gold only "resisted being pegged" because people wanted to be able to change the money supply, arguing that the money supply needs to fluctuate. Under a free market commodity standard, it doesn't. Or so I've read (remember, I'm still learning).

You're only looking at one side of the coin... the other reason the gold resists being pegged is that the gold supplyis subject to ridiculous amounts of variation over time.

Historically, the most significant cause of variance has been trade imbalances. (This is what ultimately forced most countires off the gold standard. They didn't have the financial where-withall to kept their currencies pegged at a fixed rate)

There have been a number of well documented cases in which discoveries of significant new supplies of gold have caused equivilent problems. (The large influx of "new world" into the Spanish empire and the subsequent inflationary ripples around the Mediterranean is the best known example. If the Russian gold reserves ever hit the open market we'll see something equivalent)

Then, of course, there are always commodity bubbles like the one we're experiencing now...

Simply put, there is no reason why one should expect gold's value to remain stable over time...
More important, if you're maintaining a gold standard you need to ensure that the ratio of gold reserves to GNP remains stable.
This is an even more silly assumption

[luke warm]

 blackshoe, on 2011-July-15, 12:47, said:

I'm disinclined to accept the pronouncement of some authority on that just because he is an authority.

i guess that means you're even less inclined to accept those of non-authorities then, eh?

 hrothgar, on 2011-July-15, 13:11, said:

More important, if you're maintaining a gold standard you need to ensure that the ratio of gold reserves to GNP remains stable.

why is such a thing mandatory, exactly?

[hrothgar]

 luke warm, on 2011-July-15, 13:26, said:

why is such a thing mandatory, exactly?

The point of a gold standard is to (try to) avoid long term inflation/deflation.

You lose your ability to conduct monetary policy
You dramatically increase the variance in prices
However, you hope that you can control long term inflation / deflation

If you don't maintain a constant ratio between your bullion supplies and GNP, you're one decent benfit gets tossed out the window.
Because statements that you are on the gold standard don't mean jack ***** unless you have bullion to back things up...

And maintianing those cash rserves is a royal pain in the ass... I recommend looking at British attempts to avoid withdrawl from the Exchange Rate Mechanism, culminating in Black Wednesday. (admittedly, the ERM used currency bands rather than pegging currencies directly, but the basic concept remains the same). Alternatively, look at the collapse of Bretton Woods.

[hrothgar]

 luke warm, on 2011-July-15, 13:26, said:

i guess that means you're even less inclined to accept those of non-authorities then, eh?

In the land of the blind, the one eyed man is King...

I don't claim to be an authority on monetary policy. My graduate work focused on game theory and inventory control models.

With this said and done, in undergrad I majored in government, economics, and history.
I took a lot of economic history in one of the top universities in the country.
(Wesleyan is usually ranked in the top five liberal arts colleges in the country)
While I was there, I received the departmental award for the top major in two of those departments and had the best GPA in the third. I got a full ride scholarship for grad study at University of Chicago before I finished my junior year of undergrad. I was in the top handful in my class at MIT.

Still, I probably don't count as an authority on monetary policy, however, compared to you yahoos, I'm mother fraking Solomon...

[PassedOut]

 blackshoe, on 2011-July-15, 12:47, said:

The problem with this view is that it's backwards. ... When you set the "price" of gold at $35 an ounce, you're not saying that an ounce of gold is worth $35, you're saying that a dollar is worth ... 1/35th of an ounce of gold.

Isn't saying that gold is worth $35 per ounce exactly the same as saying that $1 is worth 1/35 of an ounce of gold?

[luke warm]

 hrothgar, on 2011-July-15, 13:57, said:

Still, I probably don't count as an authority on monetary policy, however, compared to you yahoos, I'm mother fraking Solomon...

no argument from me, your majesty

[blackshoe]

 PassedOut, on 2011-July-15, 14:01, said:

Isn't saying that gold is worth $35 per ounce exactly the same as saying that $1 is worth 1/35 of an ounce of gold?

I don't think so. It's not a case of different systems of measurement, like comparing inches and centimeters. If gold (or silver, or for that matter some other commodity) is the medium of exchange, then it is the standard against which other things, including representative money (e.g. dollars) are measured. You may not remember it, but when I was young, you could take a dollar bill (or any currency bill) to any bank, and redeem it for the equivalent value of silver (or in some cases gold). It said so, right on the bill. Somewhere along the line (1971 I think), you couldn't do that any more. So back when you could do that, a "dollar" bill was redeemable for a "silver dollar" coin which (in theory at least) would contain exactly however much silver a "dollar" was worth. Nowadays, you can't "redeem" a dollar bill (or a dollar coin, which these days is "base metal") for anything. Mainstream economists (among others) claim that it doesn't matter — their fiat money is backed by "the full faith and credit of the Federal government". As to that, I refer you to current news reports about Moody's and Standard and Poor's' reviews of the US's credit rating.

[PassedOut]

 blackshoe, on 2011-July-15, 16:18, said:

 PassedOut, on 2011-July-15, 14:01, said:

Isn't saying that gold is worth $35 per ounce exactly the same as saying that $1 is worth 1/35 of an ounce of gold?

I don't think so. It's not a case of different systems of measurement, like comparing inches and centimeters. If gold (or silver, or for that matter some other commodity) is the medium of exchange, then it is the standard against which other things, including representative money (e.g. dollars) are measured. You may not remember it, but when I was young, you could take a dollar bill (or any currency bill) to any bank, and redeem it for the equivalent value of silver (or in some cases gold). It said so, right on the bill.

But that 35:1 is just an exchange rate, as we have today between currencies. Don't you think that gold is subject to the same fluctuations as any other medium of exchange, relying upon the confidence that the demand for gold remains stable?

[hrothgar]

 PassedOut, on 2011-July-15, 17:56, said:

But that 35:1 is just an exchange rate, as we have today between currencies. Don't you think that gold is subject to the same fluctuations as any other medium of exchange, relying upon the confidence that the demand for gold remains stable?

The difference is that the government agrees to main a specific exchange rate between a dollar and gold.
In doing so, the government is typically compelled to buy / sell gold on the open market to maintain whatever standard it chooses.

[Winstonm]

Quote

Nowadays, you can't "redeem" a dollar bill (or a dollar coin, which these days is "base metal") for anything

This is absolutely untrue - it is simply that we are not used to thinking in correct terms. Dollars redeem debt - they are debt-backed. It says so right on the bill: this bill is legal tender for all debt, both public and private. If you have a $50K mortgage and you give the banker who holds the mortgage $50K your money is redeemed for a unencumbered title to the property. The IRS will accept dollars and your debt to Uncle Sam is redeemed.

The libertarian/austrian concept of money is inaccurate. They say that money is a store of value. But money is nothing more than the exchange medium that represents labor, either manual or intellectual. Island nations have successfully used sea shells as currency - the shell has no worth other than to represent a value, and that value is the value of a work product. Those shells are worthless today.

There is no magic in gold or a gold standard. I know Richard may jump my case about this next statement, but IMO there is no such thing as inflation with fiat currency, as inflation is simply a change in prices. Adding to the money supply, if done equally across the board all at once, affects nothing. If an item today costs $10 instead of the $5 it cost yesterday, that has no affect on me if my salary and savings also doubled overnight - relative cost is the same. The only time you can have a genuine inflation is with a commodity-backed currency, where creating new bills without a compensating increase in the amount of the commodity backing it will devalue the currency, and goods and services truly will cost more because of it.

What we see as inflation IMO is the temporary imbalance in the supply of new fiat money, because it is not distributed evenly across the board.

[blackshoe]

 Winstonm, on 2011-July-15, 18:29, said:

This is absolutely untrue - it is simply that we are not used to thinking in correct terms. Dollars redeem debt - they are debt-backed. It says so right on the bill: this bill is legal tender for all debt, both public and private. If you have a $50K mortgage and you give the banker who holds the mortgage $50K your money is redeemed for a unencumbered title to the property. The IRS will accept dollars and your debt to Uncle Sam is redeemed.

You're twisting my words, Winston. Of course you can use a dollar to pay a debt. But the dollar isn't backed by your debt — it's "backed" by the country's debt. Or so they claim.

BTW, there's no such thing as an unencumbered title to real property. Ever heard of eminent domain? Or property taxes?

[Winstonm]

 blackshoe, on 2011-July-15, 20:51, said:

You're twisting my words, Winston. Of course you can use a dollar to pay a debt. But the dollar isn't backed by your debt — it's "backed" by the country's debt. Or so they claim.

BTW, there's no such thing as an unencumbered title to real property. Ever heard of eminent domain? Or property taxes?

I am not attempting to twist your words but to point out how our money supply works. The government will no longer exchange your dollar bill for a certain amount of gold, but it will accept your dollar bill as payment for tax debt. In that sense the dollar is redeemed for your debt.

Money is not created from nothing - it is created as a response to borrowing. If no one wants to borrow, there is no money creation. There is a 1:1 asset/liability relationship between money and debt when money is created. It remains that way when money is paid back. Where it falls to pieces is when loans are made against collateral that is overvalued and then the loans cannot be repaid - then the 1:1 relationship is destroyed and the underlying collateral is not enough to make up the losses - this is what happened in the Great Recession - a debt/deflation event that was centered around the housing bubble/collapse but occured in the debt markets.

BTW, your point about unencumbered titles applies regardless of whether money is gold backed or fiat. The issue is that the debt is redeemable with fiat currency, because it is debt-backed. Its value is determined by the value of the trust in repayment. This is why a default would be so serious for the U.S. borrowing abilities - although I suspect that as Top Economic Dog, the default in the U.S. debt would be harder on countries like Greece, Spain, Ireland, Italy, etc. as the reasoning would be that if the Top Dog can default then these other countries are no better than junk bonds.

[kenberg]

Quote

Money is not created from nothing - it is created as a response to borrowing. If no one wants to borrow, there is no money creation. There is a 1:1 asset/liability relationship between money and debt when money is created. It remains that way when money is paid back.

As is frequently the case in theoretical discussions of economics, I have no idea what this means. Economics and philosophy both produce that effect with me. I am sure the speaker means something, I just have no idea what it is.

I teach a class and I am not given potatoes and a goat, I am given money. I use the money to buy potatoes and, if I wish, a goat. Who is borrowing what from whom? What is the 1:1 asset to liability? It seems to me that the basis of money is the faith that it will buy something for a roughly predictable price. I agree to perform a job for, say, $30,000. I know roughly the amount that I will have to pay in taxes and I know what a new car costs. Even if I won't receive the money for, say, three months I figure I can do the job, get paid, buy a new Honda, pay my taxes, and maybe have a little left over. I accept or do not accept the job based on whether I think that the reward is worth the effort. This, to me, is a clear way to think about money. I have no idea how to recast it in some debt mode with assets and liabilities.

There is some point beyond abstraction here. I see the government's job as preserving a predictability stable dollar. A good part of today's economic problems is said to be that no one is confident about the future. This seems right to me. It's critical that big time investors and small time spenders believe that we will get our debt under control and we will honor our financial obligations. It's not hard to see why many people have doubts about this happening.

I have often claimed that one of the results of spending a life in mathematics is to make me be very cautious about theoretical concepts, and the theory of money that you espouse fits right into that. I honestly don't get it. It's not so much that I disagree as that I have no idea what it means or how to bring it to bear on any actual problem.