Objectivism/capitalism... something is wrong here.

I'm not much of a goldbug; I'd really prefer a non-inflatable fiat currency, thus freeing up a useful metal. However, I see that no such thing exists, currency exchanges can't provide significant enough safeguard against politicians looking for short-term gain, and for now only backing by rare material can prevent significant inflation.

Kurt, what are some real-world historical examples where using gold-backed currency ruined a country in the ways you've insinuated? (What happens without backing has already been mentioned with respect to the relatively slowly inflating US - which is nothing compared to many historical examples or even current events from Argentina to Zimbabwe.)

Post 141

Wednesday, April 5, 2006 - 12:45am

Kurt, you wrote:

OK, some questions for the gold people:

If money supply is constant (i.e. gold) then the price of money fluctuates, so the price of gold would fluctuate too. If you ask, fluctuate with regard to what? -- it's fixed against dollars?

The point you're missing, I think, is that gold, not paper dollars, would be the base money. Paper money would simply be receipts for the physical gold that is deposited in banks by its respective owners. Depositors would be given receipts by the bank, which would say, "Pay to the bearer on demand" a certain quantity of gold, for which they could redeem the receipts any time they wished.

But it's not fixed against other currencies and nowadays other economies are not insignificant. Gold would have to be worth the total of all traded goods in the world (not just here, or you make us very vulnerable if you think about it,) so gold would become ridiculously expensive -- there's a lot more value in real dollars than there used to be but pretty much the same amount of gold.

Expensive relative to what? Again, gold would replace fiat money; it would not be pegged to it. Gold would be "worth" whatever it could buy either here or abroad, and what it could buy is simply whatever people would be willing to sell in exchange for a given number of ounces.

The gold standard idea is poor because you're fixing money supply. That means that whenever demand for money goes up, you have instant inflation.

Whoa! What you're saying is not what I think you mean. In economics, an increase in the demand for money (in this case, gold) means that people want to hold gold rather than spend it. But that would imply less gold in circulation -- less gold exchanging against the existing supply of goods and services, which would cause the price level (denominated in gold) to fall, not rise.

Think of it this way: Suppose that computers are the only goods being bought and sold and that your society has 1000 ounces of gold with which to buy 1000 computers. Each computer will cost on average one ounce of gold, right? But suppose that the demand for gold increases, such that half of the 1000 ounces of gold is withdrawn from circulation, so that you now have only 500 ounces of gold being spent on the computers. How much will each computer cost? The answer is half an ounce of gold. Prices would fall by half.

That alone is hugely destabilizing. So, for example, the proponent of gold standard would have to find a way to regulate demand for US goods to keep that level constant.

There is no need to keep the price level constant, if that's what you're saying. For example, prices of computers and electronic equipment have been steadily falling, and, as Ed pointed out, prices fell throughout the 19th Century due to rising productivity relative to the supply of money, raising everyone's standard of living. How was that destabilizing?

Foreign businesses and governments would regulate our price levels.

I don't follow you, Kurt. How would foreign businesses and government "regulate" our price levels?

As it is now, when inflation looms, interest rates are bumped reducing demand.

The point is that on a gold standard, there would be no real threat of inflation, because the only way the supply of gold could be increased to any significant degree would be through technological improvements affecting mining technology, which improvements would also tend to augment productivity in other sectors of the economy as well, thereby offsetting an increase in the supply of money with an increase in the supply of other products, so that the price level would tend to stay fairly constant. But even if prices fell, it would not cause any major problems.

Other questions:
How will forex be set?

Gold would exchange against foreign currencies the same as the dollar does today. The only difference would be that the base money would be gold instead of dollars.

How will an arbitrary level be maintained against changing net imports.

Again, it would be the same as for dollars today. American currency that left the country would eventually come back, because foreigners would use it to buy and/or invest in American products. Outflows of gold would not be a problem. All it would mean is that less money would be spent on the same domestic goods and services, causing U.S. prices to fall. This would make American goods cheaper relative to foreign goods, which would increase the quantity demanded of American exports, causing gold to flow back into the country as payment for them.

Every time demand for money changes, the price of money changes. What does that do to lending or borrowing?

If there is a trend, either inflationary or deflationary, lenders would take that into consideration. For example, if the real interest rate is 3% and the inflation rate is 2%, what do lenders charge borrowers? They charge them 5% (3% plus a 2% premium to cover the rate of inflation). Conversely, if the real rate were 3%, but the "deflation" rate were 2%, the nominal interest rate would be 1%, because borrowers would be repaying the loan in more valuable money. Lenders and borrowers would adjust for the rate of inflation or deflation. This is something they already do.

What would the gold standard do with something like "long term capital management" -- (a big hedge fund that went bust)? Would we all just have to suffer a depression?

LTCM was made possible by the aggressive lending practices of banks under a central banking system, in which the government stands ready to bail out banks that make bad loans and investments. Under a free banking system with no government safety net, banks would be far more prudent in their loans and investments, because they would know that there is no one around to bail them out.

How is it that we'd stop the euros or anyone who doesn't like us from buying gold and destroying our forex and thereby trade?

I don't follow you. If this is a real threat, then why isn't it also a threat with today's dollars? In this respect, gold is just another currency, isn't it?

What would happen to currency options? Could you no longer hedge against risk?

I don't see why not. Exchange rates could still fluctuate against an ounce (or monetary unit) of gold, just as they fluctuate against the dollar today.

- Bill

Post 142

Wednesday, April 5, 2006 - 6:58am

Ed - and what is your wage in 1902 vs. now? I really don't think you are going anywhere with this argument.

Bill - I will address you later.

In the interests of honesty, I didn't write most of that last post, it came from a friend of mine who knows more about economics than I do. I am therefore trying to nail down the logic by using his knowledge vs. your arguments.

Post 143

Wednesday, April 5, 2006 - 10:33am

Kurt,

=============
Ed - and what is your wage in 1902 vs. now? I really don't think you are going anywhere with this argument.
=============

I'm only talking about economic welfare (ie. the purchasing power of economic agents). Purchasing power comes from production. We're 36 times more productive now, but it seems that MORE THAN HALF of the expected increase in purchasing power (from the noted increase in production) is 'missing.' I mentioned inflation reducing the purchasing power of the dollar by 95%.

Yeah, sure, I now make 10 times more money than what middle-class folks made in 1902 -- but their 'dollar' could buy 20 TIMES MORE GOODS than what my dollar can (they were twice as rich as I am now).

Ed

Post 144

Wednesday, April 5, 2006 - 1:45pm

Ed - Not true, you are lying with statistics. You need to look at exactly what each of those stats is measuring in a great deal more detail. For instance, productivity includes many items that simply did not exist in the past, and what you now buy are items that may not have existed back in 1902. This clinging to some idea that having a gold standard would magically have changed any of this is nonsense. If you say the massive growth in government spending - there you have much of your answer, but that is not because of the way currency is handled, but because of the way government is handled in other areas.

Some of what Ed says is also not very accurate, for instance:

1 - Are you assuming every country uses the same system? If not, the statements regarding gold and the value of the "1000 PCs" are also absurd - foreign nations could give us their gold (valued normally as a commodity) in exchange for our ridiculously inflated gold value (to match our productivity) and buy things for 1000x less than we sell it now!

2 - Improved mining tech is supposed to be equal to all other areas of the economy at their growth rates? This is ludicrous. There is no chance in hell that this will be the case, nor does mining gold magically stimulate the computer industry.

I think Objectivism has bought into some absurdities here that are at odds with economic reality. That is not good for Objectivism because it discredits the philosophy when something is so obviously flawed is promulgated.

Post 145

Wednesday, April 5, 2006 - 2:22pm

Kurt, you wrote,

Bill - I will address you later.

In the interests of honesty, I didn't write most of that last post, it came from a friend of mine who knows more about economics than I do. I am therefore trying to nail down the logic by using his knowledge vs. your arguments.

I must say that I was surprised to hear these argument coming from you. I was going to recommend that you read Murray Rothbard's What Has Government Done to Our Money, which I would have assumed that you were already familiar with. Your friend is obviously unfamiliar with the arguments against central banking or with the alternative to it, which is free banking, so he would not have read Rothbard's book either. Moreover, not only is he unfamiliar with free-market economics, but no one with even a passing familiarity with basic economic theory would have said that "whenever demand for money goes up, you have instant inflation." So, I wouldn't be inclined to trust what he says. :-)

Ed, you wrote,

Yeah, sure, I now make 10 times more money than what middle-class folks made in 1902 -- but their 'dollar' could buy 20 TIMES MORE GOODS than what my dollar can (they were twice as rich as I am now).

You're ignoring two things: First, your dollar income is much higher than theirs, so even though a dollar could buy more of certain things than your dollar can today, you have many more dollars than they did. Secondly, you're ignoring the increase in productivity and the technological progress that has taken place since 1902. The middle class today is vastly richer than the middle class in 1902. You have modern plumbing, superior refrigeration, better roads, vastly superior automotive transportation, air travel, central heating, air conditioning, advances in medicine and dentistry, communication, (e.g., internet, cell phones), entertainment (e.g., TV, movies, music), you name it. There is simply no comparison between 1902 and 2006. I was born in 1940, and can remember not having a refrigerator. We had an ice box instead. And of course we had no TV until around 1950, if I recall. The dollar may have been worth more in certain respects, but many of the goods that we have today weren't available to spend it on.

- Bill

Post 146

Wednesday, April 5, 2006 - 7:05pm

Kurt wrote,

This clinging to some idea that having a gold standard would magically have changed any of this is nonsense. If you say the massive growth in government spending - there you have much of your answer, but that is not because of the way currency is handled, but because of the way government is handled in other areas.

Fiat money controlled and manipulated by the Federal Reserve is a principal cause of inflation and its aftermath, recessions and depressions. This view is not peculiar to Objectivists but is acknowledged by non-Objectivist economists as well. At my university, several members of the economics department recognize this, and none are Objectivists.

Some of what Ed says is also not very accurate, for instance:

1 - Are you assuming every country uses the same system? If not, the statements regarding gold and the value of the "1000 PCs" are also absurd - foreign nations could give us their gold (valued normally as a commodity) in exchange for our ridiculously inflated gold value (to match our productivity) and buy things for 1000x less than we sell it now!

First of all, it was I who presented this example, not Ed. And it was simply to illustrate what happens to the price level when money is withdrawn from circulation.

Secondly, I have no idea what you're talking about when you say that "other countries could give us their gold (valued normally as a commodity) in exchange for our ridiculously inflated gold value (to match our productivity)." What ridiculously inflated gold value?? Our gold would be valued as a commodity as well. If foreigners gave us their gold, it would be in exchange for our exports, insofar as our exports were cheaper than comparable products in other countries including theirs. The extra gold that we received from them in exchange for our exports would increase the supply of gold money in our economy and raise the average level of prices, making our goods more expensive relative to foreign goods, which would have the effect of discouraging foreigners from continuing to buy from us and therefore of sending us their gold. Moreover, since foreign goods would then be cheaper relative to American goods, Americans would import the cheaper foreign goods, which would cause an outflow of gold to foreign countries, in turn reducing our price level and making our goods less expensive. In short, there would be a natural equilibrium towards which the average level of prices would gravitate as the citizens of different countries traded freely with each other.

2 - Improved mining tech is supposed to be equal to all other areas of the economy at their growth rates? This is ludicrous. There is no chance in hell that this will be the case, nor does mining gold magically stimulate the computer industry.

Of course, an increase in the mining of gold due to technological improvements would not by itself stimulate other sectors of the economy, and I didn't mean to suggest that it would. I guess my argument wasn't as clear as it could have been. What I should have said is that as technology improved, it would tend to have a number of different applications throughout the economy, not limited to one particular sector. Not that its application would be uniform across all sectors of the economy, by any means, but it would not be confined solely to the mining of gold. It would presumably have uses in the mining of other minerals, as well as in manufacturing, all of which would tend to increase the production of other goods in addition to gold. In short, an increase in the supply of gold due to improvements in mining technology would tend to be accompanied by an increase in the supply of other goods as well, not necessarily to the extent of offsetting entirely any increase in the price level, but it would certainly ameliorate it. And even with an increase in the supply of gold relative to other goods and services, the risk of inflation would be minimal, since the mining of gold is far more difficult and costly than the printing of paper money.

I think Objectivism has bought into some absurdities here that are at odds with economic reality. That is not good for Objectivism because it discredits the philosophy when something is so obviously flawed is promulgated.

Don't confuse the views of individual posters on this forum with some "official" Objectivist position on the precise effects that a gold standard would have on the rate of inflation. The only official Objectivist position, if you want to call it that, on money and banking is that central banking and fiat money is undesirable and has been the precipitating cause of serious downturns in the economy, including the Great Depression. But I think that Objectivists do by and large support a gold standard, assuming that gold were the medium of exchange that a free market in money and banking would voluntarily adopt. It's conceivable that if we had free banking and the elimination of a fiat currency, some other commodity money like platinum might be favored as a medium of exchange. Which commodity became widely accepted as money would depend ultimately on people's voluntary choices - on what sellers were willing to accept in exchange for their goods and services.

- Bill

Post 147

Wednesday, April 5, 2006 - 7:44pm

Ok - sorry I knew it was you William, just made a mistake.

If Gold = money we have now, 1 oz of gold would be worth like what, $100,000 now? - something crazy. Now you just inflated foreign nation's gold value by whatever that amount is, some vast number, making them suddenly have a LOT more money without doing anything for it.

The Depression, if anything, was worse because of the gold standard, not by its lack, because of the extreme rigidity of money supply. The tariffs that increased world wide stopped trade, and it went from there. Now then comes the fed - which screwed up and did the frigging opposite of what it was supposed to, but these errors are now well known to be so, and no longer the case.

Frankly, I am on the side of Milton Friedman and not Rothbard.

I guess this should be another thread, eh?

Post 148

Wednesday, April 5, 2006 - 7:52pm

Kurt,

=================
Ed - Not true, you are lying with statistics. You need to look at exactly what each of those stats is measuring in a great deal more detail. For instance, productivity includes many items that simply did not exist in the past, and what you now buy are items that may not have existed back in 1902.
=================

Alright already, perhaps I came on just a wee little bit too strong -- and overstated some things. Overstating things is never good -- it actually diminishes the point that you're trying to make. I shouldn't do things like that. Part of my personality is to be colorful, and to drop a linguistic-rhetorical bombshell -- every now and again.

But bringing up new items (not yet existing in 1902) isn't fair argumentation, either. My bottom line here is purchasing power for transferable utility. In order to compare the 2 times (1902 against now) -- one MUST compare the cost of a 'basket of goods' available in both time periods.

Bringing up the fact that more items are available to go into the basket now -- does nothing to offset the point that the SAME basket is harder to buy now (though perhaps not 10 times harder -- as I had said earlier, when I was trying to drop a rhetorical bombshell). Yes, we've advanced in availability of goods galore -- but the point is the purchasing power of economic agents.

Kurt, my point is really about statism (and it shows up as an economic stagnation for middle-class citizens). I have a question for you ...

Has our median purchasing power parity increased in this country -- in the last 103 years?

Ed

Post 149

Wednesday, April 5, 2006 - 7:57pm

Bill,

===========
The middle class today is vastly richer than the middle class in 1902. You have modern plumbing, superior refrigeration, better roads, vastly superior automotive transportation, air travel, central heating, air conditioning, advances in medicine and dentistry, communication, (e.g., internet, cell phones), entertainment (e.g., TV, movies, music), you name it.

The dollar may have been worth more in certain respects, but many of the goods that we have today weren't available to spend it on.
===========

What you refer to is an enlarged basket of goods. What I'm referring to is a median purchasing power parity.

We're not arguing about the same thing here.

Ed

Post 150

Wednesday, April 5, 2006 - 8:03pm

Kurt, what is all this about "rigidity of money supply" causing problems? Why don't you answer my question on Post 133?

What do you act to gain or keep? One of them is USD I'm sure, so it has value to you. Money isn't intrinsically valuable. Anything can be money. You can value anything. You can trade with anything. Some things are more liquid than others. Some things are more easily copyable than others. Some things are of value to more people than others.

USD's value goes down because the US Government makes tons of it for itself to use, constantly reducing the uniqueness and the value of each USD that current private USD owners currently have. How can it be a good thing for the current owners of USD to loose value, and for the US government to gain value in such a way? How can it help the economy to reduce the value owned by current USD owners?

(Edited to remove enraged confusion)
(Edited by Dean Michael Gores
on 4/05, 8:14pm)

Post 151

Wednesday, April 5, 2006 - 10:10pm

Kurt,

==============
This clinging to some idea that having a gold standard would magically have changed any of this is nonsense. If you say the massive growth in government spending - there you have much of your answer
==============

Right, 'government spending' is the metaphorical propane that fuels the flame (inflation) that has been burning up our savings accounts -- but if FDR hadn't taken us off the gold standard in 1933, then a' massive growth in government spending' COULD NOT EVER HAVE HAPPENED in the first place.

Without propane there could be no flame -- that is something we both agree on. But, in this particular case, no flame (inflation) = no 'massive growth in government spending.'

Ed

Post 152

Wednesday, April 5, 2006 - 10:39pm

From my link in post 149 ...

============
The PPP exchange rate is 1.023 from 1980 to 2002
============

Hard evidence that US citizens lost purchasing power -- in the 22 years between 1980-2002.

Ed

Post 153

Thursday, April 6, 2006 - 6:55am

Dean,

As to your previous post, not sure if I fully understand your whole question, but let me try it:

Are you saying that if the government did not increase the money supply (by giving tons of new USD to itself and its friends) then the economy would be worse off? Are you saying that if the money you owned was constantly becoming more valuable (since the number of goods to buy was going up, but the total sum of USD that exists stays constant) that you wouldn't produce as much value or trade for as much value?

The increase of money supply depends on what is happening with the economy, sometimes it is beneficial, sometimed detrimental, and which is which depends on good monetary policy, something the US has had since Greenspan took over. I hate to do this, but I am going to refer you to this: http://economics.about.com/cs/money/a/policy.htm
You can certainly google it yourself and find all kinds of information on how it works. Milton Friedman is also a good source.

Now, you are saying that all this $ is created for use by the government, when that is not entirely true. The money is also used by businesses to expand, individuals to start new businesses, credit markets, and foreign exchange.

Post 154

Thursday, April 6, 2006 - 9:44am

Ok - let us end this thread for now (at least as it relates to Gold) and I can bring it back up later.

I am going to read Reisman's book Capitalism and see what I think after that.

Post 155

Thursday, April 6, 2006 - 12:14pm

Okay Kurt (I've got to read that book, too!).

Ed

Post 156

Thursday, April 6, 2006 - 12:47pm

What!?! You guys babbling along - an ye aint even read the Book??????

Post 157

Thursday, April 6, 2006 - 1:56pm

It is true and I admitted from the start my economic knowledge is limited, but I could not really get the various arguments down in my head, so I thought it would be a good exercise. However, I have decided that it is too complicated and that I will have to learn more to be able to speak more clearly about any side.

Post 158

Thursday, April 6, 2006 - 3:54pm

Kurt,

Now, you are saying that all this $ is created for use by the government, when that is not entirely true. The money is also used by businesses to expand, individuals to start new businesses, credit markets, and foreign exchange.

The government is stealing (by reducing the value of US by decreasing its rarity) from people who currently have money (probably because they earned it) to give to people who no one is willing to give their own money to. How will this help the economy? What you are talking about is called "wealth redistribution". Its called "Socialism". Its where you take from the people who have produced and give to the people who couldn't gain resources by any means other than a gun. Yea, you get to see the few businesses that succeed by the government hand-outs. Do you also look at the rest of the economy that was set-back by their loss in their investment in USD?

Post 159

Thursday, April 6, 2006 - 4:33pm