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Thursday, September 27, 2007

Gresham's Law Enslaves Everyone

Gresham's Law is usually stated as "bad money drives out good money". This is an understatement. The full version of Gresham's Law is "money or services artificially overvalued by red market force drives out money or services that are fairly valued".

Consider an economy in a pure gold standard. The only money in circulation is gold coins. According to the government, worn out gold coins have the same value as newly minted coins. This is not true, because the worn out coins have lost some of their metal and weigh less. Government decree says that both coins are equal. Therefore, people will hoard the new coins and only spend old coins. If the old coins have lost 10% of their metal, then perhaps when the government isn't looking, someone will trade 10 old coins for 9 new coins. The problem is that government force says that old coins have the same value as new coins. In a true free market, the worn coins would trade at a discount or have to be reminted.

Gresham's law is most commonly cited in reference to a bimetallic standard. Before the advent of the Federal Reserve, the US briefly experimented with a bimetallic gold and silver standard. To encourage inflation, silver was used as money in addition to gold. The problem with a bimetallic standard is that the government fixes the exchange rate from one metal to the other. For example, when the bimetallic standard is started, one ounce of gold is worth the same as 15 ounces of silver. The government sets the exchange rate at 15:1. After awhile, suppose more silver is mined than gold. Perhaps now the correct free market exchange rate is 20:1. The government decree says that the exchange rate is 15:1. Therefore, people will hoard their gold coins and spend their silver coins.

The problem with a bimetallic standard is the government-mandated conversion ratio. People can use both gold and silver as money, provided the free market determines the exchange rate between gold and silver. The problem is the government's price-fixing attempt by fixing the exchange ratio. Whenever the government attempts to fix the price of something, it's really causing a scarcity. A bimetallic standard would work if the exchange rate from one metal to the other is allowed to be determined by the market.

I've also seen Gresham's law in another context. It's stated as "Bad merchandise drives out good merchandise." If customers don't know which cars are lemons and which cars are great, then the only cars on the market will be lemons. If customers are prevented from sharing information and figuring out what products are best, then only shoddy products will be offered for sale. That is the reason advertising is more important than the quality of product. Most customers don't have adequate tools for deciding which products are of high quality and which are lousy. Customers don't pay a premium for high quality, because they don't trust any vendor to consistently produce high quality. If there was an adequate information sharing system for customers to rate products, then quality products would be offered for sale.

The problem is that sellers have sophisticated systems for measuring and manipulating the tendencies of buyers. Customers don't share and aggregate information like a large corporation does. That is one reason why the current economic system is fasco-capitalism rather than a true free market.

If you consider a large corporation to be an extension of the government, then the people who control corporations can use Gresham's law for its own benefit the same way that the red market does.

Another way to phrase Gresham's law is: "Whenever the government tries to fix the price of something artificially low, it causes a shortage."

The government attempts to fix the price of productive work with income taxes and by fixing interest rates. By fixing the price of productive work, the government is causing a scarcity of productive work! That's the reason it's more profitable to be a red market worker than a white market worker. Literally, interest rates are the value of work in the present compared to work in the future. With inflation and artificially low interest rates, work in the present is undervalued and work in the future is overvalued!

Work in the present is undervalued and work in the future is overvalued. However, people need to work in the present to survive. In the language of a futures market, the demand for labor is contango, but the supply of labor suffers from backwardation. (In a normal futures market, prices are contango. A contango gold price means that the 1 year gold price equals the spot price for gold, plus capital costs, plus the cost of storing gold for 1 year. Backwardation means that the current price is greater than the future price. For example, in December, you need heating oil to make it through the winter. A June futures contract does you no good during the winter.) The supply of labor suffers from backwardation because people have to work in the present to make it to the future. The labor market suffers from backwardation because all laborers are slaves. The demand for labor is contango, because all the rules of the labor market favor employers. The red market has placed all the bias in the economic system against labor.

If you assume that a collapse of the current global economic system is inevitable, current labor has no value at all. The only value of current labor is that it might allow you to survive until after the collapse of the current system. There is no safe mechanism for storing value under the old system and carrying it forward to the new system. The only things that can store value are hard goods, like guns and food, perhaps gold and silver, or perhaps barter credits from a trustworthy trading partner.

It's like the old Soviet Union joke. You pretend to pay us, and we pretend to work! Remember that the USA is a communist country. Most American workers do the minimum possible to get by, because they've subconsciously figured out the truth.

Why bother working under the old economic system anymore? It's time to start building equity in the replacement economic system.

Summarizing, Gresham's law says "Things artificially overvalued by the government drive out things artificially undervalued by the government." Similarly, "When customers can't comparison shop effectively, bad quality goods drive out high quality goods." In other words, "Goods artificially overvalued by the red market drive out good that are artificially undervalued by the red market". The government causes red market labor to be overvalued and white market labor to be undervalued. Therefore, there is a shortage of productive white market workers and a surplus of red market wealth destroyers.

1 comment:

Anonymous said...

Gresham's Law really means that parasitic activity drives out productive activity. Why should anybody do anything productive when being parasitic is just as valuable. Banksters drive out productive workers. Corporations drive out small businesses. Governments drive out autonomous communities.

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