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Tuesday, January 1, 2008

Megan McArdle Trolls the Gold Standard

On the Ron Paul Forum, someone asked about this thread on, referring to this article by Megan McArdle on

"The Atlantic" is a mainstream magazine. Of course, they are going to tout the official party line. The official false party line is that history discredited the gold standard, and we should all be grateful for the Federal Reserve and Ben Bernanke for their sound management of the US economy.

Unfortunately, none of the posters on gave a good response to Megan McArdle's troll article, so I guess I have to do it.

I get tired of repeating the same arguments over and over again. On the other hand, some people find a direct response to a troll to be helpful.

In short, you don't get anything out of a gold standard that you didn't bring with you. If your government is a credible steward of the money supply, you don't need it; and if it isn't, it won't be able to stay on it long anyway. (See Argentina's dollar peg). Meanwhile, the limitations on the government's ability to respond to fiscal crises, the necessity of defending against speculative attacks in times of crises, and the possibility of independent changes in the relative price of gold, make your economy more unstable. It's a terrible idea, which is why there are so few economists willing to raise their voices in support of it.

The US government and the Federal Reserve are *NOT* credible stewards of the money supply.

Any foreign country that pegs its currency to the dollar is effectively ceding its sovereignty to the Federal Reserve. Why should it be a surprise that foreign countries with a dollar currency peg suffer economic disaster?

An unsound monetary system is the CAUSE of fiscal crises. If you have a sound gold standard, your money CAN'T be under attack by foreigners.

Most economists get their funding, directly or indirectly, from the government. Any economist who advocated a sound monetary policy would soon find himself out of a job.

No Ron Paul supporter (or other gold standard advocate) has managed to articulate to me what problem the gold standard solves. Inflation is low, and even better, relatively predictable, so the expectation is built into asset prices. Moreover, most people on fixed incomes are retirees, and most retirees get almost half their income from Social Security, which is indexed for inflation.

According to M2, inflation is around 7%. The scumbags at the Federal Reserve ceased publishing M3. Some sources say M3 is growing at a rate of 15% or more. I wouldn't call inflation of 7%-15% to be "low". The CPI is a biased measure of inflation.

Social Security is *NOT* indexed for inflation. Social Security is indexed according to the biased CPI, which understates the true inflation rate.

This Ron Paul speech lists a number of reasons, all of them wrong:

1. The Federal Reserve destabilizes the economy with its "boom and bust" monetary policy. This is hard to square with the fact that the longer the Federal Reserve has been in existance, the more stable the economy has been. Dr. Paul's words strongly imply that he believes that there was no business cycle in the 19th century, which is untrue; as best we can tell, recessions were much longer and deeper before America had a central bank.

This is the Compound Interest Paradox. I don't see how you can credit the Federal Reserve with "stabilizing the economy". The US economy is shrinking! All the Federal Reserve "stabilizes" is profits for politically connected insiders.

The problem before 1913 was REGULATION of banking. The large banks practically had a monopoly over the gold supply, and they acted as a cartel. Regulation of banking limited the ability of non-cartel banks to counteract the manipulations of large cartel banks.

Also, some sources say that boom/bust cycles were LESS SEVERE before the Federal Reserve was created. History is written by the winners, and it's not possible to go back in time and check.

The most severe boom/bust cycle in US history was the Great Depression. That occurred after the Federal Reserve was created. A depression that large would have been impossible without the Federal Reserve.

2. Americans don't save because they're afraid inflation will erode their savings. This is daft. Moderate inflationary expectations are built into the interest rates that banks offer. After thirty years of stable monetary policy, a good portion of the population doesn't even remember high inflation, and the ones that do are mostly retired and spending down their savings. Americans don't save because . . . well, have you tried the Wii? It's awesome.

American's don't have savings because of the Compound Interest Paradox. There literally isn't enough money in circulation for everyone to have savings.

The US population doesn't understand inflation, because they've been brainwashed by corrupt economists and a corrupt media.

Americans are being squeezed by a corrupt economic system. For most Americans, their pay raises aren't keeping pace with the true inflation rate of 7%-15%. It's hard to have savings when your inflation-adjusted paycheck is decreasing.

If you keep your money in a bank, you will earn a negative inflation-adjusted return. This is a further disincentive for saving. Most Americans don't feel comfortable investing in the stock market or in physical gold or silver.

3. American exporters are whipsawed by our fluctuating currency. Unless Dr. Paul has plans to put the entire world back on the gold standard--which I mote would require the kind of powerful international organization he's so suspicious of, or invasion--our currency will still fluctuate relative to others if we're on the gold standard. Every time the price of gold changes in another country, American exporters will either be helped or hurt by a change in the relative prices of their goods. The gold standard will shelter exporters from currency fluctuations only in their trade with other countries on the gold standard. There are no other countries on the gold standard.

If the US returned to a gold standard, you can be sure that other countries would follow.

Under a gold standard, a natural arbitrage mechanism insures that imports equal exports. Otherwise, you wind up importing or exporting gold.

Under the current system, the US imports in exchange for a piece of paper with a number printed on it. Such a system cannot continue forever.

Other countries accept a worthless piece of paper in exchange for exports to the USA. How can US exporters be economically competitive under such a system? If other countries prefer a piece of paper to an export of tangible goods, why not just export paper?

4. Fiat money inflation benefits those shadowy figures who receive access to artificially inflated money before the inflationary effects kick in. Those shadowy figures being the bankers who loaned it to you so that you could buy your house. At any rate, this would only be true if we were talking about unexpected inflation. Expected inflation is already built into asset prices. The US economy does not have significant unexpected inflation.

Bankers are able to loan you money at 6% for your mortgage because they can borrow from the Federal Reserve at 4.25%. Using leverage, banks make a practically guaranteed riskless profit.

A mortgage contract isn't technically a valid contract. In order for a contract to be valid, *BOTH* parties must provide something of tangible concrete value. When you take out a mortgage, the bank literally prints new money and loans it to you. As an individual, you don't have this magic money printing power. An individual must perform actual work to acquire the principal and interest payments required by the mortgage contract. A mortgage contract is technically a "no-interest contract", where one party has not provided a service of tangible economic value.

Why can't I borrow directly from the Federal Reserve at 4.25% when I take out a mortgage? Why do I have to go through the middleman of a banker? The spread between the Fed Funds Rate and the rate banks change on loans is unearned profits for banks. The banks earn economic rent from their privilege of being able to borrow at the Fed Funds Rate.

Property values are so high that a mortgage is the only practical way to buy a house. Your expected interest payments are less than the true inflation rate. This makes the loan a sensible financing option. Even if you could afford to pay the full price in cash when buying a house, you would be a fool to do so. You're better off taking out a mortgage and receiving this massive government subsidy.

If your mortgage rate is 6%, and your expected return on stock investments is 10% or more, you should maximize your mortgage and invest the proceeds in stocks. As an individual, this strategy is risky, because you don't know when the next economic bust will occur. However, if you have sufficient investments and income to meet the mortgage payments, this is a sound investment strategy.

Expected future inflation isn't built into current asset prices. That money hasn't been printed yet! Asset prices rise as new money is printed. Tangible assets are an inflation hedge.

5. Fiat money inflation "also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state". This is an extraordinarily primitive view of the money supply. The Federal government is not Caesar cutting his denarii with lead. The revenues from seignorage on 2% inflation are trivial. The Federal government gets the money for the "welfare-warfare" state just where it says it does: by taxing the bejeesus out of your wages.

Inflation is not 2%, even according to the corrupt and biased CPI. Inflation is actually 7%-15%. When you say "15% of the entire value of the economy is stolen each year via inflation", that sounds like more than pocket change to me.

Most of the benefits of inflation accrue to the financial industry and not the Federal government.

6. Congress does not have constitutional authority to delegate its power "the authority to coin money and regulate the value of the currency". Hmm. Okay, but I'm pretty sure none of our legislators are qualified to operate a printing press, much less the annealing ovens and upsetting mills needed to mint coins.

This point makes absolutely no sense whatsoever.

Federal Reserve Notes are ALREADY printed by the Treasury department. The problem is that they are sold to the Federal Reserve for the printing cost and not the face amount. US coins are ALREADY minted by the Treasury department.

That's like saying "If you don't know how to program a computer, you aren't qualified to post lies and propaganda on the Internet."

The US Constitution no longer imposes any restrictions on the behavior of the Federal Government. Here's a better way to think of government. There exists a criminal organization that has adopted the US Constitution as its bylaws. The US Constitution is followed only when it is convenient.

7. Congress "should only permit currency backed by stable commodities such as silver and gold". Commodities, almost by definition, are not stable. The price of gold looks as if it used to be stable, because the dollar was fixed relative to an ounce of gold. This does not mean that its value relative to other economic goods was unchanged. You could fix your currency to the price of a bushel of wheat, and suddenly "wheat bugs" would be claiming that wheat is the only reliable, stable commodity in the world whose price never changes. That wouldn't stop fluctuating wheat supplies from whipsawing your economy back and forth. To be sure, the supply of gold changes more slowly than the supply of wheat. But demand for it is not so fixed.

Commodity prices are quoted in dollars. Commodity prices are not stable because the value of the dollar itself is not stable.

The price of gold/silver is stable. The price of oil/gold is stable. If you look at the price of one commodity relative to another, the prices are usually stable. The price of commodities, quoted in dollars, is unstable. This is due to the Compound Interest Paradox.

I grow tired of responding to trolls all the time. Did I waste my time writing this?


Anonymous said...

I found the piece useful so no it was not a waste of time. So long as most people are unaware and they appear to gain something from the current system, or they think it is normal for things to be as they are...they will continue to support it. The alternatives may be too painful to bring into effect or they are made to fear alternatives as chaotic and would lead to anarchy (as in disorder and they will not rise up against it. The mass man is totally controlled and his ideas and views are pre-configured for him, by mass education and mass media. Edward Bernays made a good job of Public Relations and Propaganda.

In addition people who depend on a salary, or owe money to a bank are easier to control and manipulate because they fear losing their jobs or homes. Only when the system starts to produce real destructive effects will people attempt to rise against it, however by then the Police State will be firmly entrenched and they will point their weapons at their own domestic populations to keep order and the money masters in power.

Anonymous said...

Well written. Question though.

Your last statement:

The price of gold/silver is stable. The price of oil/gold is stable. If you look at the price of one commodity relative to another, the prices are usually stable. The price of commodities, quoted in dollars, is unstable.

Commodities pricing is also subject to market manipulation, and natural (whenever the market is allowed to be natural - i.e. almost never) supply demand curves. However, you are perfectly correct that the dollar is an unstable measure of price as the private banks and Fed manipulate its purchasing power constantly - usually in favor of Wall Street at the expense of Main Street.

However, could you please explain your assertion that the price of gold/silver ratio is stable? As far as I can see and assuming these graphs are correct, it doesn't appear that stable to me. At one time, you can see the ratio of gold to silver is: 1/100 (approx) and as low as 1/20. As of close yesterday it is 1/56.42.

Even the gold/oil ratio is not all that consistent

What could explain these gyrations?

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