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Everything is a 'fiat' currency

RobertBrusca's picture





 

There seems to be a lot of interest in currency regimes with the failings in EMU and concerns about what might happen there next. The US and the dollar have become part of this dialogue as the dollar has over the years lost value and gold bugs are quick to propose gold as an alternative that would be better at preserving capital.

I don’t think there is really much doubt about that.

On a gold standard a country commits itself to fix its currency value to a certain price of gold. But such a link has its costs as a peg to gold eliminates flexibility. And, I know that to many that is a great benefit or even the point of having a gold-based system. But even a gold-based system uses currency, as we did under Bretton Woods. Gold cannot be the coin of the realm. It may back the coin of the realm but gold is not used in transactions.

When gold and other precious metal coins did circulate as ‘money’ there was always someone making an attempt to undermine the integrity of the circulating coin. Some people would shave them others might clip them, depriving them of intrinsic value. In today’s world we have heard of gold bars that are filled with titanium, another form of debasement.

Gresham’s Law describes the result of these sorts of antics on a precious metal circulating coin: ‘bad money drives out the good’. This is the earliest statement that I know of that referred to a phenomenon we have come to be call ‘adverse selection’. When you can’t know the value of something you are transacting for (or with) markets tend to drive the price down to its worst-case value.

So even with gold there can be problems. Gold does not circulate well. In light of this I would like to re-open the notion of what fiat currency means to make these sorts of risk more apparent. Economists refer to paper currency unbacked by a pledge to link it to another asset’s value as a fiat currency. A Fiat currency is backed by the law of the land and has no intrinsic value. This is supposed to be different from a gold backed currency or a silver backed currency and so on. But is it?

In looking at the expression I would like to focus on the fact that the fiat aspect relates to all currencies however they may be backed. Since a dollar put on the gold standard only has the implied value of gold as long as the governments stick to the gold standard gold also has a fiat element to it. . Essentially I think all currencies except those that actually circulate coinage made of precious metals are fiat currencies.

Gold bugs like to point out the fragility of the fiat currency system by pointing out that in history no fiat currency has survived (so far). I take their point. Maybe they should also take mine. It is that while many nations have been on gold standards no one in the history of the world has pegged to gold and stayed with it. No one? So does gold have any better record?

Adopting a gold backing for your currency is doing the one thing that you can be just about sure of that will come to an end. Gold standards are not flexible and they put government in straitjackets that they refuse to stay buckled into. Gold standards fail.

And as much as a gold bug might say that is why we need it, I will assert, again, the fact that its inflexibility is why it is impractical and why it is eventually rejected.

All currencies are fiat currencies in the sense that the value a currency has stems from the decision of a government to imbue that currency with certain features (a link to gold or not, for example). A nation’s money needs to fulfill the role of being a store of value, satisfying speculative demands and transaction demands. Modern fiat currencies are able to do those things.

I would urge anyone who is truly a gold bug to get off their high horse and realize that government is not in the preservation of value business. You will not replace the capriciousness of government by linking your currency to gold. When the government adopts a currency people in that country are free to invest as they like in the stocks and bonds of domestic companies that will be denominated in the currency or in the financial paper of foreign economies that will be denominated in another sort of paper. Or investors can invest in hard assets or gold.

In the end it is not a question of whether a country has preserved the value of its currency. It is whether the currency has helped to promote the business within that country. Business is the objective not the preservation of value. A currency that is sufficiently elastic for business may not hold its value relative to gold. That does not make it a bad currency. Indeed, I see one of the big problems with EMU as being that countries are undergoing all sorts of pain to preserve a currency while that currency is doing nothing for them but causing them pain. EMU has it backwards. Setting an economy up on gold might preserve the currency values but might do it at a cost of growth and higher unemployment.

On balance I think gold bugs take the arguments that are beneficial to them too quickly. No fiat currency system has lasted in the history of the world and that includes a system in which government fiat decreed that it would peg its currency value to gold.

The international community has become very fluid with new nations emerging and some ‘old ones’ running very high rates of growth. It would be hard to sustain a system like this with everyone stuck to gold. Gold is oversold by its advocates who are uninterested in looking the problems that gold standards have faced over the years. The problems are so great that they have caused every single country that adopted gold ultimately to reject it. Gold is no panacea. It might fix one problem you don’t like today but it would introduce many constraints that would impede us in the future. Better to have a fiat currency system and to let investors know that they have to manage their own risks to preserve their capital because that is true even in a gold-based system, it’s just that everyone assumes a gold-based system will not break down so that when it does everyone is completely unprepared. Is that really better?

 


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Wed, 05/16/2012 - 05:24 | Link to Comment sof_hannibal
sof_hannibal's picture

One problem that I have seen with fiat/ fractional reserve banking and nixing of something like a gold standard-- is lack of transparency, which is somewhat opposite of how Brusca's see's it.

I think it goes back to the debate of academic type "theory," vs. reality-- how things play out in the real world/ i.e. how is "fiat" paper put into practice... and, at the least, I believe, we have seen-- more and more recently, how easily it (paper money backed by "stats," but nothing very tangible)-- how that is manipulated (e.g., playing with GDP calculations-- [and constant revisions], unemployment, inflation, etc.) In "the real world," these are somewhat abstract concepts and can be manipulated and debated (I see this way is the best way to calculate this, not I see it this other way(-- further debatable points: what is inflation, is inflation going up, how do we calculate it, ok, let's print some more fiat paper... then change how we see inflation... bottom line-- there are too many ways to manipulate something so arbitrary...

It's pretty much a guarantee, that fiat paper currency is going to be ruined when (and it's not a question of if), but when -- the 700+ derivatives bubble goes up in flames; there will be a liquidity push-- basically running paper fractional reserve baking fiat as we know it (for the time being; but probably not for ever). Gold and to a lesser extent silver (and some other metals) will the answer, and where the "money" or true value is... now... If you want to get really creative and try to look 300 years in the future (if we make it that long without blowing ourselves up); and we consider (although history can be very cyclical at times)--

let's say overall humans have made "forward" / better / improving progress-- I would say (that if we do go back to gold standard for some time, after said implosion), actually, I do not think it last that long (the "next" gold standard; but ultimately, we have to find a "better" way to deal in currency-- a way that is more accurately measures/ weighted against something; in addition to something that can be less easily manipulated with entities like the FED and overly complicated with mathematics and statisticians (that may be simply taking takes cues from whomever pays them) -- with these "models" for calculating "paper" worth, GDP growth-- being simply too debatable and academic (again, what it is the best way to calculate inflation etc.?)...there is no one "true," correct answer...it's grey. Gold has a value...it's tangible, it retains value for the most part over time...

understanding that fiat paper based on arbitrary economic numbers via a govt. stats calculator (historically), has done nothing, but lose value...to inflation... or is deflation...or is it minimax solutions... Hey, if your Warren Buffet, buy a farm; but for the more avg. people-- physical gold, for the time being, is the best way to preserve your wealth over the next several years...!!! prove me wrong to big to fail JPM, etc... I don't think you will-- not with all those "rouge" traders out there...

Watching the evolution of something like bitcoin (digital currency has been interesting); they have tried hard to make it very transparent-- and at times there has been some fraud, but the value remains stable (for the most part)-- it is interesting, because nothing is "backing," bitcoin's value...nothing like GDP or gold...but the clear transparency of what it is worth and how many bitcoin's are out there-- makes it viable (that and you can use it to buy things); but although, they try to maintain "fairness/transparency," when they did have problems with fraud-- the currency collapse for sometime, as it in one sense is wholly worthless...the gold standard, is very logical; and ultimately makes prices/ values stable-- this unfortunately does not help elite billionaires make more billions... so the spin will continue; that is, until the collapse of modern paper currency...

Tue, 05/15/2012 - 22:47 | Link to Comment tawdzilla
tawdzilla's picture

How does increasing debt "promote more business within the country?" 

Wed, 05/16/2012 - 14:52 | Link to Comment valkyrie99
valkyrie99's picture

We currently have a debt-based currency so expanding debt bubbles is currently the only way to expand the money supply.  Of course it's not sustainable but I believe acceptance of the debt-based currency is behind the authors' reasoning that todays money system 'works'

Tue, 05/15/2012 - 23:02 | Link to Comment sumo
sumo's picture

More business for the finance sector, Bob's BFFs

Tue, 05/15/2012 - 22:35 | Link to Comment sumo
sumo's picture

"When gold and other precious metal coins did circulate as ‘money’ there was always someone making an attempt to undermine the integrity of the circulating coin. Some people would shave them others might clip them, depriving them of intrinsic value."

Well, duh! It's called counterfeiting, Bob. And counterfeiters try it on anything of value.

Is Bob the point man for the Fed's "outreach" program? Is the Fed trying to tranqilize blogs with useless crap, the way it's trying to tranquilize markets?

 Fuck, Bob, your articles are so useless. You worked at the Fed? Yeah, it fits.

Tue, 05/15/2012 - 22:19 | Link to Comment technicalanarchy
technicalanarchy's picture

I kind of agree with the author on this one. Mainly whatever the currency is people must have faith in the system. People could lose faith in gold, silver, dollars, yen. We could use poo or seashells for currency as long as the masses agreed and there was faith in the base. Gold can be manipulated as well. It's not the currency as mush as the morality behind the system and we have none minus some in the current one.

Thu, 05/17/2012 - 17:33 | Link to Comment JeffB
JeffB's picture

"Mainly whatever the currency is people must have faith in the system."

I disagree with that premise, technicalanarchy.

"Money" in the form of coins etc. have been used for centuries without any trust in any particular government or "system". That's the beauty of it. Governments came and went, but something with inherent value retains that value. No government was even needed in many cases. It's obviously handy to have rule of law rather than every man for himself, but even then gold and silver were valuable. They didn't become valuable because of some government fiat, and they don't lose their value when any government falls.

 


Tue, 05/15/2012 - 22:12 | Link to Comment Sun and Moon
Sun and Moon's picture
Everything is a 'fiat' currency

fiat: a command or act of will that creates something without or as if without further effort

Physical gold is NOT a 'fiat'' currency because governments cannot create it effortlessly. It requires a great deal of effort to find gold and extract it from the ground. That along with the rarity of gold, its beauty, resistance to corrosion, and high density make it an excellent choice for a medium of exchange.

Paper gold is definitely a fiat currency. The government can print paper gold at will and devalue it whenever it feels the need to.

Robert B. is seriously confused. He cannot see the difference between metal and paper.

Wed, 05/16/2012 - 07:17 | Link to Comment RobertBrusca
RobertBrusca's picture

Sure I do. Drop on you foot and it hurts. Walk out of the bathroom with the other stuck to your heel and you look like a fool.

Did you read the article or are you just a fool?

Tue, 05/15/2012 - 22:03 | Link to Comment oldman
oldman's picture

@robert brusca

Sir,

Your article sounds very defensive about something to do with gold bugs, and full of projection of positions that I do not think most goldbugs would support. It has just a tiny bit of a 'personal' feel to it, so I hope that you have not been beaten up by a gold bug, and if so, certainly most gold bugs would offer you their sympathy.

The basic problem seems to be one of honor and integrity and not fiat vs. real money. This is why debasement in real money and the printing of 'whatever it takes' in fiat occur: big pol or little pol I still have to buy your vote.

It seems to me that democracy is far too sophisticated for humans---we haven't been very successful with this 'new idea' in government.

in reading your piece, I kept wondering why we are not talking about government, governing, and governable rather than real money vs. fiat. Surely, this is our problem today.

By the way, while I have you on the line, could you do an old man the great favor of critiquing the mishmash of English below and tell what you think of such simplicity of mind, please? I have wanted to find someone of your obviously high academic stature to read this and let me know where it is faulted. All I want to do is to become one of the 'one per cent', because I'm tired of being so visibly poor by fiat standards. Besides, you might have fun with the concept----------------

Thanks much      om

"re:Gold

According to a recent article, there are 6 billion ounces(all that has ever been found) of gold in negotiable form on the planet. This seemed to me to be an amazing coincidence because, according to my count, this is also about how many humans ther are. I won't argue the precise number of the human population here; no one knows the true number, anyway, because all the numbers are 'estimated according to-----' and in today's world 'ten per cent plus or minus' is quite acceptable.

Six billion ounces of gold for six billion persons is obviously one ounce per person; quite simple and basic math. This makes economics, also, quite simple and basic; if we accept the premise that gold is the true money and that one per cent hold 90% of the human 'wealth'. We can figure out exactly who the one per cent are and how much gold, on average, each holds and understand what this means.

The math is too simple to do; one percent of six billion is 60 million people. Likewise, the math is simple for how much each of the one per cent holds: six billion divide by 60 million is 100 ounces times 90 per cent comes out to 90 ounces of gold for each member of the '1 per centers'. So, there it is-----a one per center holds 90 ounces of gold where gold is the only true measure of wealth and one per cent of the human population holds 90% of all wealth.

This is not so much gold since had one bought 90 ounces at $300 per ounce---for a $27,000 purchase price, that person would now be one of the 60 million people who hold nearly all of the wealth of human society. A lot to think about, is it not?

How many of us in the US took this easy way to fortune? Ten, one hundred, a thousand, ten thousand----I don't know but I would guess less than a thousand people and, perhaps, no more than one hundred did this in a single purchase while the opportunity was so easily within the reach of the rest of us. And how many of us now, hold 90 ounces of the physical? Or how many, after reading this, and while physical is still to be picked up at the pittance of less than $1700 per ounce, are doing so rather than writing mindless trash on this wonderful blog?

But, maybe, the premises are wrong. Maybe, gold is not the only true money and, perhaps, the one per cent is no more than a figment of the imagination-----who can say? But, lest anyone think that the opportunity above is 'going to get away', try this experiment:

Go tell a thousand persons the tale above, explain the mechanics, and prevail upon them to act-------I think each of us will learn a lot about our fellow humans. I'm also quite certain that not one person with whom you speak will step up to the plate and buy 90 ounces of the physical even if you give them the cash. To those among us who might say, “I'll take that offer---the others are too stupid”, I say,

“Great!! You pretend that I have given the money and you have it in hand, and I'll pretend that you are smarter than the rest; but in real time, I have to ask if you are so smart---why don't you have the 90 ounces of gold?”

Me too---I'm so so stupid that I only realized these premises three days ago----and I had the fucking $27,000 in cash at the time!!!!

BTW, 90 ounces at $1700 as I write is still only $153,000 and I'll bet not one person who reads this will buy the 90 ounces even though it is within reach. If I am wrong about you, I lose the bet, but I want you to send me three ounces of gold as my loss; it is the least you can do for an oldman who put you among the 1 %ers."

 

Wed, 05/16/2012 - 07:20 | Link to Comment RobertBrusca
RobertBrusca's picture

The amount of gold does not define value for the global economy.

Wed, 05/16/2012 - 12:36 | Link to Comment oldman
oldman's picture

@robertbrusca

Sir,

I have re-read your article three times in an attempt to find some relevance to the comment above, and can find not a thing in it that supports this comment; are you OK?

Gold, of course, has NOTHING to do with the 'global economy'; gold just 'is'. It is a measure of relative value AGAINST which statistics may be compared; it can never support growth without an increase in its base when used as collateral for a currency. I know that this is an ancient argument, and I, am not here for a 'pissing contest', but rather, seriously interested in the concepts that are inherent in the discussion. What is the evidence of 'real growth' under a fiat system unless confirmed by a standard not included in the model? Gold is only one of many, but it is a valid measure independent of the model itself: sort of a 'control' as science used to employ until it was overwhelmed by statistics.

Anyway, may I assume that you are abandoning your interest in this topic and that the discussion is closed? I hope not because what I had hoped was that you have a genuine interest in the issues raised between your fiat position and the position of the goldbugs. I hope that this is the case because a frank and honest discussion is called for rather than just more labeling of the positions and namecalling Keynesian/goldbug-----0h well, frankly, it is not worth pursuing if there is no true interest.

Thank you for your time and patience with an ignorant oldman           om

Tue, 05/15/2012 - 22:35 | Link to Comment fourchan
fourchan's picture

we have a republic not a democracy stupid.

Tue, 05/15/2012 - 22:48 | Link to Comment oldman
oldman's picture

@fourchan

Sir, When I was educated in the US from 1947 to 1965, we were taught that we lived in a democratic republic.

Thank you for re-educating a stupid oldman       om

 

 

 

Tue, 05/15/2012 - 23:30 | Link to Comment Ranger4564
Ranger4564's picture

Soon you'll be reducated to learn that you now live in a Fascist Dictatorship.

Wed, 05/16/2012 - 00:00 | Link to Comment oldman
oldman's picture

@Ranger

Oh, THAT, I learned on a Saturday morning early in 1980 when the 'exchange rules' were set aside to accomodate those poor Governors of the exchange who were short silver and the Texans discovered that the corner they had worked so hard to build was just going to go 'poof': and, it did. I was at Shearson at the time and no one had even imagined that the rules would be excepted-----but, we were wrong.

That was the first time I ever applied the word 'fascist' to the US and even though I had a couple of fistfights over the application, I've never regretted it. The problem has always been that this is what americans always wanted---I'm still the odd man out

Thanks---I'd forgotten all about that          om

Tue, 05/15/2012 - 21:55 | Link to Comment skepticCarl
skepticCarl's picture

Fellow goldbugs, we are better off that the $US is not tied to gold, and that gold can outperform the dollar, greatly, due to the arguments that Brusca presented.  Let's get those knotted panties untied.... and just BTFD in gold.

Tue, 05/15/2012 - 23:26 | Link to Comment Ranger4564
Ranger4564's picture

I'm not sure about this since I'm not an economist, but I think I have this story right.  This will either win me friends and let me influence people, or it will result in me being further orstracized as that idiot savant, only no one has yet figured out what it is I'm supposed to be saavy in.

I'll start off somewhat timidly: This article is a travesty.  The author clearly has no understanding of economics and instead appears to be here to defend a corrupt system.

Contrary to the premise of the article, most money is not FIAT, it has an inherent value that's defined / acknowledged / accepted.  Gold similarly has inherent value because it has been trusted as a basis for exchange.

What is the foundation of money when there is no Gold to hold it firm?  Currency is defacto always pegged to Weapons, Military, Will to use the first two, Productive capacity and output, size of the Population, potential for Surplus Value, Creativity, Innovation, Education, Institutions, Consumption and Export, and so on. 

Most paper currency, and for that matter most coined currency, was worth something because the issuers had control of the above elements and the currency was respected as having a value at an acceptable fraction of the above elements.  The amount of money you print has the ability to buy so many missiles, and the other nations know approximately what it costs to make missiles, so they agree, given the context of your economy, you're entitled to value your currency = so many missiles and you're allowed so much currency.

What constitutes Fiat currency is when you have no control over these elements, and or when you cannot enforce the use of the currency, and or when you multiply it at will, with complete disregard to the peg the currency had to the above elements.  So Fiat is not a constant condition; it is only actually present when you cannot convince other nations that your currency can buy so many missiles, because you're now actually lying... you have far too much currency in relation to your productive capacity / military capability, and you claim you're worth so many missiles.  You can't buy that many missiles because your people don't produce that much surplus value or that many products, or don't innovate at a comparable rate, etc. The other nations decide when you've entered the looney bin and decide to define your currency as Fiat.

Fiat really exists when the other nations decide not to trust your valuation of your own currency, for various reasons. It is not just a result of money printing... it could also be because you overinflate the value of the currency in relation to other currencies. 

No one is stupid, so all actors in international trade agree their own people produce so much wealth, your people produce this much wealth, so they accept the exchange rate and thereby determine your purchasing power. 

So to claim that all money is in fact Fiat, or that Gold is Fiat, is absurd.  Wrong.  Delusional thinking.  All currencies are inherently trustworthy because we have imbued trust onto them.  They become Fiat only when we / others have removed that trust.

It's also tragic to hear some bullshit about how the ONLY role of government is to enable Business, not the preservation of value, because this is the sort of reasoning that will be employed to justify the looting of our wealth by the business of the banking scumbags. Evil shit there Bob. You really sleep with the devil.

On a purely rational level, this is partly true and completely wrong.  The role of government is to accomplish the tasks the people entrusted unto that government, including building of roads, bridges, facilitating business, advancing technologies, protecting ones wealth and security, protecting one's posessions (nation / borders / people / assets / etc), and so on. 

Government is established to entrust administration of our civilization so that we don't all have to do it ourselves or fail trying.  However, if Government debased currency and did not guarantee the power of the currency, then the citizens would overthrow that government and install one that can protect the power of the currency.  No one wants to toil their ass away (ok, i know, there are many hard working masochists out there, but bear with me) only to find out each day they wake up, the value of the surplus they produced yesterday and earned as wages yesterday has decreased by any percentage.  To make the example stark... if yesterday you earned $100 and you woke up today to learn your money only buys $50 worth of goods, and tomorrow, it will only buy $25... you'd freak I think, and so the hell would Bob.

So this article is utterly erroneous and all the reasoning shows a lack of comprehension and lack of engagement.  These are not ideas Bob, these are people.  You're talking about people, even when you refer to Business... MY YOUR OUR THEIR business, MY YOUR OUR THEIR money. 

By the way Bob, economics is supposed to determine how best to achieve equitable exchange amongst all peoples on Earth, so that all are provided for and all are compensated for equitably.  That some profit and some deficit is not the aim of an economy, it is another form of Fiat... this time perpetrated by the individual instead of a nation or an economy.  Maybe you should work on that problem.

Tue, 05/15/2012 - 21:37 | Link to Comment Clowns on Acid
Clowns on Acid's picture

Who the hell gave Bobby B. more than 1 on the Ratings ?!!

Must have been one of his jr.college students looking for extra credit.

This has to be the most pathetic gold standard / non gold standard treatise ever submitted.

Wed, 05/16/2012 - 07:24 | Link to Comment RobertBrusca
RobertBrusca's picture

When you hate it I know I'm right.

Thanks for the confirmation, Clowny!

Tue, 05/15/2012 - 21:23 | Link to Comment Augustus
Augustus's picture

Gold is simply a form of Fiat that cannot be easily sourced.  It has no usefulness unto its self.

There is value in chickens, salt, pepper, cigarettes, whiskey, etc.  All are needed by a large number of people.  For some reason people have agreed that they can accept gold and later exchange it for needed items, as long as there is a greater fool who has not tried to actually subsist on gold.

Tue, 05/15/2012 - 22:01 | Link to Comment sumo
sumo's picture

"It has no usefulness unto its self."

This is incorrect. Gold is a very useful material in electronics. But as the price increases, engineers look for cheaper substitutes. The rising price of gold drives it out of cost-sensitive applications. It's got to the point where chip-makers are replacing gold with platinum.

I have a batch of discrete transistors, 20 years old, with gold-plated leads. No-one would make transistors like that now, because of the cost. But back then, it was practical and cost-effective for the intended application.

Imagine that copper cost $1500 per oz. Would you use it to wire your house? Or would you look for a cheaper substitute? Would you then declare that copper has no usefulness unto itself?

 

Wed, 05/16/2012 - 18:22 | Link to Comment New_Meat
New_Meat's picture

+RoHS

Tue, 05/15/2012 - 21:59 | Link to Comment nmewn
nmewn's picture

"Gold is simply a form of Fiat that cannot be easily sourced.  It has no usefulness unto its self."

Augustus old friend, I would say, in the context of government & fiat, that is precisely it's value.

It has no liability to any other fiat on the planet...it remains unencumbered to the paper/digital bonds or credits or stocks of fragile government promotors, like Munger & this author.

It's real, small, transportable, easily recognizable as money anywhere in the world.

A credit card is small but it can be rejected outside of your control. Bills are light but governments rise and fall all the time, issuing new fiat making the old fiat worthless, finally admitting to the public they screwed the pooch.

A dog house has value too...but only to someone with a dog ;-)

Tue, 05/15/2012 - 21:31 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Gold has no counter party risk, it is finite, it is easily storable and tradable, and it has demand as technology and jewelry.  I would say that is demand enough.

Tue, 05/15/2012 - 21:28 | Link to Comment Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Everything is a 'fiat' currency

The definition of fiat is that it is an order of government; it is by decree.  Gold is not an order of government; a government can only offer gold as collateral:  gold is not fiat, because government can not dictate the more or less of the reserves of gold it uses as a currency.

Gold does not circulate well.

Mr Brusca, you wrote the above statement yet offered no reason that it would not circulate well, and even often no examples on how it fails to do so. 

I disagree, and can offer you the fact that gold is easily fungible, and has a halflife in the hundreds of thousands of years, offering it the abilities to circulate not only well, but for an extended period of time.

A Fiat currency is backed by the law of the land[.]

This is a trite way of saying that fiat currencie is an IOU.  You and yours often use the term, 'promise to pay', because it sounds fancier.

Since a dollar put on the gold standard only has the implied value of gold as long as the governments stick to the gold standard gold also has a fiat element to it.

Yes, if the holder lies about the amount held as a reserve and is not audited.

It is that while many nations have been on gold standards no one in the history of the world has pegged to gold and stayed with it.

This because gold failed the Nation-State?  Or did the State collapse due to their reckless abandon for debt without an underlying asset?

Adopting a gold backing for your currency is doing the one thing that you can be just about sure of that will come to an end. Gold standards are not flexible and they put government in straitjackets that they refuse to stay buckled into. Gold standards fail.

Please give some proofs on how the gold standard ends; once again, is it because of the gold standard?  Or because the Sate had too many redemptions and not enough collateral.  Second, what is wrong with maintaining the government's credit?  Is it worse to give up your sanctimonious 'flexibility' if the Sate maintains its dignity?  Finally, do gold standards fail the State?  Or do States fail the gold standard?

Modern fiat currencies are able to do [these] things (satisfying speculative demands and transaction demands).

Mr Brusca, you once again fail to show how these things happen; instead you presuppose they do.

You will not replace the capriciousness of government by linking your currency to gold.

You write like the government is outside the people.  The government is by the people, and for the people.

....at a cost of growth and higher unemployment.

Once again, you do not show how a fiat currency allows for these miracles that you surmise it does.  If you think it does by its 'flexibility', how is it flexible?  Also, how would this 'flexibilty' spur growth with consideration to inflation cutting in to real growth.

It would be hard to sustain a system like this with everyone stuck to gold.

How so?  Your choice of wording that the system is 'stuck' in gold shows disdain, and that your wording is opposing to flexibility, but if the system maintains its credit, how would this be a bad thing?  If other States know the gold holdings, and are repaid with gold-credit, how would this system not sustain itself, when repayments are given in an exact measurement of price?  Isn't the stability of price a benefit? 

The problems are so great that they have caused every single country that adopted gold ultimately to reject it.

Once again, is it that the States rejected the gold standard after the gold standard had failed?  Or did the States neglect their debts and in turn then it was the States that failed their gold standard?

Wed, 05/16/2012 - 07:35 | Link to Comment RobertBrusca
RobertBrusca's picture

NO!

I did not say or imply any of that stuff. This is all you tomfoolery.

What I said/implied was simple and TRUE: that whenever the currency is adopted by a nation it does so by fiat. In that sense all currencies are fiat currencies. Gold advocates treat gold as something special as though once it is ordained as a currency backing it will be that way forever. They deride unbacked currencies as not lasting when in fact no currency has ever 'lasted' save in a museum.

Gold is only gold. It is not God. And if it exists in a currency system but is not the backing for the currency it is like steel or prunes. Not as hard as steel, not as soft as prunes.

Thu, 05/17/2012 - 01:16 | Link to Comment Bay of Pigs
Bay of Pigs's picture

You got pwned Bob

Wed, 05/16/2012 - 18:16 | Link to Comment nmewn
nmewn's picture

"What I said/implied was simple and TRUE: that whenever the currency is adopted by a nation it does so by fiat."

You said quite a bit...including that.

"Gold advocates treat gold as something special as though once it is ordained as a currency backing it will be that way forever."

I thought I was clear...it is special. No one can say "forever" but it's track record is outstanding...for centuries.

It is international currency in all it's forms...even in fiat if one feels like throwing away a ten dollar gold coin valued at over fifteen hundred dollars for a six pack of beer...lol.

"They deride unbacked currencies as not lasting when in fact no currency has ever 'lasted' save in a museum."

I'll tell ya what Bob, you can have all the unbacked paper currencies in the museum and I'll take all the gold and silver currencies...dea? ;-)

Tue, 05/15/2012 - 21:14 | Link to Comment Inspector Bird
Inspector Bird's picture

I've made the point that gold standards fail here many times in the comments section, but it somehow never resonates.  This isn't to say I'm opposed to gold standards, just that saying fiat currencies fail is meaningless - so do gold standards.

I believe gold standards are things that should be applied when the government needs to be held accountable (such as now).  The problem, of course, is how to make them accountable?  Who gets to make that choice, that decision? 

A gold standard, today, would clear the decks, force some fiscal responsibility, force a much-needed (and much deeper) recession, but we'd get healthier faster, and move forward sooner, rather than taking our medicine in small doses as we are now.  All we've done is strung out the inevitable - the likelyhood of another recession is very high, and it may or may not be worse than the last one we supposedly ended (though I'd say it never ended). 

Gold prevents profligate behaviors.  Rather than being the best looking horse at the glue factory, we'd be on the racetrack sooner.

Wed, 05/16/2012 - 07:36 | Link to Comment RobertBrusca
RobertBrusca's picture

Yes, it does that- at a cost.

Tue, 05/15/2012 - 22:12 | Link to Comment Libertarian777
Libertarian777's picture

Because everyone equates a 'gold standard' with a pegged fiat currency or the bretton woods system of fixed exchange rates.

Thatbis not a gold standard, that is a quasi-gold standard.

A true gold or silver standard defines a dollar or other monetary unit in a specific weight and purity of gold or silver.

Fiat currencies should be done away with. This is not to say paper or electronic money cannot be issued, but in much the same way a bank issues bonds, theycan issue paper currency. As banks debase their currency and fail, the damage will be limited to that bank, provided we dont't bail them out or give them monopoly power over issuing any currency. In that way, in a competing currency system, the banks issuing the best currency (who always redeem at 100%) will become the de facto standard. The governments role in that system would be to audit and verify the backing of the currencies issued by these banks, ie. to 'regulate the value' thereof.

The problem with fiat laws is that they require you to accept the note, whereas a competing currency system has no such requirement.

Tue, 05/15/2012 - 23:16 | Link to Comment valkyrie99
valkyrie99's picture

True gold standards were also vulnerable to governments suspending redemption or devaluing, which did happen. Maybe governments could have done better or maybe they couldn't,  but even when economies used coinage governments still found a way to devalue.

Also even in early US history we weren't on a pure gold standard as banks created circulating currency.  I'm not sure if I'm understanding your comments regarding bank creation of money correctly - are you stating they could issue only 100% backed notes as overseen by the gov, ie full reserve banking? Or that they would compete for who could get away with the most dilution of reserves without folding with notes not declared legal tender? 

Tue, 05/15/2012 - 21:10 | Link to Comment disabledvet
disabledvet's picture

I don't know about the rest of you all but i do what i do so that someone will bring back the pure copper penny. Is it too much to ask? I mean "get rid of the penny" Canada? What a downer...

Tue, 05/15/2012 - 21:07 | Link to Comment mick_richfield
mick_richfield's picture

 

But such a link has its costs as a peg to gold eliminates flexibility. Gold cannot be the coin of the realm.

Boy.  In the time I come from, your assumptions are all undone, and all your wisdom is the butt of bitter jokes.

 

Wed, 05/16/2012 - 07:38 | Link to Comment RobertBrusca
RobertBrusca's picture

Look at EMU and see what a 'fixed currency system' does when you try to get out of a fix. The inability to devalue is killing Greece, Spain, Portugal.

You can have your high-rad and make me the butt of any unenlightened joke you choose. It doesn't make you right.

Wed, 05/16/2012 - 07:44 | Link to Comment GeneMarchbanks
GeneMarchbanks's picture

The inability to devalue is killing Greece, Spain, Portugal.

Wrong as always, shitball. Corruption, crushing bureaucracy and monopolized business is killing Greece, NOT devaluation.

 

Tue, 05/15/2012 - 21:00 | Link to Comment nmewn
nmewn's picture

High horse or high on horse?...lol.

"I would urge anyone who is truly a gold bug to get off their high horse and realize that government is not in the preservation of value business.

No shit. So you agree that the value of labor should necessarily decrease (that is how labor is measured, through fiat currency) at the expense of those who labor for it?

"You will not replace the capriciousness of government by linking your currency to gold."

lol...no, but it will damned sure slow politicians down in their promises of wealth without earnings/labor.

"When the government adopts a currency people in that country are free to invest as they like in the stocks and bonds of domestic companies that will be denominated in the currency or in the financial paper of foreign economies that will be denominated in another sort of paper."

This is a function of any money system. The government can "adopt" any money it wants but if no one trusts it...it will not be accepted for anything.

"Or investors can invest >>>I would say exchange<<< in hard assets or gold."

Or paintings or land or jewels or cars or...they were purchased...all parties gained in the transaction did they not?

"In the end it is not a question of whether a country has preserved the value of its currency. It is whether the currency has helped to promote the business within that country. Business is the objective not the preservation of value."

I have to ask...where does the capital for business growth come from in your mind?

Is it the saved earnings of all positive previous labors willing to be risked once owned free & clear or a tree growing in Bernanke's back yard being watered by a pink unicorn?

Tue, 05/15/2012 - 20:58 | Link to Comment HamyWanger
HamyWanger's picture

Robert Brusca does have a point: what matters in an economy is that one dollar of value created = one dollar of currency. 

Gold is a way, among others, to achieve that. You also could create a fixed amount of currency units, and make sure the amount is never increased. That what was done in Germany after the Weimar period. 

Everything is a question of trust in the government.

Tue, 05/15/2012 - 21:13 | Link to Comment disabledvet
disabledvet's picture

Pay your taxes Hamy. In fact...by my taxes too while you're at it.

Tue, 05/15/2012 - 21:13 | Link to Comment mick_richfield
mick_richfield's picture

I don't have a 'government'.  The very word, and the idea behind it, betokens savages.

Everything is a question of freedom.  You can have all the guns you want.   if you accept the 'money' of reptiles, then you will be their food.

 

Tue, 05/15/2012 - 20:50 | Link to Comment JeffB
JeffB's picture

"When you can’t know the value of something you are transacting for (or with) markets tend to drive the price down to its worst-case value."
--

I don't necessarily accept that statement at face value, though I know what you are driving at. But stocks, bonds, homes or anything of value don't typically sell at "worst case value". Remember "irrational exuberance" and "housing bubble", for instance?

"Since a dollar put on the gold standard only has the implied value of gold as long as the governments stick to the gold standard gold also has a fiat element to it."
--

I don't really agree with this either. "Fiat" really means the government can bring money into existence at will. They have the authority to do so and everyone recognizes that. There is some counter party risk when they issue paper or digital currency that they guarantee to be backed by something of intrinsic value like gold or silver with the promise of converting it at a fixed rate upon demand, of course, but they don't have the right and authority to abrogate their promise in the minds of the people who accept and use their paper/digital money.
--

"[Gold standards] will always come to an end."
--

I think that's only true because governments don't want to live within their means. They're always looking for a way to steal a little bit, or a lot, more from their citizens. Abrogating their promises &/or converting to a fiat system is the least painful (for them) way of doing that.

In any event, if/when a gold standard comes to an end, people left holding their gold and silver coins aren't left "holding the bag" (of fiat paper currency that is now suddenly worth less, or worthless as the case may be). When fiat crashes people are often left with worthless pieces of colored paper with pictures of famous people on them.

It also destroys an economy in short order. When a society loses it's money chaos and misery reign. Stories of people trying to survive in a hyperinflationary environment are legion. There are no such stories of people left with worthless piles of gold.
---

"A nation’s money needs to fulfill the role of being a store of value, satisfying speculative demands and transaction demands. Modern fiat currencies are able to do those things."
---

What is the longest period of time a fiat currency has held it's value? ie. examples of a fiat currency that could buy a fixed amount of gold at one point in its history and a similar amount 50 or 100 or ... years later?
---

"government is not in the preservation of value business. You will not replace the capriciousness of government by linking your currency to gold."
---

You'll certainly go a long way in keeping them from stealing from their citizens by stealth. If they are truly servants of the people, then they should be able to convince their people to raise taxes when necessary for the common good. The government should not be in the money printing business at all. If anything, they could oversee mints that charge people to turn metals into coins that can be used for money. Countries have done that for many years at a time and their economies thrived.
---

"In the end it is not a question of whether a country has preserved the value of its currency. It is whether the currency has helped to promote the business within that country."
---

But a stable currency helps promote business, stability and fairness in a society. Any country that can print fiat money at will will tend to become an oligarchy of the politically connected. Friends of those who control the elephant in the room can get filthy rich. Those who are surprised by their moves can get stepped on with disastrous results.

Having a stable currency helps individuals and businesses plan for the future with confidence. Just as it is necessary for a tennis match or pool tournament to have a stable foundation for the playing field, having a stable currency is necessary for optimum results in business or for persons. Playing a tennis match or pool game on a ship that is tossing and turning in gale force winds is suboptimal at best.

We saw some of the fruits of fiat money in our most recent economic crisis which indeed threatened to take down all the economies of the world. It was a classic case of a central bank flooding a market with too much money while artificially holding down interest rates below market levels. This distorted perceptions of the true underlying economy and businesses and individuals mistakenly believed there was sufficient savings to embark upon all of the building and spending projects the low interest rates implied could be completed only to eventually discover to everyone's dismay that the business boom was based upon false premises and a savings base that couldn't support such a boom. Hence the resulting crash, pain and suffering.

Unfortunately, the Central Banks seem intent on trying to blow enough air into the collapsed bubble to keep the economy from coming back down to reality, a reality that is now worse than it would have been if resources had not been misallocated so badly during the artificially induced boom. This continues sending false signals about the true situation of the economy and encourages yet more misallocation of resources, making us all worse off, and quite likely MUCH MUCH worse off. The next crash could indeed take down the whole system.

Tue, 05/15/2012 - 21:56 | Link to Comment valkyrie99
valkyrie99's picture

I don't really advocate fiat money, but I do question if gold is the best backing commodity or directly tradable commodity that can or has been used as a basis for currency.  Your post is interesting (probably better argued then the article!) but I would point out a couple thoughts:

Markets tend to devalue hard to price assets: I'm with you on this disagreement, I would say the prices become more determined by external factors like money supply or reflecting other markets and are thus more volatile but not necessarily low in price then easy to price assets.

I'm 1/2 way with you on the second point - but a gold-backed currency vs. trading gold by weight creates additional counter-party risk because gov't can suspend redemption, as well as devalue vs. gold, which would thus violate the currencies promise. However gold-backing has been used successfully in domestic and international markets to gain trust in a currency, regardless of if it's deserved. 

I would have to point out that in terms of calories purchasable by weight of gold over it's history, or the longevity of various weight based coinage systems, is not that stable either. I question if the calories wouldn't have been a better measurement for exchange. 

What is the longest period of time a fiat currency has held it's value? The ancient money systems of Greek and Rome were fiat - 'nomisma', given value by government mandate, as Aristotle and others wrote of, even though they were made of coinage. Metals were valued at many multiples of their weight once they had a stamp of an emperor on them.  This system  originated 600BC and lasted until the fall of the Byzantine empire about 700AD; there was some devaluing at times, the most at times when emperors were getting killed in new coups every few years, but there was also centuries of stability - less inflation then acceptable today. It wasn't until about 200 years after Rome that that gold devalued all the way to the value implied the supply vs. silver. Later we saw medieval English tally sticks working as one medium of exchange for a couple hundred years and some overvalued bronze,  but the early power centers like Venice didn't create any monies and really creating money based on declaration of value instead of metal weight wasn't thought of again until private bankers started doing it through fractional reserves and then later through directly issuing paper currencies. These have all shown worse results then coinage valued by either weight or government decree.

I would agree that a stable currency that only grows in step with the size of the economy is important to promote business, and additionally to stem the growth of debt bubbles that work to misallocate resources,  destroy overall productivity, as well as concentrate wealth among creditors. 

Tue, 05/15/2012 - 23:33 | Link to Comment JeffB
JeffB's picture

Thanks for the reply, valkyrie99.

I agree that in theory something other than gold or silver or something else of intrinsic value might work as money, but there are potential severe dangers in it & I would be loathe to experiment with something like that. A government would have to be restricted from being able to "print" more when it wanted to do so. I'm not sure even constitutional restrictions would be sufficient when push inevitably comes to shove.

I'm also not so sure that a money supply necessarily needs to grow with an economy or population. If it doesn't, there may be some deflation, but that isn't necessarily a bad thing, from what I have read. It's indicative of a rising standard of living. Falling prices on computers, TVs & iPods hasn't really been a problem and supposedly when there have been periods of falling prices in the U.S. the people have been content with things.

A depression is a different matter, of course, but supposedly the Great Depression was made worse by government attempts to keep prices from dropping.

Thanks for the heads up on possibly extended stable periods in fiat currencies in Greece, and the Roman Empire & the Brittish Empire(?). I'll have to see if I can read up on that a bit. Any links to any articles on that would be appreciated if you have any handy.

Wed, 05/16/2012 - 00:17 | Link to Comment valkyrie99
valkyrie99's picture

As far as alternative currency backing I would suggest locally abundant food crops - the ox/wheat standard of Mesopotamia is the longest running standerdized balance of trade I've found in my reserch (about 3000 years).  It's inherintly much harder for the powerful to gain monopoly contol over and distort. It automatically grew with the most important resourcs to society. Also society never suffered from interest burdens when loans were made in money that reproduced.

There are of course benefits to some with deflation, but not for debtors.  Deflation in the early US was hard for indebted farmers who had to repay loans in scarcer money, but was good for banks who reposesed their properties or took them at firesale prices. Deflation may not have had as much impact if we didn't have fractional reserve banking, but the only example I can think of that fits this example is the fall of the Rome, and this was a period of severe poverty, the birth of feudalism, a lack of progress or great societies, and trade severely impeded by lack of circulating currency in the West. 

I don't know anywhere the ancient money systems of Greece and Rome have made it on youtube I'm afraid, but here's Aristotle's Ethics http://www.gutenberg.org/cache/epub/8438/pg8438.html (see book 5 chapter 4 the builder and the shoemaker, to start) and I would suggest reading The Lost Science of Money from the American Monetary Institute for a summery of monetary history (i know it's on this list  http://isohunt.com/torrent_details/357649997/?tab=summary)

 

Wed, 05/16/2012 - 15:45 | Link to Comment JeffB
JeffB's picture

It seems to me as though the lender is losing out in those wheat/ox loans. It sounds like there's opportunity cost that they're absorbing. If they loan out a couple of oxen that reproduce multiple offspring and then receive one of those offspring back they're probably worse off than if they had kept the originals and received the work and the offspring as well if there's much time involved.

It seems like perhaps there should be some sort of "interest burden" or other compensation in the "interest" of fairness.

But I suppose there are instances when it's a form of savings for someone who has more wheat or cattle than they can presently handle. Their friend takes care of the animal for a year or two and then gives them a similar or perhaps younger/better animal in return after their sons are old enough to help handle the extra livestock or harvesting, or they've purchased more land and can now handle them.

With regard to the deflation issue, I don't think it's always an additional burden. When it's the result of a boom / bust cyle, it's obviously more difficult for borrowers, but if the deflation occurs in a stable economy and is the direct result of improved productivity because of better manufacturing processes, improving infrastructure etc. that have in return resulted from an extended stable economy and human ingenuity, it isn't necessarily any more difficult to pay back those loans. In fact, it might actually be easier as their other expenses are dropping at the same time. Wages don't have to fall in an economy with productivity advances, even though prices for those products may drop.

If wages remain stable, but other expenses drop, the effect for the borrower would be similar to what would happen in an environment of stable prices and increasing wages.

One other factor to consider, is that in that theoretical stable economy where money supply remains stable, but productivity is improving and therefore prices are falling, one would expect lenders to be willing to lend at lower interest rates, than in one where prices are stable or even more in an inflationary environment.

The problem would occur when an economy shifts from expectations of an inflationary environment when a loan is made and it then shifts to a deflationary one. But I think that's far less likely to be a problem in a stable money environment where gold or silver etc. is money vs a government printed fiat money system which is prone to those deleterious boom and bust cycles.

But even should that occur, the main damage would be paying higher interest rates than would be the case had they known, and than would have been the case had they transacted the loan later. But that risk is certainly already there in spades in our current fiat monetary system. In fact, it's far more prone to random swings up and down at the whim of the Central Banks trying to carry out multiple, sometimes conflicting mandates. It also causes far more uncertainty and pain due to the boom and bust cycles making it a crap shoot for people to guess where the economy may be headed a few years down the road. Not only interest rates may be bouncing around, but wages, unemployment rates, inflation or deflation.

All in all a true, stable monetary base is far more productive for any society and its economy in the long run, in my opinion.

P.S. Thanks for the info & the links!

Wed, 05/16/2012 - 16:24 | Link to Comment valkyrie99
valkyrie99's picture

And thanks for the intersting conversation and good material for thought and research!

Wed, 05/16/2012 - 16:05 | Link to Comment valkyrie99
valkyrie99's picture

I do agree that there should be interest compensation for opportunity cost and in compensation for risk.  In Sumeria I've found the best records of how this worked in the ancient systems. The Sumerian word for interest 'mas' literally means 'young cow'. It appears the lending of a cow was like purchasing a stock today - your would make a better return if the beast did well, and would get multiple offspring if they had them. If the beast didn't gain in value, had no offspring, the original cow would be owed back after a time, this would work as the lender taking a little haircut on the depreciated cow that is still good for milk and meat. If the beast did very poorly, let's say by dying with no fault of the borrower, the lender would take the loss - this was the risk they took in exchange for their interest. The system appeared to be more profitable then hiring people (or feeding slaves) to take care of large numbers of cattle, because this was more prevalent then huge estates. It was not so profitable that the lending class became wealthier then the royal ruling class though, like later bankers became.

I'm also in agreement that deflation would not have as many negative effects if it wasn't due to credit cycles busting.  It's just difficult to find real examples - since fractional reserve banking, there have been frequent deflationary panics, many sharp declines every century in every economy. Previous to this, there were few periods of deflation but when they did occur they were slow declines over centuries instead of sudden shocks. In the limited history I have to support my views on this, the main problem with non-debt caused deflation was simple shortage of medium of exchange throughout lands as metal holdings had become more concentrated in walled cities containing the ruling class. This left the populations resulting to barter, which does have inefficiencies. The same people had the same skills and natural resources, but productivity declined and scientific advancement halted. The problem has been described as going to build a house - having all the wood, nails, builders, and other materials, but not being able to because there were no inches - trade stopped because the countryside ran out of its' measurement. I don't know why there would be price deflation and not wage deflation.  I suppose wages may be stickier, but catch up eventually. This would be hard to find any precedent for for because through history a much smaller % of people earned wages instead of self sustaining (since most income came from sales of goods these incomes directly decreased with prices during deflation).  In later deflationary events wages would decline with just a little delay from price declines, although as mentioned these events had different causes. I agree if their were enough productivity advances this does in essence ad to underlying currency value and could mean wages could stay consistent while prices fell, I just am not sure if these pressures could possibly outweigh deflationary forces from a diminishing currency supply vs. population, or if we don't have examples of this because it can't happen in the long-term.

I again agree with currency stability as being ideal, I'm just considering stability to mean maintaining quantity value needed for each participant to hold a constant amount whereas you are looking at fixed overall amounts - I will give you that either version of stability is a whole lot better then what we have now, my fear would be eventually deflationary forces would force politicians to change your system, and last time they tried to eliminating this problem it was by allowing private banks to start printing.

Wed, 05/16/2012 - 23:40 | Link to Comment JeffB
JeffB's picture

That's interesting how the Sumerians used animals & grain for money back then, and pioneered some investing of sorts, including interest, risk, haircuts and a futures market to boot. That they system seemed to be generally beneficial for all is the best part, though. Too bad that doesn't seem to be the case today.

The periods of a long slow deflation are the ones I was thinking of. It sounds like you've done more historical reading on the topic than I have. I'm going off bits & pieces I've read here and there, mostly 2nd & 3rd hand. I know some have complained that people use those deflationary periods as evidence against gold or a hard asset backed currency, but they contend it wasn't a bad thing for the people at the time at all.

I'm speculating here, but if things like railroads & telephones, or perhaps sawmills & water powered grain mills, electricity & gas powered engines or whatever advancements that have been made over time was able to improve productivity, shipping & communication and dropped prices thereby everyone would be better off.

I could see how that might make money more scarce relative to goods produced and tend to drop wages as well as prices, but don't think that would be bad for most people if their cost of living was dropping commensurately.

But I could see where it might tend to keep wages from falling as fast as the cost of goods & services, or perhaps not even falling at all. If the railroad was hiring people to lay tracks or run the railroad, and others were employed in factories, telegraph offices etc., the demand for workers should tend to increase wages, I would think. There might be fewer people wanting to be blacksmiths, for instance, and he might have more customers able to afford his services. His earnings might actually go up, even as the cost of his food and other goods went down. The food might be more plentiful, even if wages were stable, because of better shipping, or improved, disease resistant strains, or more efficient mills etc.

It's speculation, but it seems reasonable and fits with the things I've heard others say.

Thanks again for the info & conversation. It was indeed interesting.

Tue, 05/15/2012 - 21:52 | Link to Comment JeffB
JeffB's picture

RobertBrusca: Business is the objective not the preservation of value. A currency that is sufficiently elastic for business may not hold its value relative to gold. That does not make it a bad currency.

Fair enough, but I would submit that a stable currency is the very best environment for any business. It certainly adds a significant element of risk for any business if the value of their fiat currency or the fiat currency of their trading partners will fluctuate relative to one another or even with regard to goods, services & wages.

A company, for instance, could lose it's shirt if it gambles that the currencies won't fluctuate when it builds a plant in one country as opposed to another. If Japan suddenly devalues it's currency, for instance, their goods and services are suddenly cheaper than they were relative to all other countries a day or two earlier. Companies are faced with currency risks and can lose or make millions from one year to another, solely because of fluctuations in currencies. It's one more variable they have to account for, which adds more expense and more risk for them.

In similar fashion, individuals suddenly take on far more risk in a fiat money system. Look at our senior citizens, for instance. Many saved for retirement expecting they could retire comfortably on the nest egg they accumulated. When the Fed decides it's going to start printing money and artificially holding interest rates down, their plans carried out over many years are suddently thrown out the window. They earn hardly any interest, while inflation eats away at their standard of living, and the Ponzi scheme that is Social Security threatens to cut benefits for them, as does Medicare.

Of course, each country jeolously guards their own workforce and wants their exports to be competitive with those of other countries. They can do that by devaluing their currency, which has the added benefit of allowing them to reward their friends, families and allies, while reaping the ability to spend more to further reward the aforementioned &/or purchase things they want for the country or push agendas they favor, all without having to raise taxes. What a deal. But if they're all doing that, they each have an incentive to try and outdo the other, much as gas stations trying to lower their prices a penny or two below their competitors down the street. No wonder the countries of the world seem to be engaged in a dangerous game of chicken -- currency race to the bottom.

Even if they all stay the same relative to each other, devaluation relative to fixed goods and resources creates problems for business, and of course the citizens both business and governments should be serving.

Studies have shown that businesses suffer significantly in times of inflation, much less hyper inflation. Wages have to be frequently negotiated and renegotiated, often resulting in strikes or work stoppages. One union may come to terms only to have a supplier go on strike and shut a business down again waiting for those negotiations to finish.

Inflation can also make it difficult to engage in long term contracts, and people who have done so when inflation was tame, have been burned badly, sometimes very very badly when inflation later rears its ugly head.

Then you get the whole industry of economists who have to figure out what inflation is, so that contracts can use them as multipliers and people can try to plan for things like retirement or a college fund etc. But people disagree and so economists end up arguing among themselves and private critics spend time trying to keep them honest and arguing over which formula to calculate inflation is most accurate and fair.

These are some of our best and brightest people who are wasting their time on inflation which would not be an issue if governments kept their noses out of the money printing business.

RobertBrusca: Indeed, I see one of the big problems with EMU as being that countries are undergoing all sorts of pain to preserve a currency while that currency is doing nothing for them but causing them pain. EMU has it backwards. Setting an economy up on gold might preserve the currency values but might do it at a cost of growth and higher unemployment.

I think that's where our perspectives are diametrically opposed. I think it was the central bankers that were the root cause of this financial crisis in the first place. It was the central bankers printing their fiat money, holding interest rates artificially low that artificially stimulated the world economy far above sustainable levels. The world economy was like a junkie on crack. It was fun while it lasted, but it's quite false to blame the hangover on the fact they don't have enough money to buy enough crack to keep the party going. The fact of the matter is that more money would buy more crack, but it's still unsustainable long term. The human body doesn't have the resources to run that fast forever, and neither does the world economy.

On balance I think gold bugs take the arguments that are beneficial to them too quickly. No fiat currency system has lasted in the history of the world and that includes a system in which government fiat decreed that it would peg its currency value to gold.

That's the fault of the governments not living up to their promises and responsibilities, not a deficiency in the underlying system. My kids wouldn't get too far by saying that children have failed to do homework or study for tests or behave well in class from time immemorial, ergo, we should do away with homework, studying and rules of conduct.

Life isn't perfect, but we need to hold our governments accountable, even though it is a never ending task and they'll periodically fall off the wagon. Throwing out the rules might be easier and letting them print as much money as they like at their own discretion is hardly the answer to that tedious task. It would be easier to give my kids credit cards and tell them to go ahead and buy whatever they think they need, and that would certainly be easier than arguing with them over such things. At least it would be easier until things eventually blew up. Like the world economy did in 2008 and threatens to do again at any moment in the near future.

The international community has become very fluid with new nations emerging and some ‘old ones’ running very high rates of growth. It would be hard to sustain a system like this with everyone stuck to gold.

I don't see any problem with that at all. Countries have risen and fallen on a gold standard for millenia. Why should it suddenly be some implacable problem?

Gold is oversold by its advocates who are uninterested in looking the problems that gold standards have faced over the years.

I'm interested, but I've never seen anyone put forward any credible reason why gold standards shouldn't work as well as they always have in the past.

The problems are so great that they have caused every single country that adopted gold ultimately to reject it.

Governments ultimately reject the gold standard because it is a form of constraint and they don't like it, much as kids throw off constraints their parents put on them, and drivers disregard constraints speed limits place on them. Just because they try to get out of them so they can misbehave is no reason to throw out the constraints. The constraints, at least in this case, are good for them and most assuredly for their citizens.

Gold is no panacea. It might fix one problem you don’t like today but it would introduce many constraints that would impede us in the future.

I call baloney on that one. Just because you proclaim it, doesn't mean it's true, and everything I've seen shows it to be blatantly false.

Better to have a fiat currency system and to let investors know that they have to manage their own risks to preserve their capital because that is true even in a gold-based system, it’s just that everyone assumes a gold-based system will not break down so that when it does everyone is completely unprepared. Is that really better?

That doesn't really make any sense at all. When fiat currencies come to an end those holding them lose all of their savings stored in them. As far as I can tell, gold based monetary systems don't collapse, governments just try to confiscate it or arbitrarily declare they will no longer honor the promises they formerly made to convert their paper to gold or silver at a fixed rate. No one holding gold is loses their life savings even if a country goes off the gold standard. Even when a country reneges on their promise of conversion, their new fiat currency doesn't lose all of its value at once. When Nixon closed the gold window the value fiat dollar didn't suddenly fall off of a cliff. Citizens, if they wanted to could have converted it to gold, silver, platinum, exotic paintings, land, antique cars or almost anything else at close to the same price as before. At least for awhile.

 

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