Antal Fekete Responds To Ben Bernanke On The Gold Standard

Tyler Durden's picture

Yesterday, Ben Bernanke dedicated his entire first propaganda lecture to college student to the bashing of the gold standard. Of course, he has his prerogatives: he has to validate a crumbling monetary system and the legitimacy of the Fed, first to schoolchildrden and then to soon to be college grads encumbered in massive amounts of non-dischargeable student loans. While it is decidedly arguable that the gold standard may or may not have led to the first Great Depression, there is no debate at all that it was sheer modern monetary insanity and bubble blowing (by the very same professor!) that brought us to the verge of collapse in the Second Great Depression in 2008, which had nothing to do with the gold standard. And as usual there is always an other side to the story. Presenting that here today, is Antal Fekete with "The Gold Problem Revisited."

THE GOLD PROBLEM REVISITED (pdf)

Antal E. Fekete

The article The Gold Problem of Ludwig von Mises, published 47 years ago in 1965, just six years before he died (the gold standard died with him in the same year) has some breath-taking thoughts, for example, “the gold standard alone can make the determination of money’s purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups”, or: “the gold standard did not fail: governments deliberately sabotaged it, and still go on sabotaging it.” But for all our admiration we would be amiss if we did not point out certain errors in his article. These are all errors of omission, and correcting them would hopefully make the Mises article even more helpful to the discriminating reader.

Mises fails to answer his own question why gold is the best choice to serve as money. Indeed, why not another commodity, or a basket of commodities? The reason is that the marginal utility of gold is unique in that it declines at a rate slower than that of any other substance on Earth. Various assets have various marginal utilities which determine their value. All of them decline, albeit at various rates. In other words, economic actors accumulate assets increasingly reluctantly, up to their satiation point that will be reached sooner or later. For gold, this point is removed farther, so far indeed that for all practical purposes it is beyond reach.

Therefore if you substituted another commodity, or basket of commodities for gold, then you would end up with a unit of value the marginal utility of which was inferior. It would decline at a rate faster than that of gold. It would be akin to substituting a yardstick made of rubber for one made of metal.

1. The futility of inflationary policies

Mises ignores the fact that newly created money can be spent not only on goods and services, but also on financial assets. This is the proverbial fly in the ointment of the inflationary argument. It is also a subtle one, so much so that the government as the would-be perpetrator of inflation often falls victim to it. It may think that it is promoting inflation while, in fact, it acts as quartermaster for deflation.

By restricting the circulation of gold money or by other means, the government can make financial speculation more attractive. In doing so it wants to reduce the amount of money available for buying goods and services. This strategy of the government and its pseudo-economists consists precisely in channeling enough of the newly created money into speculative ventures so that the untoward consequences of price and wage rises will not occur, or they will occur later, so that the causality relation is obscured.

The paramount example is bond speculation. Of course, under the gold standard there is no bond speculation because the variation in the bond price (or, equivalently, in the rate of interest) is minuscule making the opportunity to earn speculative profits negligible. Unless… unless… the central bank makes profits risk free as a bait to speculators by inappropriate monetary and fiscal measures. This is exactly what happened in the early 1920’s when the policy of open market operations, so called, of the Fed were first introduced quite illegally, we might add (the policy was legalized retroactively in 1935).

As the Fed was originally constituted, it was only enabled to be a passive partner in business. Limited by its charter the Federal Reserve Act of 1913, it could enter (or decline to enter) business initiated by others, but it could not initiate business on its own. It could post its rediscount rate, but member banks had step forward to request rediscounting real bills from their portfolio. In and of itself rediscounting was not inflationary as a way to create new money. The new purchasing power so created was backed, dollar for dollar, by salable merchandise arising in production, and it was to be extinguished when the merchandise was sold to the ultimate consumer at the time the bill matured.

This was not the case, however, when the Fed assumed an active role and started purchasing government bonds in the open market at its own initiative in contravention of the Federal Reserve Act of 1913. The monetary base was enlarged. This provided a direct incentive for member banks to make loans regardless whether or not new merchandise was simultaneously emerging in production. Using standard Quantity Theory of Money (QTM) reasoning the Fed and everybody else assumed that the effect would be inflationary. Hooray, a subtle and potent new way of inflating the money supply has been invented! The economy can now be micromanaged at will! There was jubilation in the inflationist camp.

The jubilation was premature. The policy of open market operation as an instrument of inflation was an enormous blunder. QTM was inoperative: bond speculators overrode it. They knew when the Fed had to go to the open market to relieve ‘natures urge’ (to purchase its next quota of government bonds). Speculators could make risk-free profits by pre-empting the Fed in buying the bonds first. The ‘tool’ of baiting speculators with risk free profits backfired badly, if only for the reason that speculators were a much smarter lot than central bank agents facing them in the bond pit. They risked their own capital while losses made by central bank agents were covered from public funds. The game plan was upset. What was supposed to be inflation ended up as deflation. Here are the details.

In an unhampered market risk-free profits that may occur from time to time are ephemeral and therefore inconsequential. Hawk-eyed speculators immediately take advantage of them with the result that any further opportunity to make risk-free profits is eliminated on the spot. This is no longer true if the opportunity to make risk-free profit is not an infrequent aberration but the consequence of deliberate and well-advertised official policy as it is in the case of the policy of open market operations. When the central bank relies on open market purchases of government bonds in order to augment the monetary base on a regular, ongoing basis, then speculators can anticipate and pre-empt it. This policy, whole-heartedly supported by Keynesian/Friedmanite economics, is the most ill-conceived monetary policy ever concocted for the purpose of increasing the stock of money. The Federal Reserve Act of 1913, for excellent reasons, disallowed such a policy and imposed stiff and progressive penalties for non-compliance on the Federal Reserve banks if their balance sheet showed that government bonds had been used to cover Federal Reserve note or deposit liabilities. At first the Fed used open market operations illegally. It could get away with it because of the connivance of the Treasury in ‘forgetting’ to collect the penalty. The conspiracy created a fait accompli and, in the end, Congress was forced to legalize the corrosive practice retroactively in 1935 when it amended the Federal Reserve Act.

The newly invented monetary policy of open market operations is responsible for much of the deflationary damage inflicted on the world economy during the Great Depression of the 1930’s. It started an avalanche of falling interest rates that soon went out of control. Falling interest rates destroy capital as they increase the burden of debt contracted earlier at higher rates. Perfectly sound businesses fail if their debt burden, through no fault of theirs, exceeds the profitability of deployed capital. The whole process was most insidious. Entrepreneurs did not know what hit them. From one day to the next they found themselves uncompetitive as competitors financed their business at lower rates. They had to lay off their employees. They went bankrupt in droves. Wanton destruction of capital was the main cause of deflation and the Great Depression in the 1930’s.

Herein lies the incredible failure of the policy of open market operations, missed by Mises. The policy is counterproductive from the point of view of central bank and pseudo-economists acting as its cheer-leaders. It released the genie of risk-free bond speculation from the bottle in the hope that it could always be put back. But it could not. Falling interest rates would run their devastating course.

The same thing repeats itself today. Interest rates have been falling for over thirty years. The Fed is no longer in control. It is lunacy to believe that it can stop the avalanche that it started so easily in the early 1980’s. Today the speculators are the only buyers after China and other exporters to the US bailed out of the US T-bond market. Speculators will keep buying the bonds as long as they can reap risk free profits. It is true that ‘quantitative easing’ cuts into that business, as the Fed is buying bonds directly from the Treasury, bypassing the open market (another illegal practice). Watch for the day when the speculators will start dumping bonds and selling them short. When they transfer their buying from the bond market to the commodity market, the game is up.

Open market operations is a charade that can go on only so long as speculators are allowed to reap risk-free profits at the expense of the producers and the savers. When the latter have been squeezed dry, it’s “après nous le deluge”. That is the true scenario of Great Depression II.

2. The futility of the policy of suppressing interest rates.

The rate of interest is a market phenomenon just like prices. In fact, the definition of the rate of interest must refer to the bond price: it is the rate that amortizes the price of the bond as quoted in the secondary market through the bond’s maturity date. The floor for the range in which the interest rate may move is determined by marginal time preference. (The ceiling, on the other hand, is determined by the marginal productivity of capital.) To understand this, we must consider the arbitrage of the marginal bondholder between the bond market and the gold market. If the rate of interest falls below the rate of marginal time preference, then the marginal bondholder sells his overpriced bond and keeps the proceeds in gold coin. In this way he can force the bond price to come back to earth from outer space. Bank reserves are shrinking and the banks have to call in some of their credits and sell bonds from portfolio. When the bond price falls, the marginal bondholder repurchases his bond at a cheaper price. Time preference has no meaning outside of this context. It will remain a pious wish ? until the marginal bondholder gives it teeth.

Mises (and, before him, Ricardo who was an advocate of the elimination of gold coins from circulation) was wrong when he stated that there is no difference between the gold coin and a promise to pay gold coin as long as the security and maturity of the promise cannot be doubted. The promise can perform all the monetary functions that the gold coin does. Well, it cannot, because there is one very important exception. When the marginal bondholder in protest to low interest rates sells his bond (a future good), he insists on getting gold (a present good). He will not take a promise to pay gold, because it is still a future good, and an inferior one to boot as it pays no interest. Taking it would mean jumping from the frying pan into the fire. This shows that gold hoarding, far from being a deus ex machina, and far from being a curse of the gold standard, is an important market signal. It indicates that the rate of interest is being pushed below the rate of marginal time preference. It had better be heeded before it is too late. Gold hoarding cannot be understood except in the context of its counterpart, gold dishoarding. When the signal is heeded, banks tighten up their loose credit policies and the government reins in expenditures, gold will be dishoarded and the marginal bondholder will replace gold in his portfolio by repurchasing the bond at a profit.

This was the reason for eliminating gold coin circulation first in Europe in 1914, and then in the United States and Canada in the 1930’s. Governments wanted to make sure that they were in full control of the rate of interest, free from any interference from the marginal bondholder. This policy had to fail. It was shipwrecked on the reef of gold hoarding.

All economists, including Mises himself, missed the importance of the nexus of gold hoarding and dishoarding as the manifestation of arbitrage by the marginal bondholder between the bond market and the gold market, explaining the all-important contact between gold and interest.

3. The futility of the policy of boosting wages.

Mises did not subscribe to Adam Smith’s Real Bills Doctrine (RBD). Although he acknowledged the fact that real bills drawn on consumer goods in most urgent demand could circulate as a kind of ephemeral money through endorsing, as they indeed did in Lancashire before the Bank of England opened its branch in Manchester, he did not find this matter worthy of further attention. He coined the word “circulation credit” that financed the movement of commodities from the producer to the consumer through the various phases of production, but he blotted out the important distinction between the discount rate and the rate of interest. He never used the term “self-liquidating credit”, that would have revealed why circulation credit did indeed circulate without any coercion from the government. They did circulate because the credit was liquidated by the sale of merchandise in high demand on which the bill was drawn.

Mises was unimpressed by the fact that bonds and mortgages could not circulate in the same way. He had too great a faith in the Quantity Theory of Money, and was probably disturbed by the fact that real bills, however temporarily, could serve either as money substitutes, or as bank reserves on which sound money could be built. His negative attitude with regard to Adam Smith’s RBD is regrettable. Real Bills are the next best thing to gold into which they mature in 91 days or less. The demand for real bills is virtually unlimited. Not only banks with surplus gold in their tills scramble for them as the best earning asset commercial banks can have, but also those individuals and institutions who have large payments coming up (say, the purchase of a house, or a factory, or the retirement of a bond issue) and they have to assemble cash by the closing or maturity date. They could not put these accumulating funds into stocks, bonds, or mortgages because they were not sufficiently liquid. An increased offering would immediately depress their price. Instead, these people went into the bill market and bought real bills the liquidity of which was second only to gold.

But real bills had another great significance having to do with the labor market. The only author who recognized this fact was the German economist Heinrich Rittershausen (1898-1984), see his book Arbeitslosigkeit und Kapitalbildung, Jena, 1930. A large part of outstanding real bills in circulation represented the wage fund of society. Out of this fund wages for labor producing merchandise that will not be available for sale for up to 91 days could be paid now. Thus real bills represented a real extension of demand for labor. Employers would simply go ahead and hire all the hands needed to produce merchandise in high consumer demand, without worrying who will advance the funds to pay wages before the merchandise could be sold. The wage fund would always be there. The RBD explains why there was no ‘structural unemployment’ in the 19th century, in contrast with the 20th when the wage fund was destroyed never to be rebuilt. 19th century entrepreneurs did not have to assume the burden of financing the payment of wages. The bill market took care of that. Say’s Law was operative: there were employment opportunities as long as prospective employees wanted to eat, get clad, shod, and keep themselves warm in winter.

The point was driven home most forcefully when the wage fund was inadvertently destroyed by the victorious Entente Powers. They decided not to allow the rehabilitation of the bill market after the cessation of hostilities in 1918. This single decision sealed the fate of tens of millions of workers who were to be laid off in the 1930’s for lack of financing the wage bill. It was also the reason for creating the corrosive ‘welfare’ state that paid workers for not working and farmers for not farming. It also caused the demise of the gold standard by removing a vital organ, its clearing house: the bill market. Here are the details.

The victorious Entente Powers were afraid of German competition in the postwar period. They wanted to monitor, if not control, Germany’s exports and imports. As this would not be possible under the system of multilateral trade, that is, trade financed by real bills circulation, they opted for a system of bilateral trade. Never mind that this meant a setback for their own producers and consumers as well. Never mind that much more gold was needed to run a system of bilateral trade than that required by a system of multilateral trade extra gold they did not have. Never mind that this would make the 1925 return of Britain to the gold standard deflationary. The neurotic fear of German competition took precedence over all other concerns. In fact, these concerns were never examined and the decision was made in high secrecy.

This was the end of real-bill financed world trade, the great success story of the 19th century. The bill market was destroyed. We still suffer the consequences. In effect, world trade was reduced to barter. Worse still, along with the destruction of the bill market society’s wage fund was also destroyed. There was no one to advance wages payable to laborers whose products could not be sold for cash up to 91 days. Vast sections of the world’s productive plants were condemned to idleness for the disappearance of the wage fund. As I mentioned, the only economist in the world who saw what was coming was Rittershausen. Economists still owe him recognition for his great insight. The world is still condemning the gold standard as the major cause of the Great Depression of the 1930’s and the horrible unemployment in its wake, when the real cause was the destruction of the wage fund, a misguided unilateral decision of the victors in World War I made in secrecy.

It was most unfortunate for economic science that Mises failed to put the weight of his reputation behind Rittershausen’s charge. Not only had governments put improper and counterproductive measures into effect to boost wage rates, thus fostering unemployment. They were directly responsible for the world-wide leap-tide of unemployment by destroying the bill market and the wage fund.

Once again the world is facing the same dangers as it did four score of years ago. Yet one can see only complacent governments in a self-congratulating mood over their ‘success’ in ‘fending off’ the Great Financial Crisis. But the writing is on the wall: if governments fail to rehabilitate the gold standard and its clearing house, the bill market, together with the wage fund, then a much more devastating leap-tide may soon engulf the world.

4. The futility of the policy of gold valorization.

The world has been witnessing the pathetic attempts of governments and central banks “to keep the gold price in check” since the 1971 fraudulent default of the US government on its international gold obligations. To be sure, a default is always followed by a depreciation of the dishonored paper, so the futility of the policy of gold valorization has always been a foregone conclusion. But what we have is far more than this self-defeating effort to keep gold out forever from the monetary system. What we have is a veritable brain-washing of the whole world about the role of gold in the economy, and blaming gold for results that only keeping gold in the system could have prevented.

It is alleged that gold has disqualified itself from playing the role as the monetary anchor and source of credit in the economy. ‘Gold is far too volatile for that’. This is puerile because it ignores the fact that the so-called volatility of gold is just the mirror image of the volatility of the irredeemable dollar in which the price of gold is quoted.

It is also ignored that the debt crisis is a direct consequence of exiling gold from the international monetary system. Gold is the only ultimate extinguisher of debt. It cannot be replaced by the dollar or any other irredeemable currency. Under the dollar system debt simply cannot be extinguished. Total debt can only grow, never shrink. All the bad debt and “toxic sludge” stays in the system and is merely kicked upstairs into the balance sheet of the US Treasury. There it remains, representing a great threat to the world. Like radioactive material, when its quantity exceeds the threshold, a chain-reaction starts triggering an nuclear explosion. The world needs gold as a safe way to eliminate bad debt.

Through a system of bribes, blackmail and intimidation research on questions relating to gold has been discouraged to the point that it is practically non-existent. The world continues to live in a fool’s paradise. It believes the size of government debt does not matter because it can always be rolled over. Nor would it cause inflation or deflation because competent and honorable gentlemen at the helm can safely navigate our monetary ship through the strait of Scylla and Charybdis. They have a sharp tool, the printing press, and with its judicious application they can fine-tune the quantity of money in circulation as well as the rate of interest for the benefit of all. But the virtual elimination of research on gold will strike back. These ‘competent’ and ‘honorable’ gentlemen at the helm are complete ignoramuses when it comes to gold. They have no notion of the erosion of the gold basis and the irresistible march of the gold futures markets into the death valley of permanent gold backwardation. When disaster strikes, gold will not be available at any price. What this means is that the world is insidiously slipping into barter. But you cannot feed the world’s present population on the basis of a barter economy. Poverty, pestilence, famine threatens society, not to mention the breakdown of law and order. All this, and more, because government leaders have allowed the suppression not only of monetary gold itself, but also the research on monetary gold.

Ben Bernanke, the Chairman of the Federal Reserve Board introduced a new phrase into the vocabulary of economics on July 11, 2011, in his testimony at a Congressional hearing. The new phrase is: tail risk. He defined it as the “really, really bad outcomes” in the economy, as if they were completely outside of human control on the pattern of floods, earthquakes, volcanic eruptions and tsunamis.

But ‘tail risk’ in reality is the wholly unnecessary risk taken with human lives by a parasitic, contemptuous, conceited, and yes, ignorant ruling class symbolized by Bernanke, that has hijacked the Constitution, in particular, turning the Constitution’s monetary provisions upside down which define money in terms of gold and silver. They are only interested in their own self-aggrandizement, in perpetuating their power, and in preserving their superstitious faith in irredeemable currency a monetary system that has failed miserably every time foolish leaders in history experimented with it.

Mises was a great warrior fighting these usurpers and monetary hijackers with the sharpest weapon there is: human reason. We must follow his lead even if it sometimes means that we have to add new ideas that go beyond Mises’s opus.

The day of reckoning for monetary insanity is on hand. The Constitution is there for the protection of all. If we fail to preserve and uphold it, and meekly succumb to the monetary hijackers’ and usurpers’ tactics, then we shall have only ourselves to blame for the consequences.

March 20, 2012.

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WALLST8MY8BALL's picture

ManBernKrug! Half Man, Half Bearded Psychotic Keynesian!

Badabing's picture

WOW!

But ‘tail risk’ in reality is the wholly unnecessary risk taken with human lives by a parasitic, contemptuous, conceited, and yes, ignorant ruling class symbolized by Bernanke, that has hijacked the Constitution, in particular, turning the Constitution’s monetary provisions upside down which define money in terms of gold and silver. They are only interested in their own self-aggrandizement, in perpetuating their power, and in preserving their superstitious faith in irredeemable currency a monetary system that has failed miserably every time foolish leaders in history experimented with it.

alfred b.'s picture

 

....and let's not forget the enablers of all of this corruption and trespassiong over most constitutional rights, namely Obama, Jamie Dimon, DoJ's Holder, Gensler as well as many other scum bags!

 

 

flacon's picture

This is a very good read. Fekete debunks the whole "the gold standard was a leading cause of the great depression" nonesense. 

Harlequin001's picture

The problem is not the central bank, but the central banks ability to create money from nothing...

Gold will resolve that, and all the mal practice that comes with it...

Donnie Duvanie's picture

This article is wrong about one thing - If you give me access to unlimited quanitities, I guarantee you that I can have too much gold.

Cadavre's picture

Oh de humanity, please give Fiat dribbling Zen Ben white shoe boy extraordinaries de benefit of de debt doubt. FOR CRYING OUT LOUD: Rigging markets by front running USD buys while the FTSE is open, and then front running USD sells when S&P opens is hard - shit - you that daylight savings time crap to contend with.

INFLATION is not currency debasement, it's PRICE DICOVERY. The FED is simply attempting to determine the "affordablity" threshold for essntial goods and services at which Americans would be open to considering reverse mortgage on their internal organs. Mind you it be for benchmarking purposes only, and not to extend the lives of thw "it" wit de mark.

Flash off the lame stream: Goldman rating changed from hold to buy - Isn't that the same thing that happened with Lehman that plunged the S&P bact to, OMG, "realty when it hit a beastly 666?

First compliance mantra: If me die before me wake, me give my soul to Goldman to keep.

Flash off the lame stream: Fartabalony just asked some muppet, "Would you call this an entry point?"  To which the muppet say, "Yep - all dat money on de sideline should be moving back tnto equities  any second now ... yep ... yep rel son ... aaa ... any time now . (as market reacts like it do to Bernanki on da TV - even HFT bots got sense `nuff to bleed off alittle wen de ben movem dem lips.

Duel Entry Accounting be da oldest profession in the world, if de recollection be a serving rigt `n proper, an dat be for sure by cracky.

In other flash inference and recent historical coincidence and non news packaged as news plus a technical epiphany ..

Looks like CNBC's last two holdouts,  Pisani and Santelli be considering the writing on the wall when FOX BUSINESS decided they'd rather drop their profitable "Freedom Watch" franchise than suffer an FBI investigation into News Corp phone tapping activities on dis side of the pond, and now, Bob and Rick seem to be shilling the party line (and they are having a hard time feigning exuberance. Member when all the noise from a non-existent accelerator issue gave Americans a tearful apology from Toyota's CEO on da CSPAN TV. Remember that? Remember it happening at the same time a Japanese MP called 911 hoax and the Japanese commons was all pissed and all that at the fiscal and personal costs of occupation and US Bases and their participation in War Usury Empires Genocide Machine's Globalony WOT?

When will de top hog at CNBC's former parent be crying on da CSPAN TV for turning Japan into a giant GE microwave oven?

The useless shit to buy TV programming has bleed all the juice from the DIY 2ed mortgage for granite counters and stainless appliance dweebs has moved up market to the nose job and tummy tuck prospect sector still printing enough of a credit line to look like the latest blast of mindless hypno tube magic Cosmetically Cut  Bitch Wives Living Meaningless Existences. I beleive dt shit whet the nose job man can make de Hilary look like da 80 pis lipped wick licking Monica!

She be da pink donation to the dragon in my dreams (but Fistema still better dan dat)!

Looking for a vid of "Closing Bell" yesterday. Some guest was talking about something and said something about 500 on the S&P when out of nowhere applause and shit be blocking what the guy was saying and CNBC switches to the NYSE floor as a parade of Medal of Honor recipients are marching to the podium to ring the bell. Most times, the CNBC producers wait until the day's anointee's are actually at the podium and actually ringing the fucking bell for their daily telecast "post card" close shot. Didn't know CNBC was so interested on the Medal of Honor, cause this guy got two of him and the CNBC never talk `bout him.

Closed formed derivative contract pricing algors are actuarial schedules for pieces of paper.

jcpicks's picture

Why waste your time digging for gold when you can just print?

SHEEPFUKKER's picture

Gold is just tradition right Benny?

Ignatius's picture

Dr. Fekete is obviously a learned and well read man on economics, but God my head implodes waiting for him to make his point when/if he gets to one.

Simple.  You've done work for me, do you want this gold as payment or this promise to pay that I've etched onto this fine quality paper?  When paid in gold you have been paid.

"Gold is the only ultimate extinguisher of debt." -- Fekete.  Wrong, but it is likely the best.  Owe me some money and as payment offer up your fine daughter as payment.  I'm thinking we may be able to work something out.

Gold is first and foremost a wealth reserve asset, and arguably the best wealth reserve asset.

DoChenRollingBearing's picture

+ 1

I hope that FOFOA will take a look at Fekete´s new piece.  I would really like FOFOA´s take on this.

Both agree that mismanagement (inevitable) will lead to gold not available at ANY price, at least for a while.

Readers of this piece might want to tackle FOFOA´s work, I would start about October 2009 and read forward (LOTS of reading):

fofoa.blogspot.com

Disclosure: I am not FOFOA but I do contribute to his blog.

flacon's picture

DoChenRollingBearing,

 

How about gold's little brother: SILVER? I know FOFOA is strictly "gold only" but throughout history SILVER has been used as money in the same way gold has. 

 

(PS: I enjoy the FOFOA blog, and spent hours (probably days) reading the material). I started reading FOFOA a few years ago. 

 

DoChenRollingBearing's picture

+ 1 flacon

I own silver too, but WAY MORE gold ($ value).  

 

My silver is mostly to be SPENT in a SHTF.

My gold is what will preserve wealth.

SWRichmond's picture

He makes many points.  Like this one:

"The rate of interest is a market phenomenon just like prices. In fact, the definition of the rate of interest must refer to the bond price: it is the rate that amortizes the price of the bond as quoted in the secondary market through the bond’s maturity date. The floor for the range in which the interest rate may move is determined by marginal time preference. (The ceiling, on the other hand, is determined by the marginal productivity of capital."

And this one, which apparently sailed right through your mind like a neutrino without hitting anything:

"...gold hoarding, far from being a deus ex machina, and far from being a curse of the gold standard, is an important market signal. It indicates that the rate of interest is being pushed below the rate of marginal time preference. It had better be heeded before it is too late. Gold hoarding cannot be understood except in the context of its counterpart, gold dishoarding. When the signal is heeded, banks tighten up their loose credit policies and the government reins in expenditures, gold will be dishoarded and the marginal bondholder will replace gold in his portfolio by repurchasing the bond at a profit."

Ignatius's picture

SW says:

"...which apparently sailed right through your mind like a neutrino without hitting anything:"

Dr. Fekete is addressing a largely lay audience, and I'm suggesting he might do well to speak in a less academic tone.  I watched a Feynman lecture on the quantum theories of light and as complex as the subject can be, he was able to tone it down and express the main ideas in a way non-academics could follow.

I would wager that you could more economically reconsruct the main points in the two pieces you quoted.

SWRichmond's picture

THE fundamental precept of markets is that they run on price signals.  When these signals are thwarted, as is always done by the entity with the legal monopoly on the use of force, markets are distorted, and in severe cases breakdown, causing capital to go into hiding, if it hasn't already been destroyed through risk-free speculation / moral hazard. 

The entity with the legal monpoly on the use of force ignores this fact at its peril, peril which it nonetheless endlessly endeavors to transfer to the producing class.

:)

Fiat Currency's picture

Ignatius: "Gold is first and foremost a wealth reserve asset, and arguably the best wealth reserve asset."

 

Yep. I like the version I give my children ... Gold is concentrated wealth. Full stop.

bank guy in Brussels's picture

Retired mathematics professor Fekete is obviously pretty brilliant, but after reading a number of his articles I still have trouble digesting what he has to say, though he buids some fascinating threads of thought.

And the fact is that, during the gold standard 'Golden Age' of the 1800s and before 1913, to which Antal Fekete looks with such fondness, there was a quite endless series of credit booms and busts and depressions, with more overall volatility than since then.

Even with gold money, you have credit expansions, 'irrational exuberance', contractions and enormous depressions, which seem as if they can even be worse because the liquidity crunches get so severe.

There is also the fact that during the 1930s, it was the countries that more quickly dropped the gold standard, which did better during the Great Depression, than the countries that held on to it, as the US did (though after devaluing the dollar and criminally confiscating much of citizens' gold).

Gold is very important, and I was glad to long ago become a gold owner, but I am not sure that going back to the Great Depression of 1873 under the gold standard, is where we want to go.

DoChenRollingBearing's picture

+ 1

bank guy said:

...Fekete is obviously pretty brilliant, but after reading a number of his articles I still have trouble digesting what he has to say, though he buids some fascinating threads of thought.

I have the same problem digesting FOFOA.  Long and intricate but very logical articles.

SWRichmond's picture

I personlly find FOFOA's writing style remarkably irritating; it is as if he/she enjoys hearing themselves talk.  I started and quickly stopped reading it.

Ignatius's picture

FOFOA's writing style asside -- to each his own -- do you believe we should have a gold exchange standard?

SWRichmond's picture

I believe people should be able to use whatever they want for money.

SWRichmond's picture

The booms and busts were smaller; the panics of shorter duration.  Corrections were allowed to happen, markets cleared, and then business resumed.  There was no guaranteed profitability model (moral hazard) that relied on taxpayer subsidy as now;o clogged markets full of mis (artificially) -priced assets.

As to the post-30's expansion, the problem with central banking is that it appears to work for awhile, until it doesn't.  "Doesn't" is where we are now.

Withdrawn Sanction's picture

The booms and busts were smaller; the panics of shorter duration. Corrections were allowed to happen, markets cleared, and then business resumed.

All quite true.  Indeed, the expansions and contractions were almost rhythmic in behavior (not quite, but clearly closer than today's). For proof, look at the TIME durations of the expansions and contractions then vs. now in the NBER business cycle dating series.  (nber.org)

And as I study the issue more, I become increasingly convinced that this relatively more stable outcome is largely the result of remarkably stable interest rates.  Compare, for instance, the variation (relative or absolute change), in long bond yields in the 70 years prior to the Fed to rate variability in the years following the Fed.  The data will positively leap out at you.  1914 or so stands out like an earthquake on a seismograph.  The only comparable variability in interest rates during the pre-Fed era (and it's not even close) was around the time of the War Between the States.  Otherwise, the pre-Fed era interest rates fluctuate in a very narrow range as it seems the arbitrage process Fekete points to actually works itself out in practice.

Stability in interest rates is key to long-range planning and investment.  Wildly gyrating rates cloud the picture, while near-zero rates send savers fleeing. Both are highly disruptive to properly functioning capital markets.  Thanks BB, you douche.

 

jimmyjames's picture

Even with gold money, you have credit expansions, 'irrational exuberance', contractions and enormous depressions, which seem as if they can even be worse because the liquidity crunches get so severe.

***************

The California and later Klondike gold rushes caused the boom bust periods of that time and also a few bank runs (gold redemption) panics-

The inflow of gold from those gold rushes created nasty inflation's that allowed banks to extend more credit and the subsequent deflation's as a result of exhaustion of easy money exuberance-

Buckaroo Banzai's picture

The meat of Fekete's arguments revolve around Real Bills Doctrine. Without a functional way to clear Real Bills, a gold standard cannot operate. There will ALWAYS be booms and busts in the economy, whether we have a gold standard or not-- the economy is a living thing that breathes. But an economy that effectively uses Real Bills,COMBINED with a gold standard, can at least recover quickly from the busts.

We need to stay focused on Real Bills if we are to make a positive difference. For anyone looking to learn more about this, simply search Fekete's substantial writings on the topic.

akak's picture

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There will ALWAYS be booms and busts in the economy, whether we have a gold standard or not-- the economy is a living thing that breathes.

I wonder if that is really true.  Certainly the sociopathic monsters who wear the robes of central bankers would LIKE us to believe that, but is not fractional reserve banking the REAL root of the boom-and-bust problem here?  After all, most living things do NOT routinely survive by alternately binging until grossly fat and bloated, and then starving until near death before repeating the cycle.

Ghordius's picture

at least on empirical/historic evidence, yes. booms and busts were sharper and shorter, rarely extending to two years. at the end, the fiat fractional reserve banking system paired with bailouts just takes the pain from one year and spreds it over the next 5 to 20 years. the main difference is how many companies go bust and there you can start to argue on the value of the method...

Ghordius's picture

IMHO Prof. Fekete makes a very valid point on the Real Bills Doctrine, though I understand two different banking techniques have evolved/adapted to take care of this need.

Of course, there is the familiar method of going public (issuing stocks), issuing debt (bonds, collateralized or not) and using letters of credit - the way big banks like (BIG) business.

On the other side, for the smaller producers and merchants who really needed the Real Bills, the commercial/regional banks took over, by extending credit based on the inspection and direct relationship of the bank officer on the spot - something you can achieve only if you have a finely meshed commercial banking system, with a tendency to small/regional. So part of this kind of credit is self-estinguishing and part of it is based on collateral, though not on collateral a young Master of the Universe writing idiocies about european continental banking practices, their "aging assets" and their "antiquated banking practices" wants to understand in his London or NY office.

(Exception: a small biz producing a commodity, of course, for example a small wheat farmer but not a small shoe producer). Going to strongly the first way has this little side effect of big producers shifting their production to Asia and then retailing trough big biz like Walmart, btw, while going strongly the other way biz tends to stay in the region and adapt differently to prices and markets...

bobola's picture

Interesting how Bernanke is now speaking in public more often.

This is a HUGE red flag, him speaking before school kids.

Traditionally the Fed chair rarely speaks in public.

He must be scared shitless about the future size of our debt pile........

Everyone should buy more physical gold and silver each time he speaks...........

MarcusLCrassus's picture

Nice catch.

 

Its like he's gone into Baghdad Bob mode. 

LuKOsro's picture

Money should be backed by the only thing that never expands: common sense.

Big Corked Boots's picture

Alas, common sense is too rare to provide the backing needed.

GoinFawr's picture

damnit, when will you people learn it's not the 'scarcity' of the underlying common sense that matters,  it's the real value per monad of it.

Troll Magnet's picture

yeah but couldn't they just rehypothecate common sense?  they can also fractional reserve the hell out of common sense and voila!  suddenly we're overflowing with common sense!  problem solved!

GoinFawr's picture

haha! I saw what you did there.

Fox-Scully's picture

There is nothing so uncommon as common sense!

TINN's picture

B. Hoye of IA has proposed (for the past few years) a bull market in common sense...

oddjob's picture

Hoye is a tired act. A withering paperbug.

TruthInSunshine's picture

LuKOsro: "Money should be backed by the only thing that never expands: common sense."

 

Advocates of a gold standard would never argue that the 'money' supply shouldn't expand or be expandable.

Advocates of a gold standard, or any other standard whereby fiat currency has to be tied to something of real, inherent value, would argue that unless the creation of fiat currency isn't limited (in whatever quantity) to a degree that roughly approximates the increase in something of value that an economy is able to produce in larger amounts, then the creation of fiat currency will ultimately outpace the creation of any additional units of real wealth, thus damning the fiat currency that underpins the very economic structure (especially in cases where a fiat currency thas monopoly status, enforced by the state, as payment of all debts, both private and public).

DoChenRollingBearing's picture

+ mucho

And THAT is one of (or maybe the) biggest problems of a gold standard.  It can be perverted too by TPTB.

TruthInSunshine's picture

I would only add that the component of 'leverage' is nearly or maybe as equally important to discuss, in terms of comparing the merits and flaws of comparative  'money' or 'banking' systems, as whether to tie the creation of fiat currency to the amount of 'things' having inherent value in circulation (or held in reserve) itself.

LuKOsro's picture

You are right, the asset base should probably have to expand at a rate similar to the one of a good proxy for overall economic productivity gains. 

Buckaroo Banzai's picture

Yes, you are correct-- the PTB can corrupt a gold standard, but ONLY in the absence of Real Bills. THAT is why they killed Real Bills before they killed the gold standard.

STAY FOCUSED on Real Bills.

alfred b.'s picture

 

    sorry, but way too many have sold their 'common senses' to the highest bidder....and we all know who they are!

Chaffinch's picture

Backing money with common sense is a nice idea but how do you expect them to keep common sense in a bank? You'd never get it in through the doors to start with...

GOSPLAN HERO's picture

The Magna Carta adresses usury "Debt and money-lending"

"Medieval Christians were forbidden from lending money at interest, whereas Jews were free to make such loans.

The king and the barons depended on Jewish money-lenders because they needed financial credit, but the king also plundered Jewish wealth through punitive levies and the confiscation of property.

Since the Crown had the right to collect debts owed to Jews who had died, Jewish loans to the barons were often profitable for the king and financially painful for the barons. However, Magna Carta did not ban the reversion to the Crown of debts owed to Jews. It also implicitly allowed the seizure of property for the payment of debts, it did not prohibit imprisonment for debt and the the clause dealing with intestacy specifically preserved the rights of debtors. Instead Magna Carta merely set out principles for how debts should be collected and corrected two minor abuses. If the heir of a debt to a Jew was a minor, the debt could not accrue interest, and widows and minors were to be protected from excessive demands for repayment."

firstdivision's picture

I see Biran Sack made it to his desk at 11am.

evolutionx's picture

Let us be very clear, this financial Shangri-La is now coming to an end. The financial system is broke, many western sovereign states are bankrupt and governments will continue to apply the only remedy they know which is issuing debt that will never ever be repaid with normal money.

more

http://www.mmnews.de/index.php/english-news/7063-hyperinflation-will-drive-gold-to-unthinkable-heights