Guest Post: Fiat Money Kills Productivity

Tyler Durden's picture

From John Aziz of Azizonomics

Fiat Money Kills Productivity

I have long suspected that a money supply based on nothing other than faith in government is a productivity killer.

Last November I wrote:

During 1947-73 (for all but two of those years America had a gold standard where the unit of exchange was tied to gold at a fixed rate) average family income increased at a greater rate than that of the top 1%. From 1979-2007 (years without a gold standard) the top 1% did much, much better than the average family.


As we have seen with the quantitative easing program, the newly-printed money is directed to the rich. The Keynesian response to that might be that income growth inequality can be solved (or at least remedied) by making sure that helicopter drops of new money are done over the entire economy rather than directed solely to Wall Street megabanks.


But I think there is a deeper problem here. My hypothesis is that leaving the gold exchange standard was a free lunch: GDP growth could be achieved without any real gains in productivity, or efficiency, or in infrastructure, but instead by just pumping money into the system.

And now I have empirical evidence that my hypothesis has been true — total factor productivity.

In 2009 the Economist explained TFP as follows:

Productivity growth is perhaps the single most important gauge of an economy’s health. Nothing matters more for long-term living standards than improvements in the efficiency with which an economy combines capital and labour. Unfortunately, productivity growth is itself often inefficiently measured. Most analysts focus on labour productivity, which is usually calculated by dividing total output by the number of workers, or the number of hours worked.


A better gauge of an economy’s use of resources is “total factor productivity” (TFP), which tries to assess the efficiency with which both capital and labour are used.


Total factor productivity is calculated as the percentage increase in output that is not accounted for by changes in the volume of inputs of capital and labour. So if the capital stock and the workforce both rise by 2% and output rises by 3%, TFP goes up by 1%.

Here’s US total factor productivity:

Only a wilful and ideological Keynesian could ignore the salient detail: as soon as the USA left the gold exchange standard,  total factor productivity began to dramatically stagnate. 

Coincidence? I don’t think so — a fundamental change in the nature of the money supply coincided almost exactly with a fundamental change to the shape of the nation’s economy. Is the simultaneous outgrowth in income inequality a coincidence too?

Keynesians may respond that correlation does not necessarily imply causation, and though we do not know the exact causation, there are a couple of strong possibilities that may have strangled productivity:

  1. Leaving the gold exchange standard was a free lunch for policymakers: GDP growth could be achieved without any real gains in productivity, or efficiency, or in infrastructure, but instead by just pumping money into the system.
  2. Leaving the gold exchange standard was a free lunch for businesses: revenue growth could be achieved without any real gains in productivity, or efficiency.
And it’s not just total factor productivity that has been lower than in the years when America was on the gold exchange standard — as a Bank of England report recently found, GDP growth has averaged lower in the pure fiat money era (2.8% vs 1.8%), and financial crises have been more frequent in the non-gold-standard years.

The authors of the report noted:

Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives.

Still think it’s a barbarous relic?

Seems more likely that the real barbarous relic is pure fiat money.

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Born Patriot's picture

The biggest killer of productivity by far is multiculturalism. With such a diverse mix of cultures all crammed into a single economy, economic growth innevitably suffers. We have to get back to solid American principles, and traditional American values. End this madness! Vote Ron Paul 2012!

urbanelf's picture

So true.  Living near a Thai restaurant and working with Indians with masters degrees has truly hindered my ability to be productive.

economics9698's picture


One thing that occurs with fiat that cannot happen for extended periods with gold is trade deficits.  With gold when a country consumes more imports gold flows out creating a shortage of money, prices rise, imports become expensive.  In the country receiving the gold the cost of money falls, imports are cheaper, and consumers buy more.

Trade balances out assuming the countries are technologically more or less equivalent. 

Why is this important?

Because with fiat trade no longer has to balance, if countries (China) want to run a trade deficit with the USA they can simply finance it with debt.  Governments can run up huge deficits and trade deficits.

This is a crucial difference between fiat and gold and productivity because now producers in the USA can increase productivity by switching from US made components to overseas cheaper components.

The other factor is creation of money misallocates resources in favor of the counterfeiters and the organizations, government and Wall Street banks, receiving the counterfeit money.

Instead of resources being used for the most productive uses government uses those resources and squanders them, generally we lose 55 cents on the dollar, as opposed to manufacturing creating $1.40 for every $1 invested.

Wall Street is only interested in paper gains which may or may not be the best allocation of resources.  In the frenzy of the newly created cash from the Federal Reserve we have seen the Savings and Loan crisis, NASDAQ crises, housing crisis, and now government debt crisis.  All misallocation of resources involving those receiving the cash, Wall Street, TBTF banks, and what not.

Ludwig von Mises does a better job explaining the misallocation of resources from the printing of counterfeit cash.  


MachoMan's picture

I'll posit that under your scenario trade balances regardless of whether a fiat or gold standard is in place. You implied this anyway. When a country is on the gold standard, it pays for its prolifigacy through transfer of its gold to creditor nations. When a country is on the fiat standard, it transfers its jobs, knowledge, and other matters to creditor nations.

In short, there is no free lunch. Discrepancies between trade balances and monetary prolifigacy are eventually checked. It's just that one method is quicker acting conceptually. The result is always a decrease in the relative standard of living for the deadbeat... For a little while anyway.

JeffB's picture

The fiat masks the transfer of wealth, however. In our case China and Japan financed our deficits by financing our debt. That artificially propped up the value of the dollar and artificially suppressed the value of the Yen and Renminbi. That, of course, allowed the trade deficits and our fiscal deficits to continue relatively painlessly.

Just as people often don't recognize the seriousness of a disease that is painless and has few symptoms until far more damage is done, we continued on our merry way under the assumption that deficits don't matter.

We could also mask some of the symptoms, such as loss of our manufacturing and quality jobs, by transfer payments and assorted government programs funded by the money lent to it by foreign governments manipulating currency rates to keep their own manufacturing and employment high.

It's left us all in a mess. We're shouldering monstrous debts that we can't repay without conjuring the money up out of thin air, devaluing the "money" they lent us. They're holding debt that isn't as valuable as they had assumed, and not as valuable as the resources it represented when they loaned it to us.

Resources have been misallocated for decades and many of our jobs and skills and even work ethic have been exported, while many of our citizens have become dependent upon government for sustenance.

We've Become a Nation of Takers, Not Makers More Americans work for the government than in manufacturing, farming, fishing, forestry, mining and utilities combined.

I wonder what the numbers would be if you added in the "Government Sponsored Enterprises" like Fannie Mae, Freddie Mac, not to mention other government programs including welfare, medicaid, subsidized housing, food stamps, agricultural subsidies etc.


JR's picture

Perhaps you meant to say this is a nation which has takers. And forgot to include “and producers.” If the American economy were a poker game and all the players around the table were out of chips except the banker-dealer with giant stacks of blue, red and white in front of him, it would be relatively easy to identify the taker.

Here’s the take from the late Joe Sobran:

“The state gives you two options. If you won’t be its dependent, you must pay taxes to support those who are. Living off others’ taxes is legitimate; refusing to pay those taxes is criminal.”

JeffB's picture

“The state gives you two options. If you won’t be its dependent, you must pay taxes to support those who are. Living off others’ taxes is legitimate; refusing to pay those taxes is criminal.”


What's in it for "the takers" in this scenario to have so many dependents? They're siphoning off far too much of the production for the producers to keep up. In the parlance of "the takers", they're "useless eaters".

I think his paradigm's a bit off. I think "the takers" are siphoning off far more than they can reasonably get away with without transitioning into a new far more obvious totalitarian paradigm, but the producers do have some of their own chips. The dependents also have a smaller pile of chips and "the takers" seem to be encouraging more and more of the producers to become dependents. I'm not sure what's in it for them to do so, unless they just want to crash the current system to make it easier to transition to the new one.



westerman's picture

Multiculturalism is divide and rule. Multiculturalism is all about reducing solidarity and atomising people. The capitalists want rootless and divided workers with no real loyalties and no solidarity within the population. Massimmigration means cheap unorganised labour.

Lebensphilosoph's picture

OH, you have us there. Masters degrees and Thai restaurants. The mean IQ of Indians is 81. The average IQ of masters recipients is 125. The standard deviation of an IQ distribution is normally around 15. That means for every Indian even capable of obtaining a masters degree, you're getting nearly 30 halfwits, most of whom have only borderline intellectual functioning (70-84) and many who have mild mental retardation (50-69) . And that situation isn't helped by the IQ of emigrants being higher than the mean, because of the phenomenon of reversion to the mean within racial groups.


Now stop pretending that multiculturalism is about Indians with masters degrees, Thai food, and cute East Asian girls, and not sprawling ghettos, gang rapes, out-of-control violent crime, decreased material standards of living, the occupation of ones ancestral homeland, the throwing away of European ethnic identities and the genocide of white people. The ruins of Egypt, Greece and Rome stand as testaments to the end of every multiracial experiment.

Lebensphilosoph's picture

If you fill Europe with Indians, you turn Europe into India, not Indians into Europeans, regardless of how smart they are or are not.

DaveyJones's picture

Glad to see you reduce the issues down - way down

just what the backroom boys want

Random_Robert's picture

Oh boy... unpopular (and politically incorrect to boot) truths often fan the flames of impulsive reactionism..


Arm yourself,  Mr Messenger... otherwise the same fate that often befalls messengers, will be yours as well.



Citxmech's picture

So what is the mean IQ of immigrating Indians v. the mean IQ of existing US citizenry smart guy?

malek's picture

Happy to see another person realizes the fallacy of LP's "argument"...

JeffB's picture

I'm not in favor of unfettered immigration, but have to wonder what the original Indians in North America, aka Native Americans, would think about your phraseology "the occupation of ones ancestral homeland" when referring to your goal of keeping the immigrants out.

African Americans probably weren't too happy about the way they were treated by the European ethnic identities you're so worried about preserving, either.



Dr. Acula's picture

>I'm not in favor of unfettered immigration

Don't use double negatives. How would you fetter it?

tulip_permabull's picture

Normally, Dr Acula, your libertarian freedom-fu is strong, but on this issue the Statists have pulled the wool over your eyes.

A major cause of anger over the current reality of immigration is that the state has a monopoly over it - and thus as in any monopoly situation we get poor policy at high cost.

In particular, through the twin evils of State "services" (which it is illegal to deny to anyone) and a variety of anti-discrimination laws, the State has taken away from individuals

- the complete use of their private property,

- their rights to freedom of association,  and

- their rights to free speech in relation to this issue.

So of course people are angry about current immigration policy. They feel that the State (its bureaucracies and cronies) are using immigration and the related debate to destroy cohesion and potential sources of opposition in the community. I think they are right.

shovelhead's picture

American Indians are really just Chinese early adapters.

Or really bad at directions.

Dr. Acula's picture

>the genocide of white people


>the throwing away of European ethnic identities

Can I sell mine instead? What's the going price?

>for every Indian even capable of obtaining a masters degree, you're getting nearly 30 halfwits, most of whom have only borderline intellectual functioning (70-84) and many who have mild mental retardation (50-69)

Which IQ cutoff value is the best choice for cleansing the human race? If you survive, you may end up cleaning my toilet.

But why save the highest-IQ individuals? Why not the strongest, the healthiest, or the most artistic? Why not preserve the ones whose labor commands the highest exchange value? Or maybe it's best to be the most UV-resistant individual?

JR's picture

The IQ discussion seems to have gone disappointingly astray; the bankers aren’t that much concerned about IQ. When considering opening the borders to let the masses rush in, the banker tyrants make their selections in two categories: 1) low information Third World peoples who can tip the voting franchise away from the informed middle class, and 2) skilled technical immigrants who help the bankers’ corporate pals keep payroll costs at a minimum. La Raza, ACORN, et cetera, can help with the low information unpatriotic immigrant; Microsoft, Infosys Technologies, et cetera, can help with the skilled H-1Bs who will work  for less. The ideal immigrant in both categories should be as unpatriotic and as uninformed or misinformed about American traditions as possible.

Toolshed's picture

A very feeble effort my friend. Your screen name combined with a Confederate flag = obvious troll. Try, try again.

JR's picture

Born Patriot – ignore their slings of arrows...

The concepts of multiculturalism and diversity as worthwhile goals for our society overlook the danger that some cultures pose to a prosperous and happy American system. For example, so-called Third World cultures have not been integrated into the American system and they bring complete ignorance of such critical issues as free markets, equality of races (racism), traditions such as the value of the family unit, how to participate intellectually in forming political action, the value of representative government and being used by tyrants to tear down such critical foundations of American society as its Christian heritage.

Unfortunately, many of the “new” cultures have no background or experience with the value of liberty and accept without resisting any force that happens to be in control of the government as not worth combating. IOW, they bring serfdom with them and have no concept of what great values they assist America in losing. The governing power of America, now in the hands of international bankers, is making widespread use of these low-information and often racist cultures in its breakdown of what would normally be its primary enemy – traditional middle class America.

Austen Phelps wrote in 1885 in the Introduction to Dr. Josiah Strong’s history of Our Country that almost all the thinking that thinking men have given to the subject of the welfare of the country has been “the idea of crisis in the destiny of this country and through it the destiny of the world.”

Wrote Dr. Phelps: “The common sense of men puts into homely phrase the great principles which underlie civilization of our land. It is ‘the nick of time.’ The present hour is, and always has been, ‘the nick of time’ in our history…

 “Fifty years ago (1835) our watchful fathers discerned it in their forecast of the future of the Republic. The wisest among them even then began to doubt how long the original stock of American society could bear the interfusion of elements alien to our history and to the faith of our ancestry. The conviction was then often expressed that the case was hopeless on any theory of our national growth which did not take into account the eternal decrees of God. Good men were hopeful, only because they had faith in the reserves of might which God held secret from human view.”

AnAnonymous's picture

US citizenism spreads uniformity and conformity.

So called multiculturalism, diversity is just smoke and mirror.

For example, the geographical space known now as the US of A was much more culturally diverse than current US of A under US citizenism.

The threat is not so much a large set of cultures, since it is just an illusion.

The threat is actually that more and more people adopt US citizenism and this creates tension.

For example, hopping borders and settling illegally is 'American' but as Mexicans for example adopt this 'American' feature, they get reviled for it.

The tension comes and will always come from the incredible number of zero sum games contained in US citizenism.

While on the paper, freedom can be adopted by everyone, when one runs an extortion and farming business like US citizens do, it is clear on the paper that not everyone can be an extorter, a farmer. For an extorter to be, for a farmer to be, there must be extorted and farmed.

Dr. Acula's picture

Thank you,

Your troll application was received. Unfortunately, we aren't accepting any more trolls at this time.


akak's picture

Now THAT made me laugh!

Random_Robert's picture

There is a commonly held wisdom that evil flourishes when good men (good people is more apropos) do nothing...


My personal ethic is that evil only flourishes UNTIL good people decide that the time for doing nothing has lapsed, and put on their ass-kicking boots.


Good people by their nature do not willfully choose to destroy evil- especially when it requires the willful and needful killing of other human beings.


Instead- the good allow their tolerance of evil to percolate until it boils, and then they let it boil until it rages, and the point is reached when they simply say "enough" and then the good identify each other, and then band together...


and after that, the fucking bullets start flying.


The only unfortunate consequence of this dynamic is that following every historical example of this cycle, the human race grows weary of mass death and destruction before the last evil asshole meets his due comeuppance (reference Stalin circa 1945)

You see, when GWB said "you are either with US, or you are with the terrorists", what he failed to realize is that good people understand that evil can not force the good to choose between varying degrees of evil.

If you have no faith in the good, then you deserve whatever evil that befalls you.

SmittyinLA's picture

No doubt, multi-culturalism and diversity kill productivity and innovation, successful companies whom actually produce more for less more often than not DO discriminate, that's one of the primary ways they produce more for less, by discriminating against slow, ineffective, inefficient or stupid employees. 

malek's picture

Another pitiful attempt to smear Ron Paul's name...

Kayman's picture

Show me unadulterated output.  It does not exist.  Governments have been fucking with the number for at least 30 years.

When a subjective measurement like "utility" is added to the mix, then you can count on nothing.  Pun not intended.

LawsofPhysics's picture

What tripe, tell it like it is, the lack of any real consequences for bad behavior, kills everything.  Your monetary system and "money" must have consequences built-in to it's use, period.  Otherwise some paper-pusher can steal the value of your labor with the stroke of computer key.   Got physical?

Ghordius's picture

mmhhh... also an alternative explanation, but he has something right there: fiat money allows to draw resources from the future, i.e. "leaving less in the future". This raises immediate consumption now. Which is supposed to be produced later and not consumed then. This kind of deal generates a lot of attrition and losses (and banker bonuses). It's less effective than just using the resources you have at the moment.

As I repeatedly wrote, fiat money is good for war. It's something akin a weapon system. If the others have it and you don't, you are at disadvantage.

Nevertheless: here the article does not say why Nixon left the exchange based gold standard - that is something different from the gold standard.

1971 Nixon had the option of shipping some gold back to Europe, instead of leaving the exchange based gold standard. He preferred to do something that was not allowed to be called a default.

MachoMan's picture

There was a contemporaneous arms race. The winner of the arms race was able to dictate what happened to the collateral. Now, unless the arms are punitively utilized to the fullest extent of the competitive advantage provided thereby, then the trade imbalances eventually erode and rot the competitive advantage til it can no longer be utilized competitively. This decline always happens due to the fallacy of the free lunch, but how the arms advantage is implemented can prolong the stay at the top.

America probably isn't going to appreciate it if chinas manufacturing base stays intact. Although, waiting a few years might just allow it to collapse under its own weight. Time will tell.

AnAnonymous's picture

fiat money allows to draw resources from the future, i.e. "leaving less in the future". This raises immediate consumption now. Which is supposed to be produced later and not consumed then.


Rolling up a debt can be achieved without the use of any kind of money, through a barter system.

All it takes is a framework brought by US citizenism, the very idea of infinite growth, that the more you consume now, the more you'll get to consume in the future.

Fiat is a handy tool but the core is US citizenism.

akak's picture

Made me laugh!

Oh, the monoextrememum of unicity of hypocrisy inherent in Chinese citizenism!  Your desperate antiselfindictmentalism, simplistic and bigoted wording of mind, and continualistic offuscationizing are overbursting with the humor so great!

You may discuss the demerits of the idea of infinite growth when your central planning Chinese Communist overlords stop engaging in it by blobbing-up the world's resources to build dozens of empty ghost cities, and when they cease to rip up and destroy hundreds of square miles of their own territory in the mad and unsustainable frenzy to stockpile rare earth minerals, and when they also stop the unprecedented pollution and environmental destruction of their own nation in their mad zeal to replicate all the very worst aspects of US consumerism, urban sprawl, and the automobile culture.

But keep on engaging in your insane self-denialism of the myths of Chinese Citizenism fabled past and now, as they are part and package of the whole stinking pile of roadside nightsoil that is Chinese Citizenism.  Make me retch!

AnAnonymous's picture

US citizenism is spreading in China, so yep, the claim to infinite growth, building of ghost cities etc are to for US citizenism to become actual in China.

akak's picture

So in other words, your so-called "US Citizenism" is just your own self-defined, constantly shifting, all-inclusive, convenient label-of-the-moment for anything and everything that you find bad and wrong anywhere in the world, right?

Some might call that linguistic blobbing-up.  Others might call it psychosis.

AnAnonymous's picture

Not at all.

For once more, US citizenism stands for 'Americanism'

Building ghost cities is 'american'

Whishful thinking infinite growth is 'american'

akak's picture


For once more, US citizenism stands for 'Americanism'

Which, again, is just your own uniquely bigoted and simplistic way of saying "everything I find wrong or evil in the world".

Admit it, you have been exposed in your lies, bigotry and idiocy countless times here already, as demonstrated by the fact that NOBODY here ever agrees with the bigoted, pro-Chicom trollery that you spew in this forum. 

Building ghost cities is 'american'

Except for the fact that it is the CHINESE, and ONLY the Chinese, who are blobbing-up the world's resources to build ghost cities --- a centrally-planned phenomenon which has NEVER been seen in the USA!  Care to try to explain your obvious hypocrisy now?

Give it up already, you chink piece of roadside shit.

AnAnonymous's picture

'Americanism' is not my production. 'Americanism' existed and was implemented before any one who visits this site was born.

Blobbing up resources?

As to central planned phenomenum, the US of A is the product of central planning. The existence of ghost cities in the US is also the result of central planning.

A remarkable comment because in the future, as US citizenism spreads, historical US citizen nations will look in minor differences in order to deny US citizenism spreading.

US citizens are obsessed with identity. Things are never enough uniform as long as identity is not reached.

The spread of US citizenism into China can not be identical to the rise of US citizenism in the rise. Just as US citizenism developed not identically in GB for example.

akak's picture

Mindless gibberish, unworthy of response.

malek's picture

Another way of saying "It's all Bush's fault", and the Chinese are all innocent victims with no responsibility whatsoever.

TheFourthStooge-ing's picture

akak said:

So in other words, your so-called "US Citizenism" is just your own self-defined, constantly shifting, all-inclusive, convenient label-of-the-moment for anything and everything that you find bad and wrong anywhere in the world, right?

Your hitting of nail being muchly square on the head with forcefulness of hammery. Situation is strongness unoffuscated for all looking with sight, except for the viewing through AnAnonymously self cloaked eyesightedness. Chinese citizenism citizen having in AnAnonymous head now the fetish for disagreetion over all, even to the littlest of thing to insignification.

The deliciousness being held of this fetish is too much goodness of superiornographic attitudation for Chinese citizenism citizen do relinquishing of it from AnAnonymousistic self. This makes continually endeavoriousness of construction upon fantasy world of US citizenism which is much disagreeability.

This projectingness onto the entire humanity world of self illusioned US citizenism is the mettle, the crustiest bit of AnAnonymousism. This crusty mettle of projection gives  shieldment the Chinese citizenism citizen AnAnonymously from self indiction in the truest form of self justificationness. Most fruitful gift he is to himselfs and his strawsmen bestowing.

Some might call that linguistic blobbing-up.  Others might call it psychosis.

This is truthness yes in astute observingry of self evidentiary. Some might even call it display of Chinese citizenism eternal nature judiciously.

But hey, AnAnonymousity confusionated very mixed up in head sickness leads to expedient citizenism conjugation, so bear with it.

malek's picture

Oh, and going off the gold standard didn't remove real consequences for bad behavior, by putting relativism into the measure of accounting??

Sudden Debt's picture

we need more whips to get people back to work...


midgetrannyporn's picture

Nothing matters more for long-term living standards than improvements in the efficiency with which an economy combines capital and labour...





sessinpo's picture

And while some say fiat money is backed by nothing. Some others say it is backed by the goods and service (productive process from raw to finished) of the economy. Anyway, always an interesting topic.

Debugas's picture

there is a saying among workers towards employers - "you pretend to be paying us and we pretend to be working"