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Guest Post: In A Gold Standard, How Are Interest Rates Set?

Tyler Durden's picture




 

Submitted by Keith Weiner, President of the Gold Standard Institute, USA

In A Gold Standard, How Are Interest Rates Set?

Today, short-term interest rates are set by the diktats of the central bank.  And long-term interest rates are set in a “market” in which the central bank is obliged to keep coming back to buy ever more bonds, and speculators front-run the central banks to buy ahead of them.  The result has been that, for 30 years and counting, the bond price has been rising, which is the same as to say that the rate of interest has been spiraling into the black hole of zero.  When it gets there (and probably sooner) the entire monetary system will collapse.

This is the terminal stage of the disease of irredeemable paper currency.  They have banished money (gold) from the monetary system, and the result is a positive-feedback-loop that destabilizes the rate of interest.  The rate of interest has a propensity to fall, just like the value of the paper currency itself.

This leads to the question of how interest rates are set by a free market under a gold standard.  This is a non-trivial question, and the answer is profoundly important as we debate what sort of role gold ought to play and evaluate the various gold standards being proposed.

If people are free to own gold coins directly, then the mechanics of setting the rate of interest are simple.  Let’s define a term.  The marginal saver is the saver who could go either way, either holding a bond or a gold coin.  If the rate of interest ticks downward, he will sell the bond (or withdraw his money from the bank, thus forcing the bank to sell the bond) and buy the gold coin.  He would rather hold the gold than commit to the time and risk for such a low interest rate.  If the rate of interest ticks upward, he will buy the bond (or deposit his coin in the bank).

The marginal saver sets the floor under the rate of interest.  It cannot fall below his preference or else he will vote with his gold.  His preference has real teeth (unlike today).

Now let’s define one more term.  The marginal entrepreneur is the entrepreneur whose rate of profit is the lowest possible, while still being viable.  If his profit falls for any reason, such as due to a rise in costs, he will shut down his enterprise.  One cost is the cost of capital, i.e. the rate of interest.  No entrepreneur can borrow at a rate higher than his rate of profit, and the marginal entrepreneur is the first to buy the bond and sell his capital stock at an uptick in the rate of interest.  He is the first to sell a bond and buy capital stock at a downtick in the rate.

The marginal entrepreneur sets the ceiling over the rate of interest.  It cannot rise above his ability to pay, or else he will vote with his capital stock.  He also has teeth.

Under a proper gold standard, the rate of interest is kept in a band that is not only narrow, but which is also stable over long periods of time.  This is the principle virtue of the gold standard.  It does not fix the level of prices, which would be neither possible nor desirable.  It keeps the rate of interest consistent, which serves the interests of wage earners, pensioners, and other savers, and of entrepreneurs whose work provides the goods, services, jobs, and interest payments that on which everyone else depends (and which they take for granted).

When evaluating any proposed gold standard, one should ask the question: how will it determine the rate of interest?

 

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Wed, 06/06/2012 - 16:53 | 2500928 achmachat
achmachat's picture

But wouldn't that put the bernank out of a job?

Wed, 06/06/2012 - 17:02 | 2500968 SilverTree
SilverTree's picture

Ol'Ben won't survive the paradigm shift.

Wed, 06/06/2012 - 17:30 | 2501103 metastar
metastar's picture

One less tick sucking blood from the people.

Wed, 06/06/2012 - 17:33 | 2501117 dlmaniac
dlmaniac's picture

It'd put all these socialists outta business who rely on the monetary scam to finance their agendas.

Wed, 06/06/2012 - 18:09 | 2501228 Pinto Currency
Pinto Currency's picture

 

First, "gold standards" don't work because they are always abused.

A gold money system does work where gold, and only gold, is money. 

Saving money (i.e. gold) without yield occurs where gold is brought to a savings repository and the gold is stored for a fee paid by the saver - it is not lent out and is safer than gold invested for yield.  This money system is gently deflationary so gold will generally buy more in one year than presently giving an incentive to save.

Generating a return in a gold money system occurs when money is deposited with a lending institution in return for a yield that covers the utility of the money as well as providing a risk premium for potential loss.  The marginal interest rate is determined by the amouint of money (gold) available for lending.  If little is available, the interest rate (cost of borrowing) rises until enough savings are drawn to the lending institutions to meet the need.  If excess gold money is available for lending the interest rate drops until the supply is utilized and balances with supply.

There is no "lender of last resort" or "final sucker" to cover gambling risk by financial institutions.

Wed, 06/06/2012 - 17:22 | 2501075 Imminent Collapse
Imminent Collapse's picture

Good to see SnorgTee ad is back.  Vamp me up, baby!

Wed, 06/06/2012 - 19:52 | 2501505 harmonymonkey
harmonymonkey's picture

Yeah, I was jonesing - please everyone, throw in a few extra clicks.   Withdrawal's a bitch, and it's really unnecessary!!

Wed, 06/06/2012 - 17:26 | 2501088 Peter Pan
Peter Pan's picture

People fail to appreciate that holding gold is the equivalent of being your own central bank. Anything else is a lie with a limited time frame.

Wed, 06/06/2012 - 17:37 | 2501137 flacon
flacon's picture

The world "Central" (like the word "Collective") gives me the willies.... but as long as one is Central to themselves and a collective-of-one I have no objection. We call that Individualism. ;) 

Wed, 06/06/2012 - 20:33 | 2501621 disabledvet
disabledvet's picture

More than likely he'd just "follow the gold to New York" and start operating out of those digs. Probably get a nice raise, too.

Thu, 06/07/2012 - 03:52 | 2502553 cranky-old-geezer
cranky-old-geezer's picture

 

 

But wouldn't that put the bernank out of a job?

No, because a gold standard is meaningless.  He could still print currency just like now.

The only possible sort of gold standard any central banker would remotely consider these days would be a non-redeemable gold standard.

If the currency isn't redeemable for gold, then a gold standard is meaningless.

Redeemability is the only thing that counts.  It's the only thing that limits their ability to run the presses.

But then it's not a gold standard.  Gold is money and currency is merely a claim check on gold ...exactly what US currency was before the Fed came along issuing their new FRN "currency", taking US currency out of circulation.

A non-redeemable "gold standard" is just another scam to fool the public into thinking the currency has some intrinsic value.  It does nothing to limit central bankers' ability to run the presses and debase the currency.

But then everything government does these days is a scam to fool the public. 

Wed, 06/06/2012 - 16:54 | 2500934 Motley Fool
Motley Fool's picture

10/10 for being able to copy-paste. >.>

Wed, 06/06/2012 - 17:28 | 2501095 NotApplicable
NotApplicable's picture

I think you're on the wrong website.

Wed, 06/06/2012 - 17:34 | 2501122 Motley Fool
Motley Fool's picture

Because I pointed out that this is blatant plagiarism without acknowledgment?

 

w/e

Wed, 06/06/2012 - 18:12 | 2501239 NotApplicable
NotApplicable's picture

You did no such thing.

Citation, please?

Wed, 06/06/2012 - 18:41 | 2501297 NotApplicable
NotApplicable's picture

LOL, okay, you really got me there. *rolls eyes*

I just never considered one person working on his PhD under another to be a "plagarizing" of their ideas. While the terms and ideas are all Fekete's, it still isn't C&P (I checked).

I give you a +1 for actually knowing of Fekete, as you're likely the only motley fool that does.

Wed, 06/06/2012 - 18:45 | 2501303 Motley Fool
Motley Fool's picture

hehe, I also quickly checked up and came to the same conclusion.

 

You are right, I am likely alone in that regard, also likely in the regard of being the only fool top understand his work, and where he made mistakes - not many.  Haha.

Wed, 06/06/2012 - 19:16 | 2501392 NotApplicable
NotApplicable's picture

Curious, do you consider his mistakes to be the same as those who assail him over at Mises.org?

Someday I'd love to mediate a discussion between them (I found Fekete shortly after Mises and didn't yet realize the gap between their belief systems). IMO, the Mises folks mischaracterize his arguments on real bills, being much akin to the usury arguments in this thread where they are afraid of a nebulous evil that goes against their stated dogma.

Thu, 06/07/2012 - 01:09 | 2502344 Motley Fool
Motley Fool's picture

Nah, I'm not a fan of puerile dogmatic arguments. Fekete does a lot to extend Mises's work, those mischaracterizations notwithstanding.

 

His most blatant mistakes lie in idealism.

Wed, 06/06/2012 - 18:42 | 2501299 Motley Fool
Motley Fool's picture

Hmm. A quick bit of research shows him to be a student of Fekete. Still curious that there is no acknowledgment, but this does mean he likely gave permission.

Wed, 06/06/2012 - 16:57 | 2500935 Pladizow
Pladizow's picture

"An invasion of armies can be resisted but not an idea whose time has come." - Victor Hugo
 

"Of all the contrivances for cheating the laboring classes, none has been more effective than that which deludes them with paper money." - Daniel Webster

"Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice." - George Washington 1787
 

Wed, 06/06/2012 - 17:06 | 2500986 Pbn2Au
Pbn2Au's picture

@Plad +1

'Tis interesting that most all the founding statesmen decried what passes for policy today; while today's 'statesmen' embrace what the founders abhorred.  History indicates we need new statesmen.  Said another way, the 'cranks' of today may have their names on monuments of tomorrow.

Wed, 06/06/2012 - 18:57 | 2501318 Revert_Back_to_...
Revert_Back_to_1792_Act's picture

They weren't cranks!!! ARGH!

It is possible to discern truth.

Consider that the Dollar was on a Silver Standard for 172 years.  With one brief departure in 1853 that raised a huge public outcry (see the old book at bottom of this post for more), the dollar was always redeemable for a set weight of silver and that weight of silver was always worth one dollar.  The Eagle was the unit of measurement and standard for the gold coin- not the dollar.  An Eagle was worth! ten dollars of silver! (and could be reminted at differing weights)

Consdier that we departed from this with the coinage act of 1965 - just two years after Kennedy was assassinated.

Consider what has happened to the USA since that time.  In just 1971 this happened.

http://www.youtube.com/watch?v=iRzr1QU6K1o

Consider if you put away $100.00 of 1964 90 percent silver coin and $100.00 of 1964 paper money.  What would the coin be worth now?  How about the paper money?

The coin would be worth 4218.82 (melt value) in modern paper dollars as of today. @ you could have kept that investment all that time at zero counter party risk except for burglars. 

Now think about that pile of $100 of paper money.  That would just about buy you a single nice dinner or night out on the town. 

Which would you rather have saved?

If government went away, which would you rather have?

In 1900 when we still had gold eagles in circulation, we made and exported 50 percent of the worlds goods and there was NO income tax on labour.

take a look around at the USA NOW!

In fact, a silver or gold coin from any defunct and long gone government still retains its full value today. 

Here is a coin calculator to verify what I said above. 

http://www.coinflation.com/coin_calculators.html

Read these speeches;

http://avalon.law.yale.edu/18th_century/bank-tj.asp

http://avalon.law.yale.edu/19th_century/ajveto01.asp

http://www.afn.org/~govern/mcfadden_speech_1932.html

and this old book

http://archive.org/details/coinsfinancialsc00harvrich

If you can argue with their logic, then go ahead and try.

Bad Coinage laws, Departing from our Constitution, and not understanding the wisdom of our fathers has serious consequences.

Here are a few more quotes about paper money.

http://www.fame.org/NotableQuotes.asp

Study history!

 

Wed, 06/06/2012 - 16:56 | 2500940 ParkAveFlasher
ParkAveFlasher's picture

Correct me if I am wrong but linking a currency to any decentralized, non-plutocratized, non-manipulated thing, whatsoever, means market mechanisms determine all prices and costs including those that drive interest rates.

Wed, 06/06/2012 - 17:10 | 2501016 CPL
CPL's picture

You are completely correct.  Laws of supply and demand exists in everything.  iPads are great example, $20 cost basis but the market can bare $800 for something as disposable as tissue and just as well managed.  The market determines these as infinite for some appearent reason because in true cost the iPad is in the business of following the true rate of inflation otherwise it goes out of business, because it is attacked from it's cost center.

 

Of course the motives of iPads differ from a Physical commodity like Oil which is superior in it's return in terms of EROIE and ROI.  We can live without iPads, but neither we or iPads can live without Oil in this day and age.

 

However both are also great examples of a broken financial model disconnected from physical reality.  Both enjoy some weird religious dogma in the users of both items.  The users believe infinite resources exists when the numbers point a illusionary situation that is so far from the truth it borders on delusional neurotic behavior en masse.

 

Wed, 06/06/2012 - 17:29 | 2501098 kito
kito's picture

holy crap!! what a thought!! a decentalized free market actually setting its own interest rates!!! sonofabitch!! actually trusting the marketplace to do its job!!!! 

Wed, 06/06/2012 - 20:37 | 2501634 disabledvet
disabledvet's picture

ah, "trust but verify." i wouldn't trust them either. In New England there was a "slight problem" of the "guy upstream building a dam" which "caused the downstream guy to lose all river power." there was no free market solution to this problem...but there was a Judicial one!

Wed, 06/06/2012 - 16:56 | 2500942 DoChenRollingBearing
DoChenRollingBearing's picture

Yes to gold!

No to a gold standard!

 

fofoa.blogspot.com

Wed, 06/06/2012 - 17:08 | 2500999 NotApplicable
NotApplicable's picture

You know, it really isn't worth it to get all hung up on a single word with an infinite number of definitions. All you're doing is playing into the hands of the Keynesians who used it as a tool to undermine the defacto standard created by using gold as a currency.

To add yet another word, when you criticize the "Gold Standard," you're really criticizing the "Gold-Exchange Standard" (the proper name for the tool).

To state that there should be no standard for a unit of measurement is nonsensical. (As is the idea of "Freegold" needing Euros to exist.)

Wed, 06/06/2012 - 17:14 | 2501039 CPL
CPL's picture

I thought the "Freegold" idea is the ECB were just going to loot the shit out of the Europeans and any vault they can rip from the walls if in reach (Yacht's, Private planes, hidden scooby doo painting safe) under the guise of banking?

 

That's how it historically goes.

Wed, 06/06/2012 - 17:22 | 2501072 NotApplicable
NotApplicable's picture

That looks like the plan to me.

Wed, 06/06/2012 - 17:31 | 2501112 dlmaniac
dlmaniac's picture

FOFOA is a fool thinking a floating standard allowing bankers to issue currencies is a viable solution.

Thu, 06/07/2012 - 02:21 | 2502465 Maos Dog
Maos Dog's picture

The point is that under freegold you can always vote with your feet and easily convert all of your fiat holdings to gold when fiat does get out of control, which will cause the value of fiat to drop and bring the system back into some kind of equilibrium. 

Thu, 06/07/2012 - 14:25 | 2504770 dlmaniac
dlmaniac's picture

We already are able to vote with our feet right now at least here in ZH. Freegold is not addressing the root cause to our problems now. The same banker/politician crooks would still be printing phony paper in FOFOA's system to disrupt the economy, and therefore have every bit of the same motive to rig the price as now. So why do you claim these guys will give you an honest gold price under free gold? 

It won't happen!! They will suppress it from left to right just like today. You guys are making hollow promises.

Wed, 06/06/2012 - 18:15 | 2501145 dlmaniac
dlmaniac's picture

We are in Freegold RIGHT NOW. What people like FOFOA are reluctant to admit is that bankers would still have every bit of the same motifs to suppress the gold price for the privlledge to loot the public under his Freegold system. Expecting bankers to come up with a fair gold system is therefore naive at best.

Wed, 06/06/2012 - 18:37 | 2501288 lasvegaspersona
lasvegaspersona's picture

Maniac
So you read what? It is not FOFOA you are quoting.

Wed, 06/06/2012 - 18:48 | 2501310 NotApplicable
NotApplicable's picture

One word: Euros.

FOFOA lost me the instant that he called me an ignorant westerner for not understanding that "Euros are periodically marked to gold, so it can't hyperinflate, so we're all good."

It's nothing more than dividing the monetary system into good and bad money. Yet, for some reason, they believe they can repeal Gresham's Law.

Personally, I think Another was a Rothschildish Psy-op, pretending to let us in on a big secret, while really just creating the next trap to be sprung.

Wed, 06/06/2012 - 18:58 | 2501341 dlmaniac
dlmaniac's picture

FOFOA once claimed that it's ok for a currency to slowly depreciate as if it's good for economy. That's like saying it's fine for thieves to steal your money as long as they don't make it a spree. He unfortunately makes far less sense than his followers make him look like once you really bother to read what he says.

Wed, 06/06/2012 - 19:07 | 2501361 Motley Fool
Motley Fool's picture

There is a difference between saying something is good, and accepting something as inevitable and making the best of a bad situation.

 

You seem to be confusing wishfull thinking for reality.

Wed, 06/06/2012 - 21:05 | 2501731 dlmaniac
dlmaniac's picture

If you accept that as reality then the reality is FreeGold will only end up being what we have right now AKA another doomed to fail monetary experiment, which contradicts what FOFOA claims to be the cure for the current issues. 

We have seen it through. You guys are still in denial.

Wed, 06/06/2012 - 19:06 | 2501354 Motley Fool
Motley Fool's picture

Haha, you gave up reading due to a bruised ego? lol

"Yet, for some reason, they believe they can repeal Gresham's Law."

No. FreeGold uses Gresham's law, it does not suspend it.

 

Wed, 06/06/2012 - 19:21 | 2501408 NotApplicable
NotApplicable's picture

No, I gave up because there is no point in engaging childish people who resort to such tactics. Especially when they consider their argument to be intellectually superior. The battle of ideas is one thing, egos are another.

Thu, 06/07/2012 - 01:20 | 2502353 Motley Fool
Motley Fool's picture

Hmm. Have you considered that perhaps the argument is intellectually superior? :P

 

One armchair economist to another, I suggest you consider the ideas and stop interacting based on your need to validate your ego.

 

Some thoughts on Gresham's law : http://fofoa.blogspot.com/2009/09/greshams-ghost.html

 

"Gresham's Law states that bad money drives good money out of circulation."

 

Freegold in a (one) nutshell : gold - good  money, fiat - bad money. We spend bad money into the economy and hoard the good money; while both monies are freely exchangable at a floating rate of exchange.

Wed, 06/06/2012 - 23:20 | 2502094 LowProfile
LowProfile's picture

Well, then you thought wrong.

FREEGOLD is gold trading free of any taxation or derivatives.

What the hell, let's do it with silver too.

Wed, 06/06/2012 - 17:00 | 2500957 LawsofPhysics
LawsofPhysics's picture

in short, there is a very real cost for creting capital, especially if you don't create any real value.  If the monetary system and "money" being used do not hold people accountable with real consequences for BAD behavior, the all paper burns, period.

Oh yeah, prosecute the fraud and hold the Fed and all CBs accountable!  We either do that, or they will kill us.  History is very clear about that.

Wed, 06/06/2012 - 17:09 | 2501010 NotApplicable
NotApplicable's picture

Prosecution is one of the main sources of the fraud. In short, we're dead.

Wed, 06/06/2012 - 17:20 | 2501064 CPL
CPL's picture

Well let's hope the dark ages doesn't last as long as last time.  When it all goes down, I'm opening a hand powered print shop. 

 

Zero hedge can be delivered via horse back on strong bond hemp paper thirty years in the future by my children's children...unless something magic pops up in a year in battery technology and miniture nuclear plants, go long gold, silver, horses.

Thu, 06/07/2012 - 10:57 | 2503763 EFNuttin
EFNuttin's picture

If you haven't seen "miniature nuclear plants" you should check out thorium fueled reactors. For a variety of reasons, they have not become commercially viable yet, but they have enormous potential. The first one was running in Oak Ridge, Tennessee around 1962. From what I have read, the decision was made to focus on uranium reactors because they would provide the plutonium needed for making nuclear weapons as a useful byproduct. Thorium and it's byproducts are nowhere near as dangerous as plUtonium. It also doesn't require a lot of shielding and is of no use to bomb makers of any stripe. Thorium fueled plants could be scattered throughout cities with the attendant preservation of higher electrical efficiency that comes from using fewer transformers and fewer miles of electric power lines. If you check YouTube, India is experimenting with thorium-based power.
Any ZH'er out there know why thorium has not caught on?

Wed, 06/06/2012 - 17:02 | 2500966 CvlDobd
CvlDobd's picture

Interesting article.

FWIW. I don't give a shit what te hypothetical rate of some future bond is. I will NEVER deposit my gold with a bank.

EVER!

Wed, 06/06/2012 - 17:09 | 2501007 SilverTree
SilverTree's picture

Shit, you could probably start your own bank after the reset.

Wed, 06/06/2012 - 17:14 | 2501033 LawsofPhysics
LawsofPhysics's picture

There you go!!  this is the plan for many, should we be smart enough to survive.

Wed, 06/06/2012 - 17:33 | 2501118 NotApplicable
NotApplicable's picture

Of course, all you're saying here is that the banksters have won. If there were still honest banking, then you would care, as it would help you to earn more gold, all while contributing to legitimate growth of everyone's standard of living (Fekete's "Social Circulating Capital Pool").

Wed, 06/06/2012 - 17:51 | 2501190 Likstane
Likstane's picture

There was never a time when banking was honest.  The concept of getting more 'money' because you already have 'money' is itself dishonest(not legally but morally).    If enough people stop borrowong 'money' with usury charges(interest), then the banksters die.   It doesn't have to be complicated. 

Wed, 06/06/2012 - 18:11 | 2501237 nope-1004
nope-1004's picture

+ 1 and then some.

 

Wed, 06/06/2012 - 18:18 | 2501255 NotApplicable
NotApplicable's picture

Good Lord, this is getting really fucking sad.

Interest is not "money for money," it's money for TIME.

Oh, and it isn't complicated. You're choosing to make it that way in order to further your incoherent cause.

Wed, 06/06/2012 - 18:30 | 2501276 Likstane
Likstane's picture

So your time is valuble?  How much more valuble is 'your' time than mine, or anybody else's?  How is it you expect someone to give you more 'wealth' for the time you weren't using your 'wealth'?   Your belief that there is an honest banker says much about your own character. 

Wed, 06/06/2012 - 18:55 | 2501336 NotApplicable
NotApplicable's picture

My character? Why do you distort my words to make your case then?

There were honest bankers, but only when there was still honest banking. (see the lack of IS)

As for your questions...

1) Yes

2) nonsensical question on the surface (all valuation is subjective) but it can be quantified by productivity for ranking purposes which is unique in every individual (YMMV)

3) Well, I've answered this how many times in this thread? *sigh* I expect them use my loan to generate more wealth than they've borrowed (aka "win-win").

Wed, 06/06/2012 - 19:01 | 2501347 Likstane
Likstane's picture

The concept of you expecting more 'wealth' for loaning your 'wealth' exposes your greedy(banking) nature.  

Wed, 06/06/2012 - 19:23 | 2501412 NotApplicable
NotApplicable's picture

Yay! More character attacks, wholly devoid of reason.

I think we're done here.

Wed, 06/06/2012 - 19:35 | 2501440 Likstane
Likstane's picture

At least you addressed the morality of usury instead of assuming it was a good thing to steal under the guise of 'banking'.

/sarc

 

Wed, 06/06/2012 - 18:40 | 2501295 Ratscam
Ratscam's picture

exactly, do we need interest at all?
In a stable currency backed 100% by tangible assets and no fractional reserve banking system, there will be no inflation. so whatever you put aside belongs to you with no interest for the rest of your life. Hence, one can start saving without worrying.
The interest is never included when money is created out of debt or thin air, therefore it has to be plundered from the system.
We have had more years where usury was prohibited than when it was allowed, so go figure.

Wed, 06/06/2012 - 19:03 | 2501313 Likstane
Likstane's picture

+3.75 % per annum

/sarc

Wed, 06/06/2012 - 20:39 | 2501641 disabledvet
disabledvet's picture

still got a problem with taxes. A...BIG problem there actually.

Wed, 06/06/2012 - 17:03 | 2500973 LULZBank
LULZBank's picture

When evaluating any proposed gold standard, one should ask the question: how will it determine the rate of interest?

Maybe we could do with a monetary system without the "usury" bit, or is that too much to ask?

Wed, 06/06/2012 - 17:17 | 2501054 NotApplicable
NotApplicable's picture

Too bad that the author didn't further explain that interest is the cost of time, then perhaps you wouldn't have confused the two issues. If I loan you money (or anything else), then I'm deprived of the usage of it during the contracted period. Meanwhile, you have my capital at your disposal. Interest is the cost you pay to obtain something today, rather than having to wait while you create/earn/save it.

There is nothing usurious about this relationship. All parties agreed to it because they ALL believe it to benefit them. If you don't like interest, then it's quite simple, neither a borrower nor a lender be. Leave the rest of us alone though, as we don't want to live in your caveman world where capital can only sit in a private hoard, working only for the individual who holds it.

Wed, 06/06/2012 - 17:35 | 2501086 LULZBank
LULZBank's picture

interest is the cost of time

Another author said Time was an illusion, so I got confused.

I thought borrowing from tomorrow and spending it today, was what got us into this mess. But I guess you are right, its not exactly a mess.

In my caveman world, there would be a lot less manipulation though and things would simpler and organic.

Wed, 06/06/2012 - 17:36 | 2501135 NotApplicable
NotApplicable's picture

That's why it's important to borrow for productive investment, rather than consumption, which is a trap. If you borrow at 5%, then you'd better have done a good job of proper planning to ensure a return of greater than 5%. As the author implied, proper planning is possible only in a world of stable interest rates.

Wed, 06/06/2012 - 17:42 | 2501158 LULZBank
LULZBank's picture

If you borrow at 5%, then you'd better have done a good job of proper planning to ensure a return of greater than 5%.

Do you also believe in "debtors prisons," if one made a loss and not able to repay? Or you would rather have a pound of his fllesh or children in slavery?

Or you would rather, let go bad debts as a consequence of "improper" planning on your part?

Wed, 06/06/2012 - 18:20 | 2501261 NotApplicable
NotApplicable's picture

Yep. Debts go bad. That is yet another reason you get paid interest as a trade-off for the risk.

Wed, 06/06/2012 - 20:42 | 2501646 disabledvet
disabledvet's picture

That's why we have the West. "In lieu of debtor's prison" as they say. Kind of like what all those Facebook pump and dumpers are going to be doing actually.

Fri, 06/08/2012 - 19:29 | 2509179 WolfePaq
WolfePaq's picture

yes - time value of money makes sense in a productive system

no debtors prison- when things go wrong, it is a loss to the lender, so he makes careful loans that make sense

which why the recent BK law changes were so bad, making many debts non-dischargeable, such as student loans...

why do think banks are lending to anyone with a pulse on student loans?

because they have a big heart and want to educate the masses?

no, because the student is now a lifetime SERF for the bank. non-dischargeable... and the us government tracks you down for them to boot.

Wed, 06/06/2012 - 17:30 | 2501101 LULZBank
LULZBank's picture

All parties agreed to it because they ALL believe it to benefit them.

BTW, if I offer a loaf of bread to someone whos hungry for days and desperate, would you think that is also an amicable agreement as both parties agreed to it and they ALL believe it to benefit them?

Wed, 06/06/2012 - 17:38 | 2501142 NotApplicable
NotApplicable's picture

Yes. As all benefits are not measured in currency units. Rothbard wrote extensively on the psychic profit that you mention here.

Also, I'm not the one junking you (other than your initial post, since it was a smear).

Wed, 06/06/2012 - 17:44 | 2501170 LULZBank
LULZBank's picture

Yes. As all benefits are not measured in currency units.

In  my parts of the world, prostitutes do charge in currency units, so I guess one can put a measure to such "benefitss."

Dont worry about junking, I like affirmations from people whos hearts I've touched :)

Wed, 06/06/2012 - 17:58 | 2501209 Likstane
Likstane's picture

@na  Why do I have to participate in your usurious created 'monetary' environment?  I didn't ask to play in your fiat game, which is what all usurious activities eventually devolve into.  By advocating a usury system, you are really agreeing ith today's 'monetary' system. 

Wed, 06/06/2012 - 18:27 | 2501270 NotApplicable
NotApplicable's picture

You're confusing the issues. This article (and discussion) is about gold, not fiat as a currency. Fiat and it's fractional-reserve banking system is a method of fraud and theft in of itself.

The point at hand is whether or not interest is good/evil or nuetral. My argument is that it is beneficial to all who do not desire to live in a world where you made nearly all of your own consumer goods, rather than purchasing them from a more efficient producer. Since a loan is also a contract freely entered into by both parties, it takes force of violence to prevent (aka, evil).

Wed, 06/06/2012 - 20:44 | 2501652 disabledvet
disabledvet's picture

You're gonna run a 12 trillion dollar economy using "the King Midas method of finance"? I'll take Liberacci for 200 Alex!

Wed, 06/06/2012 - 18:14 | 2501240 Whalley World
Whalley World's picture

In his master work Gold the Once and Future Money, Prof. Nathan Lewis described how under 300 years of a gold standard interest rates remained stable and importantly, inflation was almost non existent.  This reconciles the transaction between the borrower and the lender ensuring the lender is paid back in money that has not been debached by inflation.

Sounds good to me.

Wed, 06/06/2012 - 18:50 | 2501320 Ratscam
Ratscam's picture

but then we should not call it interest, rather a banking or administration fee.
How could money backed by finite resources carry an interest on it? The math does not add up in the long run.

Wed, 06/06/2012 - 19:36 | 2501459 silverserfer
silverserfer's picture

gold standard only work if there are no fiat systems to compete otherwise the bad money will buy up the good money. A gold standard is chronicly deflationary as there is a strong inflow of gold to those in power. If you have the power the weak people wil give up their gold to the strong. Rich get richer gold begets more gold. The gold does not flow well within the community and gets hoarded and not spent.

 

Wed, 06/06/2012 - 20:46 | 2501655 disabledvet
disabledvet's picture

fuel probably wouldn't cost more than 30 cents a gallon tho.

Wed, 06/06/2012 - 17:04 | 2500979 Tirpitz
Tirpitz's picture

No entrepreneur can borrow at a rate higher than his rate of profit...

Well, now we know why the bankrupt banks get free money from the central banks.

is also stable over long periods of time.  This is the principle virtue of the gold standard.

Not only. Don't discard the confidence a rock-solid, gold-backed currency brings to the people using it. And compare it to the confetti printed by Weimar, Zimbabwe or the Fed.

Wed, 06/06/2012 - 17:07 | 2500998 urbanelf
urbanelf's picture

In Soviet Russia, interest rate sets you!

Wed, 06/06/2012 - 17:14 | 2501032 ultimate warrior
ultimate warrior's picture

Why must we have just a gold standard? Would't a mix of currencies and commodities be better. If the reserve currency was backed by a percentage of gold, silver, platinum, palladium, oil, and a basket of fiat currencies would that work?

Wed, 06/06/2012 - 17:16 | 2501043 LawsofPhysics
LawsofPhysics's picture

The term "gold standard" can refer to backing a currency with anything real.  The monetary system must have accoutability built in, period.  Your are essentially suggesting a "gold" standard.

Wed, 06/06/2012 - 17:20 | 2501063 NotApplicable
NotApplicable's picture

Well, except for they added "baskets of fiat" to the mix.

Wed, 06/06/2012 - 17:35 | 2501128 Peter Pan
Peter Pan's picture

Fiat leads to failure for two reasons. Firstly, it is built on the ponzi foundation of fractional reserve banking. Secondly, government borrowings under fiat are not backed by mortgages over real assets but rather they are backed by the promise of repayment out of future tax revenues

As a result, fractional reserve banking systems can lead to bank runs and government borrowings in the present climate will never be repaid in equivalent value.

Wed, 06/06/2012 - 17:50 | 2501187 New American Re...
New American Revolution's picture

A basket of what you suggest will not work.  Your mistake is in assigning a value to items.   The singular nature of gold is its stability, none of which you get in any of your basket items save for gold.   Forget the value of gold and instead look upon it as the North Star, a constant in the sky by which man can set and maintain his course.   If all the gold ever mined were assembled, it would make a cube 65.5 feet by 65.5', by 65.5'.  It would be pretty much the same this year as next and the year after.   It is not money when it acts as the regulator of credit, but it is simply a yard stick by which to measure everything else.   This is why it must be gold. 

Wed, 06/06/2012 - 20:48 | 2501666 disabledvet
disabledvet's picture

but you've forgotten all the fun we've had with an oil standard oh these many years! wars, trillion dollar deficits, mind martians. EEEEEE-haw brother!

Wed, 06/06/2012 - 17:18 | 2501058 Freegold
Freegold's picture

The only gold standard coming is free floating physical only goldmarket. Any attempt to fix a currency to gold will fail like it always have. I pitty the fool holding papergold :)

Wed, 06/06/2012 - 17:23 | 2501077 Joebloinvestor
Joebloinvestor's picture

Rates will be set high.

The government will have to have a source of income since it won't be able to print it.

Wed, 06/06/2012 - 17:27 | 2501092 Sudden Debt
Sudden Debt's picture

You can stroke my gold coin for a silver eagle babe!

Wed, 06/06/2012 - 17:27 | 2501093 adr
adr's picture

Yes, but how do you solve the problem that due to interest there will always be the need to pay back more money than was created in the first place?

Any loan system based on interest is simply a ponzi scheme that will eventually collapse.

Wealth needs to be based on the quality of labor, not the ability to run a con. Those who lack the ability to provide quality labor will never become rich. Essentially that is why the scams begin. Because many individuals lack the ability to produce something of value, they must trick people into believing what they produce is of greater value.

The entire Wall Street fraud system falls into that category. I'll sell you this slip of paper that will increase in value forever, making you far richer than me. A smart individual would ask, "If that piece of paper was so valuable and would make you rich, why would you sell it to me now?"

Wed, 06/06/2012 - 17:57 | 2501205 NotApplicable
NotApplicable's picture

Pay back more? Easy! There this thing called time.

You seem to be forgetting that as a borrower, I'm using the borrowed capital to earn an even greater return over time, if I'm to be a successful entrepreneur. If not, I go bankrupt, and a more efficient competitor will now have access to the capital that I had tied up in an unproductive endeavor.

In other words, tangible wealth can be invested to create even more tangible wealth by putting it into the hands of the entrepreneurs and their labor. Rothbard has gone over this subject too in great detail. And it doesn't even require a monetary system. Nor a second person. A single individual can choose to forgo consumption of their assets, instead saving them and investing them into an activity that will allow them to increase their future gains. Rothbard demonstrates this by creating a scenario where Robinson Crusoe can catch X number of fish per day by hand. If he does not consume them all each day, he can save the surplus and use the time normally spent fishing to construct a net, which will increase his efficiency, freeing up his time to do more productive things, like build a shelter. But until he has savings, he cannot start his project, as he has to eat while working on the net.

Capitalism, is merely the addition of more people into this equation, where savers invest in others who they trust will productively utilize their capital. For this risk, they are paid a price for the time and capital involved. There is no scam involved here. NONE

Wed, 06/06/2012 - 18:37 | 2501284 Sophist Economicus
Sophist Economicus's picture

In addition to time, there is also a "price" for risk.    Therefore, there can/should be different rates based on the perceived soundness of a business idea.

Also, interest provides an income stream to savers.   Usually savers are older folks that have produced more than they have consumed over a period of time.    At a certain point, they look to use their savings as a way to generate an income stream as their earning capacity wanes.   They invest their savings in the younger generation who have the earning capability but not the capital.    When it works, it is a wonderful thing.  

 

 

Wed, 06/06/2012 - 19:04 | 2501350 NotApplicable
NotApplicable's picture

To Hell with those usurious old people!

To add to my earlier comment to Irene:

The stability of the gold (or any tangible "thing") standard creates a decrease in risk premium that significantly narrows the band of market rates.

Simply put, volatility is not good for markets and entrepreneurs, but only for those who seek to game them. The rest of us, prefer stability.

Wed, 06/06/2012 - 19:15 | 2501390 Ratscam
Ratscam's picture

thats what i mean. he saves the surplus of fishes. When we save we loose it to inflation but he keeps the fishes.
the problem is, there is no natural concept of borrowing fishes or crusoe cannot borrow money for fishes.
Borrowing costs are always higher than the interest you are getting from the lendor. hence you can only make up the delta either through total exploitation or increases in productivity, which mostly leads back to the first part. Exploitation growth especially in oceans or mining or slave labor china work, is always easier to achieve than productivity increases.
Lending money for interest is great when you want to get an economy a running start. After the economy has satisfied its people with the basic maslov needs, then the greed kicks in and the finite resources will get plundered at costs that exceed any benefits the system seemed to yield at the beginning.

Wed, 06/06/2012 - 20:51 | 2501677 disabledvet
disabledvet's picture

i do agree "if we're talking to each according to his need" we indeed might not only have to arrest the entirety of Wall Street but in fact the entirety of New York City as well. I have plan to build a wall actually...would you like to hear about it?

Wed, 06/06/2012 - 18:49 | 2501109 Solon the Destroyer
Solon the Destroyer's picture

This article also gives us a description of economic power.  Economic power resides in the system's participants, ie the average Joe, when gold is money. In a fiat monetary system, the power resides in those who set the dictates of that system.

This is one of the big reasons why the proponents of the fiat system hate gold. Under a gold system, they would have to give back the usurped economic power that the common man used to have over them.  They would be subject to the whims of a host of self-determinations, rather than having the freedom to exercise their own greedy and selfish cabals. They don't want us to act in our own best interest, they want us to be forced to act in their best interest.

The invisible hand has been lopped off and replaced with a demon's claw.

Wed, 06/06/2012 - 17:34 | 2501124 Irene
Irene's picture

This analysis is a little too neo-Keynesian for my taste; way too many unrealistic assumptions made so that everything fits together neatly.

First, there is no reason under a gold standard that there needs to be a "narrow band" of interest rates because entrepreneurs could easily bid up interest rates under many different legitimate scenarios.

I also don't think that the principle virtue of the gold standard is that interest rates remain stable over long periods of time. True interest rate discovery is an important market mechanism.  Interest rates, if they represent the time value of money, can fluctuate to reflect what's happening in the real world.  Sometimes things are humming along, other times great upheavals take place and interest rates need to respond to that. Otherwise it's just the same old, same old neo-Keynesian static model.  Boring.....and discredited.

The gold standard helps ensure non-debased currency. Leave interest rate discovery to the markets.

 

 

Wed, 06/06/2012 - 18:09 | 2501232 NotApplicable
NotApplicable's picture

This analysis couldn't possibly be any further from Keynesian rhetoric, neo, or classical. And honestly, it makes the very same arguments that you do concerning market discovery.

You seem to be viewing the idea backwards.  Gold standards don't "need" narrow interest rate bands, but rather, they create them due to market stability they engender. Also, the business model you describe ("Sometimes things are humming along, other times great upheavals take place and interest rates need to respond to that.") comes from the Keynesian model, not the Austrian one. Without the Keynesian distortions to the money supply, booms and busts are much, much less severe (hence again, a normal, narrow rate of interest emerges).

Simply put, this article is every bit about market discovery of interest rates, rather than the idea that Benron should play in the market to manage them.

 

Wed, 06/06/2012 - 21:45 | 2501866 Irene
Irene's picture

I've lived through an awful lot of market instability.  Jesus, the whole wide world was turned upside down with computers and pc's.  And then the whole wide world was turned upside down again with the internet.  Nanotechnology will probably upend every sector of our economy from medicine to construction materials production.  These are not "stable" markets because they are changing so rapidly but they needn't be boom and bust cycles either.  Interest rates need to respond to what's happening on the ground and I still don't see how a gold standard creates narrow interest rate bands.  If capital is tight, interest rates should go up - gold standard or not.

The analysis was essentially static, which is why I compared it to Keynesian eco.  It was the spirit of the thing I was addressing.

Wed, 06/06/2012 - 22:03 | 2501902 billsykes
billsykes's picture

"Nanotechnology will probably upend every sector"

nano metals are going to be the asbestos of this centrury- this stuff goes thru your skin, piles up in your liver an shreds your lungs.
its really too bad, I thought the nanotech thing was great, until I looked into it.

 

Wed, 06/06/2012 - 17:43 | 2501163 New American Re...
New American Revolution's picture

Gold can set the rate of interest, and as this article indicates, it is set by the public at large.   The problem comes in the fractalization of the gold available for credit, which is set by the bank lending the money based upon their gold reserve.   Gold is the regulator of credit, but still the banks require regulation, regulation of solvency to be specific.   And this is where a reconstituted central reserve bank would come into play.   For lack of a better term, let us call it the American Reserve Bank (ARB), 2/5ths of which would be owned by the Congress with the remaining shares being held by the public and traded upon a public exchange.

This ARB would then supplant the FED over the course of a weekend, much the same way insolvent banks are closed on Friday and re-opened on Monday routinely.   There will be some restrictions on positions, but the ARB, its role now returned to the constitutional powers of Congress where they belong, will simultaniously be operated in the Public Forum, and all ARB meetings would be televised, with key decisions contingent most likely upon the majority shareholders (i.e. Congress).   I cover this in greater detail in "New American Revolution: The Constitutional Overthrow of the United States Government".

The ARB would function like the Suffolk Bank, which operated in New England from 1816 to 1861, during which time a small handful of member banks were closed (bankrupt) at the same time 1000's of banks were bankrupted over this same 45 years.   It was the policing of solvency in its member banks along with the gold standard that allowed New England to anchor and dominate American banking.   And it is this model that is required if a classical gold standard is to function successfully.  

No system can stand alone, but operating in a symbiotic relationship as described above, a classical gold standard can provide a stable platform for the reformation of America.  Without these two elements of a classical gold standard with a Suffolk like bank solvency regulator, the stability America requires will never last.  But together, they could operate indefinitely.    www.nar2012.com

Wed, 06/06/2012 - 18:34 | 2501272 WhiteNight123129
WhiteNight123129's picture

In the bimettalic standard, the Bullion flows and the parity is not set at the currency level between different currencies, but there is a link through the bullion. So the flow of bullion and redemption of notes to Gold shrinks the paper into circulation because it is shipped overseas. This is where you have your check on the fractional game, the redemption and shipping of bullion puts the bankers under the threat of bankruptcy if they have no reserve. In that situation what happens is that as the circulation is shrunk, internal prices fall, at the same time the country receiving the Bullion sees its monetary base expand. So the country with circulation shrinking through redemption and bullion shipping overseas will restore is terms of trade with lower prices while the one receiving the bullion will see its prices rise, hence the terms of trades will be restored automatically, no more China-US manipulation possible. There is little that the central bank can do to prevent a healthy, early contraction in that situation. A gold standard with fixed currency parity like the british administered Gold standard is crap. It overvalues the currency, the Gold exchange standard is ubber crap, the Bretton Woods system was absolutely destined to fail because there was no restriction on the ratio of circulation to Bullion unlike the Bank of England Charter of 1844. In bi-mettalism you can measure Gold using Silver. There is no way to measure Gold in a monomettalic standard, the only way to price Gold is not with paper (as it consistently goes down). Currency are free to float and each currency is free to use the type of Bullion it wants (a choice is better between Silver and Gold) and the currency can freely float. We use monetary base ratios because of the Gold standard experience, but the true measure is with another monetary metal.

Wed, 06/06/2012 - 17:58 | 2501166 razorthin
razorthin's picture

Set???  Set???  Free market much, you marxist?

Wed, 06/06/2012 - 18:28 | 2501275 NotApplicable
NotApplicable's picture

sarc tag?

Wed, 06/06/2012 - 18:17 | 2501251 silverserfer
silverserfer's picture

in a gold standard

THERE DOES'NT NEED TO BE FUCKING INTEREST RATES!

 Usaray was and still is a SIN!

Even thought the catholic church sold out.

If a loan is given by the government there does not need to be interest. No bankrupcy, just prision if the loan is not repayed.

Wed, 06/06/2012 - 18:49 | 2501252 silverserfer
silverserfer's picture

Bitchez.

Wed, 06/06/2012 - 18:17 | 2501253 WhiteNight123129
WhiteNight123129's picture

There are things to consider here. The post 1873 demonetization of Silver made Gold expensive and manipulated upwards, this resulted in long deflation between 1873 and 1896. Bimettalism with bullion arbitrage is much better than Gold Standard even. Silver and Gold as alternatives prevent the type of deflationary manipulation that happened in 1873. Also letting the bullion flow and be transported is a way to force contraction early in the process. A parity at the currency level on the Gold standard is much inferior to no parity on currency (that is floating currencies, so each currency is free to float), however each currency is tied to Bullion either Silver of Gold, so currencies are tied at the bullion level but not at the currency level. The bimetallism of first half of XIX century is much better than rigid currency parities on an overvalued Gold monetary standard.

Wed, 06/06/2012 - 19:31 | 2501437 jimmyjames
jimmyjames's picture

Bimetallism worked fine when gold was dollar locked and silver floated and was priced by supply and demand dynamics-

The problems came when they locked silver to gold at 15-1 -thus guaranteeing a future price for abundant underground silver supplies-

This actually weakened gold as the miners stopped mining gold and went after silver and so much silver ended up on the market that it created massive inflation-

 

Wed, 06/06/2012 - 18:32 | 2501278 P.T.Bull
P.T.Bull's picture

Is this really a matter that bears pondering? Interest rates are set in the marketplace--its called capitalism.

Wed, 06/06/2012 - 19:07 | 2501362 NotApplicable
NotApplicable's picture

Yes, but what kind of a marketplace? One where actions have consequences, or BenronWorld?

Oh, and to answer you question? Negative interest rates.

Wed, 06/06/2012 - 18:33 | 2501281 bugs_
bugs_'s picture

with sandpaper

Wed, 06/06/2012 - 18:54 | 2501330 valkyrie99
valkyrie99's picture

During just about all periods of the gold standard available for historical analysis, the money supply has been supplemented, typically overwhelmed in a combination of Gresham’s law and dishonest monopolization tactics, by fiat monies created by private fractional reserve bank of issue. Therefore interest rates were decided by whether banking cartels were going for a boom or a bust cycle at the time; much like today.

Perhaps this is why instead of how your theory claims interest rates SHOULD be restricted to a narrow band, I see no evidence of this ever occurring under a gold-standard. In fact I see lots of volatility in the cost and availability of money for various participants throughout all of US economic history with interest rates on bonds stabilizing and actually decreasing after the gold standard ended.  This whole 'clashing with actual experience' thing is a common thread among economic theories based on thought experiments of how oversimplified models of how standardized participants should react to various stimuli where no one bothers to check history – which is about the only laboratory where one can see the effects of economic experiment on as wide and diverse of a natural system as society – to see if they are right or not.

 

 

This onelooks to NOT be accurate.  Interest rates appear higher and more volatile under gold then bi-metalism, or now. In England and other old financial centers this trend appears the same, although overall interest rates throughout these areas appear to be slightly less volatile over most of the last few centuries (exceptions of course WW’s).  As stated there are few “real” gold standard periods to evaluate (most money had been created by private banks for centuries), but I’d love to see some data substantiating these claims. The only form of currency I can think of that stabilizes interest rates are: 1) systems not supplemented with fractional reserve lending or printing…bankers are trying to make a profit which comes from the ups & downs in the market, not take care of societies best interests….2) I suppose Mesopotamian mixed commodity exchange that restricted lending with interest to only occur in organic commodities capable of reproduction did stabilize interest rates as well as amounts of overall debt and ensured risk was evenly distributed between lender and borrower and as well as profit.

Wed, 06/06/2012 - 18:56 | 2501338 EverythingFubar
EverythingFubar's picture

Can one of you ueber-clever-people tell me how a gold standard could be implemented in such a way as not to favour the gold producers? ie Countries with gold in the ground are suddenly much wealthier than those that don't have gold, not as a result of better run economies etc but due to the sheer luck of having shiny-shiny in the ground? Not very fair is it?  Not quite as bad as the current fiat-fiasco but still not exactly a fair battlefield huh?

Wed, 06/06/2012 - 19:18 | 2501398 jimmyjames
jimmyjames's picture

Countries with gold in the ground are suddenly much wealthier than those that don't have gold, not as a result of better run economies etc but due to the sheer luck of having shiny-shiny in the ground?

Not very fair is it?  Not quite as bad as the current fiat-fiasco but still not exactly a fair battlefield huh?

***********

I'm not sure why it isn't fair-is it not fair that one country has oil and another does not-

The fact is-is that the gold will be mined and the production profits go to a corporation and their shareholders and not a country-save for tax and revenues and labor spinoffs-

Wed, 06/06/2012 - 19:07 | 2501360 tradewithdave
tradewithdave's picture

The writer did not mention that under what would seem to be the leading proposition for a modified gold standard whereby first the currency is divorced into two segments a) money to satisfy the double coincidence of want and b) money as a store of wealth. 

Then the fractional reserve is removed from the (a) segment of the money by removing convenience money (your mortgage, cell phone bill, groceries, gas, etc.) from the fractionally reserved banking system and essentially setting up an intraday global revolver that reconciles daily by essentially never reconciling.  This avoids bank runs because the actual convenience money exists and is not fractionally reserved.

For segment (b) it has a fractional reserve of gold behind it.  This is your savings, 401(k), pension, etc. and it is tied up six ways from Sunday.  You can take it out, but it takes 6 months to get it and you take a 20%+ hit when you do thus avoiding bank runs.

In this scenario as proposed by Mervyn King and others for a new "divorced" currency system gold simply plays the role of confidence man by standing in for a banking system unable to sustain confidence. 

Under such a scenario and in light of the writer's comments, how does the process for setting interest rates change in a divorced currency system?  It has been suggested that in a near frictionless system that Gresham's law is reversible.  In that scenario, wouldn't the value of gold (not held by central banks) be propelled towards a "free gold" termination point?

http://tradewithdave.com/?s=divorced+currency

www.tradewithdave.com

Wed, 06/06/2012 - 19:10 | 2501367 NotApplicable
NotApplicable's picture

Where's the value to be had in considering the mechanics of more monetary crankism?

Money isn't that complicated. If it is, you can bet it's just another scam.

Wed, 06/06/2012 - 19:13 | 2501379 tradewithdave
tradewithdave's picture

Would it be fair to say that the U. S. Military is complicated?  Would it be reasonable to say that the U. S. dollar is a proxy for the U. S. Military?  Seems the natural conclusion would be that the USA is therefore a scam, albeit a nuclear superpower one. 

Wed, 06/06/2012 - 19:31 | 2501446 NotApplicable
NotApplicable's picture

Okay... so what's the value of consdering infinity when it's hard enough to get through the topic at hand, which is... how do market interest rates come to be in when there's a free market for money itself (and not more fake government money standards, which is a totally different question)?

I'm not saying your views aren't relevant to the subject, realistically speaking, but the author didn't fail to mention them, as they are not a part of the paradigm being discussed.

Wed, 06/06/2012 - 19:55 | 2501510 tradewithdave
tradewithdave's picture

I should have prefaced my comments with an assertion that there will not be a return to the gold standard in the traditional sense.  Based on that, my comments are not relevant to the author's assumption of a possible gold standard.  My question would then be what would the mechanism be for interest rate setting in a "divorced" 2-part currency system and how would it be different than the current system. 

With the introduction of "novelty" currencies (or what Nassim Taleb called "fun" currencies recently) where so-called sovereigns get to issue their half of the convenience currency with no implicit leverage it can take on the appearance of a return to your "free market" when in reality it's just a debit card with a seal of the state instead of a Chase FREEDOM logo.

 

Wed, 06/06/2012 - 20:21 | 2501582 Bear
Bear's picture

Unfortunately ... This is what Ben believes so we'll be stuck with fiat for as long as it serves the TPTB

Wed, 06/06/2012 - 20:01 | 2501502 honestann
honestann's picture

Does nobody even understand the phrase "get real" any more?  Does anyone today understand that abstractions are only a mental construct, not a real/physical one?

Let's be clear.  Your living, breathing, physical pet dog is real.  So is every other living, breathing, physical dog on earth.  However, the concept spelled "dog" in english is an abstraction.  It is only a configuration of the neurons in your head.  At best it is a "mental file folder" into which you can put references to every real, physical, individual "dog" if you're sane.  But that folder is just a folder, and there is no such thing as "abstract dogness".  Like your "SantaClaus" folder, your "dog" folder has no real, physical external referent.  Mental units without external referents are what we call "fiction"... or insanity if you believe them to be more than mental constructs.  The only difference is, at least your "dog" folder contains references to real, living, breathing, individual dogs... and those dogs are outside your mind (external) and do indeed exist.

The same is true of "interest rates".  There is no "interest rate".  Even in the utterly insane world of fiat, there are only individual loans.  The abstraction "interest rate" is nothing but a mental construct.  Each individual loan may have an "interest rate" attached, though even that is a mostly a term without significance in the world of fiat, fake, fraud, fiction, fantasy, fractional-reserve-debt-non-money.  For example what is the "real interest rate" if you take a 10-year loan at 1% interest, then repay the principle and interest on that loan after 10 years --- but the value of the "money unit" the loan was denominated in has lost 99% of its value?

Once humans allow fictions into their thinking process, anything goes --- mentally speaking, that is.

Okay, let's assume the one and only real, honest gold standard.  In that system, only gold coins or bars are the standard unit of "money".  There are NO gold certificates.  There are NO forms of fractional-reserve practices whatsoever.  Every transaction involves only real, physical, valuable goods --- real products of any kind, including physical gold.  When you "buy" something, you are not actually "buying" something at all.  You are trading one real, physical good (gold) for some other physical good (any product).  Or you can trade one real, physical good (any product) for another physical good (any product) if you prefer --- gold is just one convenient real, physical good to exchange.  No phony bologna.

In such a situation, any pair of individuals can agree to lend and borrow some real physical gold... or any other product for that matter... on whatever terms they decide.  The terms might include an "interest rate" of sorts, though how that "interest rate" is calculated is not always the same, so a single naive "interest rate" doesn't even apply to individual "loans".  To imagine there is some overarching "interest rate" is pure fantasy.  Any human with the least bit of control of his consciousness will understand that there is no "overall interest rate".  That's just a mental construct, not something real.  And its even a mental construct that can be reasonably computed in different ways.

predators-DBA-government and predators-DBA-central-banks have trained humans to totally lose control of their minds.  Well, most humans anyway.

Wed, 06/06/2012 - 20:50 | 2501671 Bezukhov
Bezukhov's picture

Whatever interest there is on a loan is decided upon by the parties involved. I'll loan you 100 oz of gold, and in return you pay back to me  that 100 oz and perhaps some silver for interest, or some samples of whatever this business will produce, or a night with a  first class 'lady of the evening'...

Wed, 06/06/2012 - 21:57 | 2501885 billsykes
billsykes's picture

..."No entrepreneur can borrow at a rate higher than his rate of profit"

 

I used to agree- but this thinking is wrong, because I have learned that it is not about building value for anyone else other than yourself.

- just run a stock screen and you can see businesses that for years never made a profit and blow hundreds of millions a Q and are still in business.

FNP is one- just look at how many companies run in the red every year. In every sector in every economy and in every country there are millions of businesses that would be better wiped off the face of the earth but that is not how things work.

By the above quoted measure there should be no shipping companies, but yet there they are. There should be no paper or forestry companies, or mining companies, etc. but they continue to be funded and supported.

The above quote is the kind of common sense thinking is keeping people from getting rich of the backs of others- I thought that way before but now I frankly don't give a fuck if a company I run makes money, returns value or provides any significant value to anyone anywhere.

It is just me that matters, not ethics, not society, not god, not the government, because they don't give a fuck about me.

This is just the way it is, not many have the balls to say it or they have brain-washed themselves from BS'ing all day that they believe the lies.

Is it worst to know you are without malice and without compunction or be ignorant and do the same actions?

Thu, 06/07/2012 - 01:12 | 2502352 Amagnonx
Amagnonx's picture

Well, here we can clearly see the problem of moral hazard writ large.  IF someone can engage in capital destruction, and profit from it personally - then the law is wrong, as the fate of the controllers finances should be directly linked to the corporations to ensure ethical conduct.

 

While the laws are written by the people who may gain from this very sort of activity - then the savings of labour will continue to be destroyed, and the wealth of nations plundered -and the pirates will do it all, just to take a few pennies on every dollar they destroy.

Wed, 06/06/2012 - 22:12 | 2501937 Jean
Jean's picture

How about a practical coinage:

Penny = .22 pellet or 00 shot
Nickel = .22lr
Dime = .38 or 9mm
Quarter = ..223, .45 or .357
Dollar = .308 or 30-06

Wed, 06/06/2012 - 23:06 | 2502069 billsykes
billsykes's picture

Oh ya paying for my drink with a ak-47 clip- that would turn out real well come 2am.

Thu, 06/07/2012 - 00:14 | 2502200 Clinteastwood
Clinteastwood's picture

The article's premise is bullshit.  The comments are even worse.

With a gold standard there is no interest rate set.  That's the whole point of having a GOLD STANDARD dummies.  You don't borrow, you work for gold.

Sometimes I think the commentors here are a bunch of poor litle rich college kids who've never worked a day in their lives (and don't have a single oz. of gold to show for it, either), pontificating about something they only know theory about.

Get a job.  Buy your gold and hide it.  Trust in God.  You'll be a lot happier, and likely rich enough to survive the coming upheaval.

Thu, 06/07/2012 - 01:51 | 2502420 Amagnonx
Amagnonx's picture

A gold standard is a waste of time - money needs to be decentralized, which means gold and silver are money - not a 'standard' - no certificates issued centrally (any person should be able to issue certificates, or use electronic methods). 

 

Fractional reserve banking needs to be recognized as fraud, and therefore illegal - and the banks should have all their assets seized and that money which was stolen through fraud should be returned to its rightful owners.  The losses should be applied to the personal wealth of the board, and senior management.

Thu, 06/07/2012 - 02:49 | 2502497 WaEver
WaEver's picture

What utter nonsense. For all those die-hard believers of a gold standard go and read "Lords of Finance"   URGENTLY

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