Author Topic: Capitalism, mercantilism and the gold standard.  (Read 8351 times)

bwall

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Capitalism, mercantilism and the gold standard.
« on: December 05, 2019, 05:21:36 AM »
We've had some thought provoking comments here on gold and the gold standard, so I thought a quick review of why that system died out might be of interest. Perhaps this should be in 'off topic'? If so, maybe the mods could move it.

As Europe left the Dark Ages, there was little trust in government, and for good reason. So paper currency wasn't accepted, only gold and silver coins (also called 'specie'). The purpose of economic activity was to acquire as much gold and silver as possible, in a process referred to as 'beggar my neighbor'. Meaning; the only path to prosperity is the acquisition of specie, and if I have more gold and silver than my neighbor, I will prosper more than he will. Economic activity was viewed as a zero sum game. A knock-on effect of this worldview was it reinforced the proclivity of European powers to revert to warfare as a means to settle issues.

Then Adam Smith came along and wrote "The Wealth of Nations" in 1776. He provided the theoretical underpinning for trade and markets while pointing out the shortcomings of mercantilism. Countries have comparative advantages and absolute advantages and in either case they would both be better off by trading with one another. When trading with each other both countries benefit at no one's expense.

But vestiges of mercantilism lived on in the form of the gold standard, partly because of inertia and partly out of necessity--monarchs couldn't be trusted that much, after all.

So, the gold standard lived on throughout the 19th Century, even though Europe had no gold mines and thus had no way to expand their money supply. They could source gold from their overseas colonies, though I wonder if the conditions of extraction/trade would be considered equitable or 'fair' by today's standards (or even the standards of that time).

As the 20th Century began societies in the West saw decreased death rates and longer lifespans which led to soaring populations. Unprecedented population increases in an industrial society lead to unprecedented increased economic growth, but not the increase in gold holdings necessary to increase the money supply to the point where all the economic potential could be realized. (Thus William Jennings Bryan's popular "Cross of Gold" speech, where he speaks for the common man demanding that the government end the gold standard as it benefits only the rich and powerful at the expense of the masses.) Over the course of the 19th Century monarchs had slowly lost power and democracies provided semi-adept government; or at least an improvement on what the world had seen. Add in a world war or two which governments had to pay for somehow and then the gold standard was toast.

My point here is that the gold standard, like the Model T Ford automobile, served a good (great?) purpose and had it's day in the sun but society has now moved on to bigger and better things. Those who long for a return to the gold standard seem to me like a person who gazes at a Model T and a McLaren 720 and prefers the Model T.

Kalergie

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Re: Capitalism, mercantilism and the gold standard.
« Reply #1 on: December 05, 2019, 05:30:30 AM »
Thanks for this. I have noticed with worry that my Youtube suggestions get inundated with Gold peddlers and dooms-day guys recently. I wonder why. They almost had me though.

talltexan

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Re: Capitalism, mercantilism and the gold standard.
« Reply #2 on: December 05, 2019, 07:23:10 AM »
Nice narrative.

Two quibbles:
  • The terms "Absolute Advantage" and "Comparative Advantage" emerge from the work of David Ricardo who lived a generation after Smith, and
  • It would be nice to consider the Great Powers whose colonial policy centered around metals extraction (Spain and Portugal), and how much worse they did than countries like Britain who focused more on trade and agriculture.

Scandium

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Re: Capitalism, mercantilism and the gold standard.
« Reply #3 on: December 05, 2019, 07:32:38 AM »
Thanks for this. I have noticed with worry that my Youtube suggestions get inundated with Gold peddlers and dooms-day guys recently. I wonder why. They almost had me though.
YT is notorious for massive amounts of conspiracy nuts, right wingers/reactionaries and other nonsense. In the US at least those things are also generally the same. I'm not quite sure why. A function of gaming the algorithm and putting out what sells? Or that the audience who is dumb enough to watch a 2 hr video on chem trails will fall for anything?

Wrenchturner

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Re: Capitalism, mercantilism and the gold standard.
« Reply #4 on: December 05, 2019, 07:50:05 AM »
Deflation is bad, agreed.  How about this?

Pretty steep curve there on the right.

Scandium

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Re: Capitalism, mercantilism and the gold standard.
« Reply #5 on: December 05, 2019, 08:22:51 AM »
Deflation is bad, agreed.  How about this?

Pretty steep curve there on the right.

This seems meaningless out of context. What is it supposed to show? That's an increase of 7.45%, is that a lot?

Wrenchturner

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Re: Capitalism, mercantilism and the gold standard.
« Reply #6 on: December 05, 2019, 08:55:42 AM »
Deflation is bad, agreed.  How about this?

Pretty steep curve there on the right.

This seems meaningless out of context. What is it supposed to show? That's an increase of 7.45%, is that a lot?

That the U.S. Fed has undone a years worth of balance sheet reductions in two months?  That the trend going forward seems to be a dramatic continued climb in the Fed balance sheet?

Fiat currencies have their weaknesses too?

Xlar

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Re: Capitalism, mercantilism and the gold standard.
« Reply #7 on: December 05, 2019, 08:59:09 AM »
Deflation is bad, agreed.  How about this?

Pretty steep curve there on the right.

This seems meaningless out of context. What is it supposed to show? That's an increase of 7.45%, is that a lot?

I also have questions about what this is supposed to show. Is this inflation adjusted? What does "not seasonally adjusted" mean and does that account for the dip we see over this 1 year period? Why did you choose to show just 1 year of data and what does this 1 year show in the context of other years?

Xlar

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Re: Capitalism, mercantilism and the gold standard.
« Reply #8 on: December 05, 2019, 09:00:46 AM »
bwall, thank you for posting this. It has made for a very interesting read. I had not thought about the implications of the mercantile system and the role the industrial revolution played into moving off the gold standard.

Scandium

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Re: Capitalism, mercantilism and the gold standard.
« Reply #9 on: December 05, 2019, 12:06:41 PM »
Deflation is bad, agreed.  How about this?

Pretty steep curve there on the right.

This seems meaningless out of context. What is it supposed to show? That's an increase of 7.45%, is that a lot?

That the U.S. Fed has undone a years worth of balance sheet reductions in two months?  That the trend going forward seems to be a dramatic continued climb in the Fed balance sheet?

Fiat currencies have their weaknesses too?

ok... What (negative) effect has this had on our fiat currency?

Kalergie

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Re: Capitalism, mercantilism and the gold standard.
« Reply #10 on: December 05, 2019, 12:43:17 PM »
Thanks for this. I have noticed with worry that my Youtube suggestions get inundated with Gold peddlers and dooms-day guys recently. I wonder why. They almost had me though.
YT is notorious for massive amounts of conspiracy nuts, right wingers/reactionaries and other nonsense. In the US at least those things are also generally the same. I'm not quite sure why. A function of gaming the algorithm and putting out what sells? Or that the audience who is dumb enough to watch a 2 hr video on chem trails will fall for anything?

Unfortunately, it isn't as easy as this. It's not the flat earth, fake moon landing, get your guns and ammo ready kind of guys. Those would be easy to filter out. There's guys like for example, George Gammon (fairly new) and Peter Schiff, I've recently got suggested like crazy on YT. Some of their videos actually make a lot of sense to me at first sight. I just don't agree with the conclusion that we're basically all screwed, and we should invest in Ford F250 pickup trucks, gold and single family houses in Kansas. :D 
They and others of their kind do however challenge the buy and hold index fund strategy which I have kind of been indoctrinating myself for years. I guess it is this ultra long bull market that is bringing these guys of the woods.

Wrenchturner

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Re: Capitalism, mercantilism and the gold standard.
« Reply #11 on: December 05, 2019, 05:36:54 PM »
Deflation is bad, agreed.  How about this?

Pretty steep curve there on the right.

This seems meaningless out of context. What is it supposed to show? That's an increase of 7.45%, is that a lot?

That the U.S. Fed has undone a years worth of balance sheet reductions in two months?  That the trend going forward seems to be a dramatic continued climb in the Fed balance sheet?

Fiat currencies have their weaknesses too?

ok... What (negative) effect has this had on our fiat currency?

I'm not an economist, but maybe stagflation, and/or whatever happens when bad investments aren't flushed from the economy, as well as interest rates being suppressed by artificial bond demand.

Looks like a centrally planned economy type of strategy.

Xlar

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Re: Capitalism, mercantilism and the gold standard.
« Reply #12 on: December 06, 2019, 08:51:04 AM »
Deflation is bad, agreed.  How about this?

Pretty steep curve there on the right.

This seems meaningless out of context. What is it supposed to show? That's an increase of 7.45%, is that a lot?

That the U.S. Fed has undone a years worth of balance sheet reductions in two months?  That the trend going forward seems to be a dramatic continued climb in the Fed balance sheet?

Fiat currencies have their weaknesses too?

ok... What (negative) effect has this had on our fiat currency?

I'm not an economist, but maybe stagflation, and/or whatever happens when bad investments aren't flushed from the economy, as well as interest rates being suppressed by artificial bond demand.

Looks like a centrally planned economy type of strategy.

Is the rate of change of the total assets correlated with inflation? Can you provide a reference?

"whatever happens when bad investments aren't flushed from the economy" This sounds very generic. What do you think will happen and how is that connected to the total assets?

Wrenchturner

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Re: Capitalism, mercantilism and the gold standard.
« Reply #13 on: December 06, 2019, 10:32:42 AM »
Deflation is bad, agreed.  How about this?

Pretty steep curve there on the right.

This seems meaningless out of context. What is it supposed to show? That's an increase of 7.45%, is that a lot?

That the U.S. Fed has undone a years worth of balance sheet reductions in two months?  That the trend going forward seems to be a dramatic continued climb in the Fed balance sheet?

Fiat currencies have their weaknesses too?

ok... What (negative) effect has this had on our fiat currency?

I'm not an economist, but maybe stagflation, and/or whatever happens when bad investments aren't flushed from the economy, as well as interest rates being suppressed by artificial bond demand.

Looks like a centrally planned economy type of strategy.

Is the rate of change of the total assets correlated with inflation? Can you provide a reference?

"whatever happens when bad investments aren't flushed from the economy" This sounds very generic. What do you think will happen and how is that connected to the total assets?

Not interested in this.  Im pointing out that our current monetary system isn't foolproof either.

Scandium

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Re: Capitalism, mercantilism and the gold standard.
« Reply #14 on: December 06, 2019, 10:49:29 AM »
Deflation is bad, agreed.  How about this?

Pretty steep curve there on the right.

This seems meaningless out of context. What is it supposed to show? That's an increase of 7.45%, is that a lot?

That the U.S. Fed has undone a years worth of balance sheet reductions in two months?  That the trend going forward seems to be a dramatic continued climb in the Fed balance sheet?

Fiat currencies have their weaknesses too?

ok... What (negative) effect has this had on our fiat currency?

I'm not an economist, but maybe stagflation, and/or whatever happens when bad investments aren't flushed from the economy, as well as interest rates being suppressed by artificial bond demand.

Looks like a centrally planned economy type of strategy.

Is the rate of change of the total assets correlated with inflation? Can you provide a reference?

"whatever happens when bad investments aren't flushed from the economy" This sounds very generic. What do you think will happen and how is that connected to the total assets?

Not interested in this.  Im pointing out that our current monetary system isn't foolproof either.
And nobody has claimed it is

Telecaster

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Re: Capitalism, mercantilism and the gold standard.
« Reply #15 on: December 06, 2019, 01:10:20 PM »
There was a general currency shortage in Medieval Europe, lead to some interesting monetary developments.   One was tally sticks, where transactions were recorded on a stick (often denominated in librae, solidi, and denarii [pounds, schillings, and pence, in English]), which was then broken in half.   Matching the two halves together was proof of the debt.  Even though the transaction was denominated in say, pounds, no currency ever changed hands. 

Another is that people would simply issue their own currency.   For example an innkeeper might issue a leather token good for a sandwich and a beer in exchange for a debt.  The tokens would then circulate throughout the village as regular money and used for transactions not related to the innkeeper.   

https://en.wikipedia.org/wiki/Token_coin

https://en.wikipedia.org/wiki/Tally_stick

Point is, it isn't necessary to have a currency backed by gold in order to have it function as currency.    You simply need everyone to agree on what the currency is. 

Xlar

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Re: Capitalism, mercantilism and the gold standard.
« Reply #16 on: December 06, 2019, 02:24:51 PM »
Deflation is bad, agreed.  How about this?

Pretty steep curve there on the right.

This seems meaningless out of context. What is it supposed to show? That's an increase of 7.45%, is that a lot?

That the U.S. Fed has undone a years worth of balance sheet reductions in two months?  That the trend going forward seems to be a dramatic continued climb in the Fed balance sheet?

Fiat currencies have their weaknesses too?

ok... What (negative) effect has this had on our fiat currency?

I'm not an economist, but maybe stagflation, and/or whatever happens when bad investments aren't flushed from the economy, as well as interest rates being suppressed by artificial bond demand.

Looks like a centrally planned economy type of strategy.

Is the rate of change of the total assets correlated with inflation? Can you provide a reference?

"whatever happens when bad investments aren't flushed from the economy" This sounds very generic. What do you think will happen and how is that connected to the total assets?

Not interested in this.  Im pointing out that our current monetary system isn't foolproof either.

..... Posting a graph and then saying maybe bad stuff will happen but your not sure what isn't very helpful. No idea how you think that points out that our current monetary system isn't foolproof :/

talltexan

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Re: Capitalism, mercantilism and the gold standard.
« Reply #17 on: December 06, 2019, 02:29:10 PM »
Deflation is bad, agreed.  How about this?

Pretty steep curve there on the right.

Either a rapid correction via mass bankruptcy and insolvency of lenders who over-exposed themselves (see S&L crisis in US during the 1980s), or decades of stagnation (see Japan in the 1990s)

Ultimately, assets that fail to produce a return will have to be cut loose. ripping the bandaid off fast hurts more, now, but also frees up what can be rescued (salvaged capital and labor) for more productive activities.
This seems meaningless out of context. What is it supposed to show? That's an increase of 7.45%, is that a lot?

That the U.S. Fed has undone a years worth of balance sheet reductions in two months?  That the trend going forward seems to be a dramatic continued climb in the Fed balance sheet?

Fiat currencies have their weaknesses too?

ok... What (negative) effect has this had on our fiat currency?

I'm not an economist, but maybe stagflation, and/or whatever happens when bad investments aren't flushed from the economy, as well as interest rates being suppressed by artificial bond demand.

Looks like a centrally planned economy type of strategy.

Is the rate of change of the total assets correlated with inflation? Can you provide a reference?

"whatever happens when bad investments aren't flushed from the economy" This sounds very generic. What do you think will happen and how is that connected to the total assets?

Wrenchturner

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Re: Capitalism, mercantilism and the gold standard.
« Reply #18 on: December 06, 2019, 06:45:27 PM »
I guess I'll address the dogpile:

Bonds are supposed to price interest rates, but since the demand for bonds is being artificially supported by central bankers, the freely established price of interest is not being established.  This lever is being leaned on at an increasing rate(the graph I posted.  Edit: eventually this graph will not continue to steepen and also function.  Diminishing returns at best).  This is also allowing interest rates to remain artificially low, which is keeping us in a cycle that is "too big to fail".  This idea(too big to fail) is very dangerous since everything in an economy should be allowed to fail when it is broken, otherwise it becomes parasitic.  Parasitism can lead to death spirals if it becomes systemic.  It is also why our economy is intended to be modular enough so that, for instance, if a few banks become insolvent due to bad risk assessment, we can suffer the losses and move on.  An ounce of prevention, etc.

Put another way:

"The price of money is called the rate of interest which is the most consequential price in capitalism. When you suppress or manhandle the interest rate you are destroying information, forcing people to do business in the dark." —Jim Grant

So yes, our economy was better than a mercantile deflationary one, but the lack of recursion and price discovery of interest is causing our current monetary system to head in a single direction, which is compromising the system. This makes it somewhat comparable to a deflationary one, where people continue to remain wealthy since they own assets, regardless of quality.  Not unlike people staying rich by hoarding gold in a deflationary system.

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #19 on: December 08, 2019, 05:16:16 PM »
I guess I'll address the dogpile:

Bonds are supposed to price interest rates, but since the demand for bonds is being artificially supported by central bankers, the freely established price of interest is not being established.  This lever is being leaned on at an increasing rate(the graph I posted.  Edit: eventually this graph will not continue to steepen and also function.  Diminishing returns at best).  This is also allowing interest rates to remain artificially low, which is keeping us in a cycle that is "too big to fail".  This idea(too big to fail) is very dangerous since everything in an economy should be allowed to fail when it is broken, otherwise it becomes parasitic.  Parasitism can lead to death spirals if it becomes systemic.  It is also why our economy is intended to be modular enough so that, for instance, if a few banks become insolvent due to bad risk assessment, we can suffer the losses and move on.  An ounce of prevention, etc.

Put another way:

"The price of money is called the rate of interest which is the most consequential price in capitalism. When you suppress or manhandle the interest rate you are destroying information, forcing people to do business in the dark." —Jim Grant

So yes, our economy was better than a mercantile deflationary one, but the lack of recursion and price discovery of interest is causing our current monetary system to head in a single direction, which is compromising the system. This makes it somewhat comparable to a deflationary one, where people continue to remain wealthy since they own assets, regardless of quality.  Not unlike people staying rich by hoarding gold in a deflationary system.

I heard a colleague, a few years ago, make a passionate argument once. It made a lot of sense to me - so let me repeat what I heard.

Price of "money", "capital", "equity" are all very important and related concepts. But it is short-sighted to claim that that they are "the most consequential price in capitalism". Rather, the price of "labor" is!!

Broken capital markets lead to inefficient resource allocation. Broken labor markets lead to rising inequality, social unrest and general breakdown of society. "Inefficient resource allocation" vs. "social breakdown" makes the relative importance an easy one.

Capital is simply not that important in the 21st century where the most profitable industries are surprisingly capital-light.
 
My discussion with the aforementioned colleague was in the context of the broken COF curves (COF=Cost of Funding) in the banking context (our models weren't built for frequent negative slopes in these curves, and simulations based on them started producing nonsensical garbage).

The crux of his argument was that the labor market was broken due to one-two punch since about 1980s. The culprits were the takeover of world markets by the champions of Crony Capitalism (i.e. Milton Friedman fans), and demographic headwind in the advanced economies from a few years later. This is causing rising inequality, lack of social mobility etc.

The "capital-and-money-market" issues are simply the downstream symptoms from there..

Adam Smith, and later Marx over-emphasized the importance of the "cost of labor". So much so that early measures of "intrinsic value" centered around the cost of labor, and Marx even designed his entire economic paradigm around it.
 
OTOH, Milton Friedman and gang over-emphasized the importance of "capital".

The most efficient economic frontier probably lies somewhere in between!

You are worrying about a sniffle when the underlying cancer rages undetected by the so-called "conservatives" that are currently in control everywhere.
« Last Edit: December 08, 2019, 05:22:05 PM by ctuser1 »

SeattleCPA

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Re: Capitalism, mercantilism and the gold standard.
« Reply #20 on: December 09, 2019, 08:12:31 AM »
The crux of his argument was that the labor market was broken due to one-two punch since about 1980s. The culprits were the takeover of world markets by the champions of Crony Capitalism (i.e. Milton Friedman fans), and demographic headwind in the advanced economies from a few years later. This is causing rising inequality, lack of social mobility etc.


It's pretty murky whether inequality is growing.

This is a huge subject, but three really worthwhile things to ponder.

First, consider that much of the income data isn't longitudinal but rather point in time. This makes a HUGE difference in how the income data looks. I did a blog post a while back that compared the average lifetime earnings of top earners to the point in time data from the "anti-capitalism" economists like Piketty and Saez... and when you look at the lifetime earnings data, it can reshape one's understanding:

https://evergreensmallbusiness.com/lifetime-earnings-top-one-percent-surprise/

Second, look closely at how the folks like Piketty and Saez come up with the wealth estimates they use in their arguments. Lots of the wealth represents small business interests which are pretty richly valued. (They value my CPA firm at roughly three times its actual value for example.)

Note: By common agreement now, Piketty and Saez made other simplifications in their math which understates the wealth of the poor and the middle class and overstates the wealth of the top ten and top one percent.

Third, one wants to look closely at the countries with economic equality that the anti-capitalists point to. I don't think they deliver what some hope. E.g., dig through the our world in data website's inequality data. You can compare income deciles in US (with its apparent growing inequality) to income deciles in Sweden (nice tight equality) and what you see is nearly every income decline in Sweden is worse off. You'd guess the top decile in the US beats the top decile in Sweden. But it looks to me as if for every other decile except the bottom decile, the US beats Sweden.

This final comment: I get people don't like the fact that capitalism's resource allocation mechanism hasn't painlessly "processed" the effect of globalism and technology for some folks in developed world.  But promoting alternative approaches with no track of success seems pretty illogical. Especially when capitalism (and the globalism and technology it's spawned) has moved billions of people out of poverty.





ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #21 on: December 09, 2019, 09:49:18 AM »
The crux of his argument was that the labor market was broken due to one-two punch since about 1980s. The culprits were the takeover of world markets by the champions of Crony Capitalism (i.e. Milton Friedman fans), and demographic headwind in the advanced economies from a few years later. This is causing rising inequality, lack of social mobility etc.


It's pretty murky whether inequality is growing.

This is a huge subject, but three really worthwhile things to ponder.

First, consider that much of the income data isn't longitudinal but rather point in time. This makes a HUGE difference in how the income data looks. I did a blog post a while back that compared the average lifetime earnings of top earners to the point in time data from the "anti-capitalism" economists like Piketty and Saez... and when you look at the lifetime earnings data, it can reshape one's understanding:

https://evergreensmallbusiness.com/lifetime-earnings-top-one-percent-surprise/

Second, look closely at how the folks like Piketty and Saez come up with the wealth estimates they use in their arguments. Lots of the wealth represents small business interests which are pretty richly valued. (They value my CPA firm at roughly three times its actual value for example.)

Note: By common agreement now, Piketty and Saez made other simplifications in their math which understates the wealth of the poor and the middle class and overstates the wealth of the top ten and top one percent.

Third, one wants to look closely at the countries with economic equality that the anti-capitalists point to. I don't think they deliver what some hope. E.g., dig through the our world in data website's inequality data. You can compare income deciles in US (with its apparent growing inequality) to income deciles in Sweden (nice tight equality) and what you see is nearly every income decline in Sweden is worse off. You'd guess the top decile in the US beats the top decile in Sweden. But it looks to me as if for every other decile except the bottom decile, the US beats Sweden.

This final comment: I get people don't like the fact that capitalism's resource allocation mechanism hasn't painlessly "processed" the effect of globalism and technology for some folks in developed world.  But promoting alternative approaches with no track of success seems pretty illogical. Especially when capitalism (and the globalism and technology it's spawned) has moved billions of people out of poverty.

<disclaimer> I have not yet gone through all the references you provided, so not 100% qualified to respond to all of your points. Even so, I wanted to address a couple of mostly rhetorical points you made</disclaimer>

>> It's pretty murky whether inequality is growing.

IRS/CBO are not run by Piketty et. al.

An income distribution chart based on IRS data is in this link, that shows the rise in inequality without any scope of doubt:
https://www.cbo.gov/system/files/2018-11/54646-Distribution_of_Household_Income_2015_0.pdf

Look in the "trends" section.

Now, your challenge centers around the fact that using "lifetime" earnings even things out significantly. Would you agree that the "evened out" 1%-ers have it easier today than they had in 1960s?
(Note: I would not argue that the "bottom income" population has it worse! They don't, by any measures of consumption. But that is besides the point, inequality is the issue at question here)


>>But promoting alternative approaches with no track of success seems pretty illogical.

Ummmm... You mean to say that advocating the same economic approach US followed before the Milton Friedman gang took over in the 1980's is "illogical"?

You remember the track record of 60's where the manufacturing boom was distributed quite effectively. A much-bigger-in-absolute-terms boom in digital economy has not, since 1980s!!

Any update in your logical/illogical distinction based on the above datum?


I am still curious on your argument challenging the notion that inequality has risen, something which I took to be as close to axiomatic as possible. Much more reading for me to do. Challenging assumptions is always good.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #22 on: December 09, 2019, 11:57:34 AM »

IRS/CBO are not run by Piketty et. al.


Yes, but you want to understand what they did with the IRS data. Because they used averages to capitalize income streams and that really impacted the wealth numbers they come up with.

E.g., they capitalized the earnings of small businesses using very high multiples because they used a multiple for all businesses. So they said a business making, for example, $200K a year is worth roughly $1.4M. So a "7" multiple. I would say based on the bizcomps.com database that a business making $200K is probably worth more like $500K. So a "2.5" multiple. And that $900K difference matters.

Note: Saez and Zucman in a 2014 paper (I think it's 2014) estimate that to get into the top one percent, the threshold is about $4M. I'm fine to use that number. But exaggerating the value of small businesses (which is where a lot of the wealth of top ten percent and top one percent sits) by $900k makes the picture look different.

Another example where they did this? They used average interest rates to capitalize people's savings. E.g., if average interest rates are (say) 2%, they use that rate and the tax return interest income to determine what cash people hold. The problem with this "homogeneous return" assumption, which is what they call it, is it doesn't recognize that the top ten percent or top one percenter is investing in at least some junky stuff which pays a 4% rate and that the average person is just sitting on a modest amount of cash in a checking account. But look how this homogeneous return scrambles estimated values.

A top one percenter with $100K earning 4% (maybe the note from the person who bought his small business) earns $4,000 dollars in interest income. When that $4,000 is capitalized using a 2% average interest rate, Piketty, Saez and Zucman come up with $200,000 as the her or his cash holdings.

A middle income person with $5,000 in a combined checking and savings account paying .5% (half a percent), gets $25 a year in interest. But if you capitalize the $25 using a 2% interest rate, which is what Piketty, Saez and Zucman do, you get $1250 of cash.

So the real comparison is $5K versus $100K... but they've rejiggered the numbers so they come out $1250 versus $200,000.

I don't know if I said this before, but I don't think the anti-capitalists do this intentionally, I think they just let their confirmation bias get in the way of their math and error checking. Also, Saez and Zucman (and probably Piketty too) have been very complimentary of another economist, Zwick, who's gone more granular and used "heterogeneous returns" to get better estimates.

Note: Zwick lowers the threshold to the top one percent to about $3M based on better averages. I also think Zwick's multiples are still a little high... but now I'm getting into the weeds.

BTW, here are the actual IRS personal wealth stats summarized: https://evergreensmallbusiness.com/irs-wealth-statistics-paint-fascinating-picture-top-one-percent/


An income distribution chart based on IRS data is in this link, that shows the rise in inequality without any scope of doubt:
https://www.cbo.gov/system/files/2018-11/54646-Distribution_of_Household_Income_2015_0.pdf

Look in the "trends" section.

Now, your challenge centers around the fact that using "lifetime" earnings even things out significantly. Would you agree that the "evened out" 1%-ers have it easier today than they had in 1960s?



I'm not sure I see your point... But as my blog post that I pointed to says, inequality shows up in the longitudinal wages data. At least for the US. Apparently it doesn't show up or show up the same way for the other countries where data is available. (This from last week's Economist, which talked about all the economists looking at wealth and income inequality: Piketty, Saez, Zucman, Zwick, Auten, Splinter, etc.)

But it's also arguable whether it's anywhere near as consequential as the anti-capitalists argue. Auten and Splinter say once you adjust for stuff one should adjust for, little growth in inequality shows up:

http://davidsplinter.com/AutenSplinter-Tax_Data_and_Inequality.pdf


(Note: I would not argue that the "bottom income" population has it worse! They don't, by any measures of consumption. But that is besides the point, inequality is the issue at question here)


So here I disagree with you. Which is maybe good to point out for a minute. If the economy can improve the lots of those who are most disadvantaged and beat up economically, I'm okay if for a time a billionaire has his or her yacht.

The other thing I see is the capitalist system, at least in the west, does a pretty good job of vaporizing the ultra-wealthy's balance sheet. Inheritance and income taxes, investment expenses and then high-living consumption pretty quickly grind down the wealth.

Here's a discussion of some of this research and a TLDR summary of a really fine research paper written by William Bernstein and a couple other fellows (politics spread across the spectrum):

https://evergreensmallbusiness.com/the-rich-get-poorer-the-myth-of-dynastic-wealth/

Ummmm... You mean to say that advocating the same economic approach US followed before the Milton Friedman gang took over in the 1980's is "illogical"?

You remember the track record of 60's where the manufacturing boom was distributed quite effectively. A much-bigger-in-absolute-terms boom in digital economy has not, since 1980s!!

Any update in your logical/illogical distinction based on the above datum?

I didn't realize the Milton Friedman's gang took over. I also don't remember the 1960s as being a glorious manufacturing boom.

BTW, my geographical reality is Seattle based Boeing nearly crashed in the 60s... and the land of Microsoft and Amazon looks pretty good in the new millenium.

I am still curious on your argument challenging the notion that inequality has risen, something which I took to be as close to axiomatic as possible. Much more reading for me to do. Challenging assumptions is always good.

It's not really my argument. Peek at this: https://www.economist.com/briefing/2019/11/28/economists-are-rethinking-the-numbers-on-inequality

And then see if you can get a full copy of the print magazine because there are several other balanced stories on the subject. (By balanced, I mean that the points of view of not just Piketty, Saez and Zucman are respectfully discussed and considered but also the points of view of Auten, Splinter, etc.)

BTW, this may just jack up your blood pressure, but I did a riff on Splinter's dissertion a couple of years ago talking about how people move into and out of the top ten and top one percent... also how people at least in our economy move back toward the mean.

https://evergreensmallbusiness.com/financial-planning-for-top-one-percent/

Also, I may as well repost this link because it provides links to the Saez and Zucman and also the Zwick research papers referenced above:

https://evergreensmallbusiness.com/planning-for-the-warren-wealth-taxes/

I'm not posting the Warren wealth tax thing to stoke conflict... only for the links to the economist research papers it provides.
« Last Edit: December 09, 2019, 01:35:11 PM by SeattleCPA »

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #23 on: December 09, 2019, 01:47:25 PM »
Thanks for the details. I definitely plan to grab the economist edition of this month, should make for nice and interesting reading on my train commute.

So here I disagree with you. Which is maybe good to point out for a minute. If the economy can improve the lots of those who are most disadvantaged and beat up economically, I'm okay if for a time a billionaire has his or her yacht.
Fair and reasonable point. I don't quite agree, but can see why someone can hold the opposing position.  Getting into that argument will distract from the other, more interesting discussion however, so let's avoid that.

The other thing I see is the capitalist system, at least in the west, does a pretty good job of vaporizing the ultra-wealthy's balance sheet. Inheritance and incomes taxes, investment expenses and then high-living consumption pretty quickly grind down the wealth.
As a CPA, you are probably a much better expert than me about all the ways the truly rich avoid the inheritance taxes and income taxes - right?

Are you arguing it is fair for Romney to pay 15% tax rate while I pay 30%+? Any objections to having people pay taxes such that the marginal utility of the last tax $ roughly equals out, like Peter Diamond advocates?

I didn't realize the Milton Friedman's gang took over. I also don't remember the 1960s as being a glorious manufacturing boom.

You could not have missed the transformation from 90+% top tax rate -> "read my lips, no new taxes" -> $2Tln deficit, 80% of which go to the top earners, all in the name of "conservative" ideology!!

As to 60's manufacturing boom:
https://en.wikipedia.org/wiki/Post%E2%80%93World_War_II_economic_expansion

This expansion technically went on till the 1973-75 recession. I said 60's because that was right in the middle of this.


SeattleCPA

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Re: Capitalism, mercantilism and the gold standard.
« Reply #24 on: December 09, 2019, 03:13:09 PM »
Thanks for the details. I definitely plan to grab the economist edition of this month, should make for nice and interesting reading on my train commute.

It's really pretty interesting reading...

As a CPA, you are probably a much better expert than me about all the ways the truly rich avoid the inheritance taxes and income taxes - right?

Are you arguing it is fair for Romney to pay 15% tax rate while I pay 30%+? Any objections to having people pay taxes such that the marginal utility of the last tax $ roughly equals out, like Peter Diamond advocates?

I'm not familiar with Peter Diamond's suggestions etc. But I think people underestimate the income tax burden the wealthy pay.

To me, the math looks like this if we work with the Trump tax cuts...

Say some wealthy entrepreneur (it can be Romney if you want it to be) earns $10,000,000 a year.

If she or he operates as a sole proprietor, partner in a partnership or shareholder in an S corporation, under the new tax law he pays a 37% tax rate on 80% of her or his income. So roughly a 30% rate.

And then she or he may also pay that 3.8% Obamacare tax, so you're up potentially to roughly 33% or 34%.

If the entrepreneur operates her or his operation through a regular "C" corporation, the math works a little differently. You start with the same $10,000,000. On that income, under new tax law, the corporation pays the first tax, a 21% corporate income tax that means $2,100,000 of tax. Then, when "Romney" or whoever takes the remaining $7,900,000 of dividends, he pays a 20% qualified dividends tax rate and for sure the full 3.8% Obamacare tax. Roughly that combined 23.8%-ish rate adds up to another $1,900,000... leaving $6,000,000 of the original $10,000,000.

To me, then, if you look at all the taxes under the "C" corporation scenario--so Romney or Buffet--it's essentially a 40% federal tax rate.

So, the rate isn't 15%. I don't know why people say it is. I assume no malice. Only incomplete knowledge.

BTW, when this person dies, assuming they're super-wealthy, they'll probably lose another $3,000,000 or so to federal and state estate taxes.

You could not have missed the transformation from 90+% top tax rate -> "read my lips, no new taxes" -> $2Tln deficit, 80% of which go to the top earners, all in the name of "conservative" ideology!!

The above diverges from my understanding of tax history. For example, those high tax rates were pretty easily avoidable because tax shelters were allowed and widespread. (These tax shelters went away with Tax Reform Act of 1986 which created Section 469 passive loss limitations.)

As to 60's manufacturing boom:
https://en.wikipedia.org/wiki/Post%E2%80%93World_War_II_economic_expansion

This expansion technically went on till the 1973-75 recession. I said 60's because that was right in the middle of this.

Okay, I read the wikipedia article. I found the glowing descriptions of the Soviet Union's economy after the war, er, particularly interesting.

Calling the 1960s or the early 1970s the golden age of capitalism seems a bit more than a stretch...

Were you alive then? I was.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #25 on: December 09, 2019, 04:00:11 PM »
I'm not familiar with Peter Diamond's suggestions etc. But I think people underestimate the income tax burden the wealthy pay.

To me, the math looks like this if we work with the Trump tax cuts...

Say some wealthy entrepreneur (it can be Romney if you want it to be) earns $10,000,000 a year.

If she or he operates as a sole proprietor, partner in a partnership or shareholder in an S corporation, under the new tax law he pays a 37% tax rate on 80% of her or his income. So roughly a 30% rate.

And then she or he may also pay that 3.8% Obamacare tax, so you're up potentially to roughly 33% or 34%.

If the entrepreneur operates her or his operation through a regular "C" corporation, the math works a little differently. You start with the same $10,000,000. On that income, under new tax law, the corporation pays the first tax, a 21% corporate income tax that means $2,100,000 of tax. Then, when "Romney" or whoever takes the remaining $7,900,000 of dividends, he pays a 20% qualified dividends tax rate and for sure the full 3.8% Obamacare tax. Roughly that combined 23.8%-ish rate adds up to another $1,900,000... leaving $6,000,000 of the original $10,000,000.

To me, then, if you look at all the taxes under the "C" corporation scenario--so Romney or Buffet--it's essentially a 40% federal tax rate.

So, the rate isn't 15%. I don't know why people say it is. I assume no malice. Only incomplete knowledge.

According to Romney his tax rate was "at least" 13%:

https://www.washingtonpost.com/politics/romney-says-he-paid-at-least-13-percent-in-taxes-for-past-10-years/2012/08/16/bf4b5944-e7be-11e1-8487-64e4b2a79ba8_story.html

But one year may have been has high as 14.1% according to his tax returns: 

https://www.washingtonpost.com/politics/decision2012/romney-earned-nearly-14-million-in-2011-paid-141-percent-tax-rate-campaign-says/2012/09/21/e62e5096-0417-11e2-91e7-2962c74e7738_story.html

SeattleCPA

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Re: Capitalism, mercantilism and the gold standard.
« Reply #26 on: December 09, 2019, 05:14:45 PM »
I'm not familiar with Peter Diamond's suggestions etc. But I think people underestimate the income tax burden the wealthy pay.

To me, the math looks like this if we work with the Trump tax cuts...

Say some wealthy entrepreneur (it can be Romney if you want it to be) earns $10,000,000 a year.

If she or he operates as a sole proprietor, partner in a partnership or shareholder in an S corporation, under the new tax law he pays a 37% tax rate on 80% of her or his income. So roughly a 30% rate.

And then she or he may also pay that 3.8% Obamacare tax, so you're up potentially to roughly 33% or 34%.

If the entrepreneur operates her or his operation through a regular "C" corporation, the math works a little differently. You start with the same $10,000,000. On that income, under new tax law, the corporation pays the first tax, a 21% corporate income tax that means $2,100,000 of tax. Then, when "Romney" or whoever takes the remaining $7,900,000 of dividends, he pays a 20% qualified dividends tax rate and for sure the full 3.8% Obamacare tax. Roughly that combined 23.8%-ish rate adds up to another $1,900,000... leaving $6,000,000 of the original $10,000,000.

To me, then, if you look at all the taxes under the "C" corporation scenario--so Romney or Buffet--it's essentially a 40% federal tax rate.

So, the rate isn't 15%. I don't know why people say it is. I assume no malice. Only incomplete knowledge.

According to Romney his tax rate was "at least" 13%:

https://www.washingtonpost.com/politics/romney-says-he-paid-at-least-13-percent-in-taxes-for-past-10-years/2012/08/16/bf4b5944-e7be-11e1-8487-64e4b2a79ba8_story.html

But one year may have been has high as 14.1% according to his tax returns: 

https://www.washingtonpost.com/politics/decision2012/romney-earned-nearly-14-million-in-2011-paid-141-percent-tax-rate-campaign-says/2012/09/21/e62e5096-0417-11e2-91e7-2962c74e7738_story.html

I think now we're working from different definitions. There is no 14% tax rate... as surely people know. Further, you can't just look at the individual tax rate because someone like he or Warren Buffet will have their business pay income taxes before the money flows through to them.

People get confused about this all the time. And they decide they want to pay that low rate like Romney or Buffet. And then you walk them through the numbers and they realize, "oh shoot... he doesn't really save taxes by operating via a "C" corp, does he?"

Since we're now at this point of the conversation, it might be useful for people to identify the average tax rate (expressed as a percent of total income I guess to follow what Romney and the Washington Post did) the average American pays. I'll send a free copy of any book I've written to first person who gets a reasonably close answer.

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #27 on: December 09, 2019, 07:17:23 PM »
I'm not familiar with Peter Diamond's suggestions etc. But I think people underestimate the income tax burden the wealthy pay.

To me, the math looks like this if we work with the Trump tax cuts...

Say some wealthy entrepreneur (it can be Romney if you want it to be) earns $10,000,000 a year.

If she or he operates as a sole proprietor, partner in a partnership or shareholder in an S corporation, under the new tax law he pays a 37% tax rate on 80% of her or his income. So roughly a 30% rate.

And then she or he may also pay that 3.8% Obamacare tax, so you're up potentially to roughly 33% or 34%.

If the entrepreneur operates her or his operation through a regular "C" corporation, the math works a little differently. You start with the same $10,000,000. On that income, under new tax law, the corporation pays the first tax, a 21% corporate income tax that means $2,100,000 of tax. Then, when "Romney" or whoever takes the remaining $7,900,000 of dividends, he pays a 20% qualified dividends tax rate and for sure the full 3.8% Obamacare tax. Roughly that combined 23.8%-ish rate adds up to another $1,900,000... leaving $6,000,000 of the original $10,000,000.

To me, then, if you look at all the taxes under the "C" corporation scenario--so Romney or Buffet--it's essentially a 40% federal tax rate.

So, the rate isn't 15%. I don't know why people say it is. I assume no malice. Only incomplete knowledge.

According to Romney his tax rate was "at least" 13%:

https://www.washingtonpost.com/politics/romney-says-he-paid-at-least-13-percent-in-taxes-for-past-10-years/2012/08/16/bf4b5944-e7be-11e1-8487-64e4b2a79ba8_story.html

But one year may have been has high as 14.1% according to his tax returns: 

https://www.washingtonpost.com/politics/decision2012/romney-earned-nearly-14-million-in-2011-paid-141-percent-tax-rate-campaign-says/2012/09/21/e62e5096-0417-11e2-91e7-2962c74e7738_story.html

I think now we're working from different definitions. There is no 14% tax rate... as surely people know. Further, you can't just look at the individual tax rate because someone like he or Warren Buffet will have their business pay income taxes before the money flows through to them.

People get confused about this all the time. And they decide they want to pay that low rate like Romney or Buffet. And then you walk them through the numbers and they realize, "oh shoot... he doesn't really save taxes by operating via a "C" corp, does he?"

Since we're now at this point of the conversation, it might be useful for people to identify the average tax rate (expressed as a percent of total income I guess to follow what Romney and the Washington Post did) the average American pays. I'll send a free copy of any book I've written to first person who gets a reasonably close answer.

Yes, your "definition" and explanation is only technically correct.

People don't "have to" operate as s-corp/c-corp or whatever. In the "one person" examples you have used, they can always choose to operate as "sole proprietorship", realize all the income as a human being, and pay individual income taxes. The corporate taxes they pay that way are not a reasonable counter for any income tax argument. They may gain liability protection, tax sheltering and what not in that fashion. That's fine - up to a point - I guess. But that corporate taxation is NOT what should be compared with income taxes on earned income.

People "choose to" operate with these opaque structures because there is some economic benefit to be had that way. The specific schemes used are quite complicated. Some examples in the MNC corporation context: https://www.bu.edu/bulawreview/files/2014/03/FISHER.pdf...

But then who am I, a code monkey, to educate you on these things, a CPA?

Further data from IRS: https://www.irs.gov/statistics/soi-tax-stats-individual-statistical-tables-by-tax-rate-and-income-percentile.

Download the excel sheet for tax years 2001-2019 titled "Selected Descending Cumulative Percentiles of Returns Based on Income Size Using the Definition of AGI for Each Year, Table 1" (direct link: https://www.irs.gov/pub/irs-soi/17in01etr.xls).

Note that the "Average tax rate percentage" goes up from the bottom of the pyramid till about "Top 0.1 percent" and then starts decreasing?

If the tax system was progressive, then the top 0.001% should be paying a higher tax rate than the top 3%, not lower.

And this is just the top of the iceberg. The real egregious violators are the ilk of Romney/Trump and gang - who can control entire corporations, with their offshore shelters and all, not your run-of-the-mill doctor who barely scrapes by into the top 0.01%.

Any specific reason they should get to freeload?
« Last Edit: December 09, 2019, 07:19:43 PM by ctuser1 »

SeattleCPA

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Re: Capitalism, mercantilism and the gold standard.
« Reply #28 on: December 10, 2019, 06:47:04 AM »
But then who am I, a code monkey, to educate you on these things, a CPA?

Okay... and I'm out of this thread...

However, for the benefit of anyone else who wants to understand rather than emote, imagine this scenario. You own ten percent of a  business that makes $100,000. You can be taxed in three ways:

Firm operates as partnership and you pay individual income taxes on your $10,000. That rate runs from 0% to 37% on the full $10,000.

Firm operates as S corporation and you pay individual income taxes on your $10,000. Again, that rate runs from 0% to 37% on the full $10,000.

Firm operates as C corporation and first corp pays 21% or $2100 in corporate taxes on the $10,000. Then you pay from 0% to 20% qualified dividends tax rate and possibly a 3.8% net investment income tax rate on the leftover $7900.

If you're a business owner or an investor or a CPA advising clients, you look at the total tax burden. You don't pretend the person operating as a C corporation pays a lower tax.

BTW because I won't be reading this thread, I sadly need to withdraw my offer of a free book to person who calculates the tax rate the average taxpayer pays. That info, for anyone interested, is fairly easy to calculate using the stats available at the IRS website.

« Last Edit: December 10, 2019, 07:00:04 AM by SeattleCPA »

Paul990

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Re: Capitalism, mercantilism and the gold standard.
« Reply #29 on: December 10, 2019, 08:55:16 AM »
@ bwall, it was a good idea to open this thread. This topic doesn't fit 100% in the Precious Metals thread.

My point here is that the gold standard, like the Model T Ford automobile, served a good (great?) purpose and had it's day in the sun but society has now moved on to bigger and better things.



This is what you call bigger and better things.

Please note that this is the US dollar, the hardest fiat currency of the 20th century.
The average fiat currency did much worse than that.
Bigger and better than gold?

This was and is a catastrophe for savers and in general for those (I'm not talking only about US residents but worldwide) who don't participate in the financial markets.
You say that unlike gold-based currencies fiat currencies bring growth, because they allow central banks to implement growth-oriented monetary policies.
But until now, fiat currencies seems to bring growth especially, if not exclusively, to those who hold assets.
It's not a coincidence that the wealth inequality started to increase when the gold standard was abandoned



Quote
When you buy an asset and you incur debt, inflation makes you rich because it wipes out the value of the money you borrowed and now you’re left with the real asset that you purchased.
But who gets wiped out? The savers.
Who are the savers? The average guy who’s got a 401K or a pension. He’s got an annuity. He’s got cash value in life insurance. He’s got bonds. He’s got some savings — he’s getting wiped out.

And so the people who levered up to buy assets, which are generally richer people, have gotten richer, and the people who haven’t done that, who aren’t as sophisticated, don’t have the incomes or the assets to do that, you know, they’re just trying to save their money.
Well, they’re getting eviscerated.


But my point is another. Actually a question.
Along with the expansion of fiat money supply there is expansion of debt, both public and private.



This is the USA but I think that was a worldwide phenomenon.
I don't understand the relation between fiat money creation and debt increase.
Monetazing debt is not the normal way for the central banks to create fiat money.
So, why increasing fiat currency supply increases debt levels?

talltexan

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Re: Capitalism, mercantilism and the gold standard.
« Reply #30 on: December 10, 2019, 12:40:24 PM »
@ bwall, it was a good idea to open this thread. This topic doesn't fit 100% in the Precious Metals thread.

My point here is that the gold standard, like the Model T Ford automobile, served a good (great?) purpose and had it's day in the sun but society has now moved on to bigger and better things.



This is what you call bigger and better things.

Please note that this is the US dollar, the hardest fiat currency of the 20th century.
The average fiat currency did much worse than that.
Bigger and better than gold?

This was and is a catastrophe for savers and in general for those (I'm not talking only about US residents but worldwide) who don't participate in the financial markets.
You say that unlike gold-based currencies fiat currencies bring growth, because they allow central banks to implement growth-oriented monetary policies.
But until now, fiat currencies seems to bring growth especially, if not exclusively, to those who hold assets.
It's not a coincidence that the wealth inequality started to increase when the gold standard was abandoned



Quote
When you buy an asset and you incur debt, inflation makes you rich because it wipes out the value of the money you borrowed and now you’re left with the real asset that you purchased.
But who gets wiped out? The savers.
Who are the savers? The average guy who’s got a 401K or a pension. He’s got an annuity. He’s got cash value in life insurance. He’s got bonds. He’s got some savings — he’s getting wiped out.

And so the people who levered up to buy assets, which are generally richer people, have gotten richer, and the people who haven’t done that, who aren’t as sophisticated, don’t have the incomes or the assets to do that, you know, they’re just trying to save their money.
Well, they’re getting eviscerated.


But my point is another. Actually a question.
Along with the expansion of fiat money supply there is expansion of debt, both public and private.



This is the USA but I think that was a worldwide phenomenon.
I don't understand the relation between fiat money creation and debt increase.
Monetazing debt is not the normal way for the central banks to create fiat money.
So, why increasing fiat currency supply increases debt levels?

Yes, the dollar buys less, but when you look at the lifestyle of modern retirees, it seems so much better than in 1970's. It's not reasonable to look at units of account, but instead to add up houses, cars, access to the materials they need...and if you do that, you see that we have a better standard of living today.

Wrenchturner

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Re: Capitalism, mercantilism and the gold standard.
« Reply #31 on: December 10, 2019, 05:47:28 PM »
I guess I'll address the dogpile:

Bonds are supposed to price interest rates, but since the demand for bonds is being artificially supported by central bankers, the freely established price of interest is not being established.  This lever is being leaned on at an increasing rate(the graph I posted.  Edit: eventually this graph will not continue to steepen and also function.  Diminishing returns at best).  This is also allowing interest rates to remain artificially low, which is keeping us in a cycle that is "too big to fail".  This idea(too big to fail) is very dangerous since everything in an economy should be allowed to fail when it is broken, otherwise it becomes parasitic.  Parasitism can lead to death spirals if it becomes systemic.  It is also why our economy is intended to be modular enough so that, for instance, if a few banks become insolvent due to bad risk assessment, we can suffer the losses and move on.  An ounce of prevention, etc.

Put another way:

"The price of money is called the rate of interest which is the most consequential price in capitalism. When you suppress or manhandle the interest rate you are destroying information, forcing people to do business in the dark." —Jim Grant

So yes, our economy was better than a mercantile deflationary one, but the lack of recursion and price discovery of interest is causing our current monetary system to head in a single direction, which is compromising the system. This makes it somewhat comparable to a deflationary one, where people continue to remain wealthy since they own assets, regardless of quality.  Not unlike people staying rich by hoarding gold in a deflationary system.

I heard a colleague, a few years ago, make a passionate argument once. It made a lot of sense to me - so let me repeat what I heard.

Price of "money", "capital", "equity" are all very important and related concepts. But it is short-sighted to claim that that they are "the most consequential price in capitalism". Rather, the price of "labor" is!!

Broken capital markets lead to inefficient resource allocation. Broken labor markets lead to rising inequality, social unrest and general breakdown of society. "Inefficient resource allocation" vs. "social breakdown" makes the relative importance an easy one.

Capital is simply not that important in the 21st century where the most profitable industries are surprisingly capital-light.
 
My discussion with the aforementioned colleague was in the context of the broken COF curves (COF=Cost of Funding) in the banking context (our models weren't built for frequent negative slopes in these curves, and simulations based on them started producing nonsensical garbage).

The crux of his argument was that the labor market was broken due to one-two punch since about 1980s. The culprits were the takeover of world markets by the champions of Crony Capitalism (i.e. Milton Friedman fans), and demographic headwind in the advanced economies from a few years later. This is causing rising inequality, lack of social mobility etc.

The "capital-and-money-market" issues are simply the downstream symptoms from there..

Adam Smith, and later Marx over-emphasized the importance of the "cost of labor". So much so that early measures of "intrinsic value" centered around the cost of labor, and Marx even designed his entire economic paradigm around it.
 
OTOH, Milton Friedman and gang over-emphasized the importance of "capital".

The most efficient economic frontier probably lies somewhere in between!

You are worrying about a sniffle when the underlying cancer rages undetected by the so-called "conservatives" that are currently in control everywhere.

I wouldn't say I'm worrying about a sniffle, but you do bring up valid points.  Productivity output as a factor of wages has been multiplying for a long time as well, and that is concerning.  I'm not well versed enough to navigate this area in an argument.  The price of labor, however, seems to be dictated by how much wage one needs to be incentivized to work a particular job, it's more bottom-up than something like interest rates.  Kind of like high house prices--they get elevated because they are bid up, and wages have been bid down.  Maybe it could be argued that this is good for inflation, I'm not sure.

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #32 on: December 11, 2019, 08:37:55 AM »
But then who am I, a code monkey, to educate you on these things, a CPA?

Okay... and I'm out of this thread...

However, for the benefit of anyone else who wants to understand rather than emote, imagine this scenario. You own ten percent of a  business that makes $100,000. You can be taxed in three ways:
....

1. Your technical expertise in tax policy is NOT what I am questioning.
2. The example you gave is not relevant to how Romney/Trump et al commit tax abuses and freeload. I have given pointers from IRS data indicating it exists, AND position papers detailing how it is done.

I'd however, ask anyone with open mind to step back a bit and ponder a bit on a wider topic, away from intricacies of tax law:

I think the problem is with the broader economic setup that reduces efficiency and puts a spanner in the wheels for the Free and Efficient Markets.

Why?

Does that business use workers?

Would you agree that in an efficient market, the compensation of that worker would be the marginal extra income that worker can bring to the table?

Would you also agree that in the current economic setup, workers do NOT currently get to keep their marginal extra income? There are countless sets of data showing that business profitability has soared since the Milton-Friedman-takeover in 1980's, but the worker compensation has not!!

Do you support efficient markets? Free markets?

The "low tax rate" for the "owners of capital" compared to the "owners of labor" is just one symptom of a much bigger anti-free-and-efficient-markets takeover of our economy.

Your examples are reasonably okay (albeit not relevant to the real tax abuses committed by the billionaires), as long as you assume that the entire profit of the business is for the "owner of the capital" to keep, using slave labor if necessary and no "free market" compensation is necessary to suppliers of labor.

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #33 on: December 11, 2019, 08:42:37 AM »
I wouldn't say I'm worrying about a sniffle, but you do bring up valid points.  Productivity output as a factor of wages has been multiplying for a long time as well, and that is concerning.  I'm not well versed enough to navigate this area in an argument.  The price of labor, however, seems to be dictated by how much wage one needs to be incentivized to work a particular job, it's more bottom-up than something like interest rates.  Kind of like high house prices--they get elevated because they are bid up, and wages have been bid down.  Maybe it could be argued that this is good for inflation, I'm not sure.

In an efficient market the bidding process will set the price of labor to be equal to it's marginal impact on profitability.

We know profitability has soared but labor price has not, since 1980s. This coincides very neatly with the time since when Reagan set his anti-free-and-efficient-market policies in effect that prioritized capital above all other economic inputs.

Any bets whether all the union busting and all other pro-capital-but-anti-free-market efforts had some effect on why labor and capital diverged?

(fair disclosure: I don't like unions and could never imagine working in a job that is unionized, but let's focus on the broader economic topic , not my personal likes/dislikes)

Wrenchturner

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Re: Capitalism, mercantilism and the gold standard.
« Reply #34 on: December 11, 2019, 11:27:27 AM »
I wouldn't say I'm worrying about a sniffle, but you do bring up valid points.  Productivity output as a factor of wages has been multiplying for a long time as well, and that is concerning.  I'm not well versed enough to navigate this area in an argument.  The price of labor, however, seems to be dictated by how much wage one needs to be incentivized to work a particular job, it's more bottom-up than something like interest rates.  Kind of like high house prices--they get elevated because they are bid up, and wages have been bid down.  Maybe it could be argued that this is good for inflation, I'm not sure.

In an efficient market the bidding process will set the price of labor to be equal to it's marginal impact on profitability.

We know profitability has soared but labor price has not, since 1980s. This coincides very neatly with the time since when Reagan set his anti-free-and-efficient-market policies in effect that prioritized capital above all other economic inputs.

Any bets whether all the union busting and all other pro-capital-but-anti-free-market efforts had some effect on why labor and capital diverged?

(fair disclosure: I don't like unions and could never imagine working in a job that is unionized, but let's focus on the broader economic topic , not my personal likes/dislikes)

My only explanation for the divergence other than union busting is increased debt, sustained desperation by employees, and enough added value from innovation to help keep the wheels on.  The average worker seemed to sustain an increasing standard of living since ww2 despite the problems mentioned in this thread.

Paul990

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Re: Capitalism, mercantilism and the gold standard.
« Reply #35 on: December 12, 2019, 02:42:39 AM »
Yes, the dollar buys less, but when you look at the lifestyle of modern retirees, it seems so much better than in 1970's. It's not reasonable to look at units of account, but instead to add up houses, cars, access to the materials they need...and if you do that, you see that we have a better standard of living today.
@talltexan,
how much of that better standard of living is financed with debt?
There is a difference between a debt free standard of living increase, and a standard of living increase financed through debt.
The difference between the two kinds of standard of living increase is the day of reckoning, at least when your debt level grows up exponentially.

When you compare gold standard with fiat standard, as we are doing in this thread, when we wonder which one of them is better in order to increase standards of living, you can't neglect the factor debt, if debt levels are influenced by fiat currency supply.


You see that after abandoning the gold standard not only fiat currency supply but also debt levels started to expand considerably




There is a positive correlation between increase of fiat quantity and increase of debt quantity.
That's why I wonder whether there is not only correlation but causation, i.e. whether increasing fiat currency supply leads to an increase of debt levels.
« Last Edit: December 12, 2019, 03:02:35 AM by Paul990 »

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #36 on: December 12, 2019, 05:06:25 AM »
Yes, the dollar buys less, but when you look at the lifestyle of modern retirees, it seems so much better than in 1970's. It's not reasonable to look at units of account, but instead to add up houses, cars, access to the materials they need...and if you do that, you see that we have a better standard of living today.
@talltexan,
how much of that better standard of living is financed with debt?
There is a difference between a debt free standard of living increase, and a standard of living increase financed through debt.
The difference between the two kinds of standard of living increase is the day of reckoning, at least when your debt level grows up exponentially.

When you compare gold standard with fiat standard, as we are doing in this thread, when we wonder which one of them is better in order to increase standards of living, you can't neglect the factor debt, if debt levels are influenced by fiat currency supply.


You see that after abandoning the gold standard not only fiat currency supply but also debt levels started to expand considerably




There is a positive correlation between increase of fiat quantity and increase of debt quantity.
That's why I wonder whether there is not only correlation but causation, i.e. whether increasing fiat currency supply leads to an increase of debt levels.

The chart you provided is not meaningful.

Public Debt as a % of GDP:
https://upload.wikimedia.org/wikipedia/commons/e/e1/Public_debt_percent_of_GDP.pdf

Gold standard has no direct link with debt levels.

How can I say that with an almost meteoric rise in the absolute debt levels?

Well - these time series are "compounding variables", just like any graph of the stock market, GDP or almost any other interesting economic time-series, so any plot of them on a scalar/linear graph is utterly meaningless. To make them meaningful, you have to plot them on a logarithmic graph. As soon as you do that, they stop being interesting.

The "Public Debt as a % of GDP" that I linked above is not an exponential entity, rather it is a ratio of two exponential ones. So a linear graph of *that* is still meaningful and useful.

Any website/book/any-other-entity-claiming-authority that uses these "time series on a scalar graph" trick as a major component of their argument does not deserve to be taken seriously.

« Last Edit: December 12, 2019, 07:26:48 AM by ctuser1 »

talltexan

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Re: Capitalism, mercantilism and the gold standard.
« Reply #37 on: December 12, 2019, 07:34:49 AM »
I think @ctuser1 nails it.

The private debts that have arisen today have done so primarily in an environment with very low interest rates.

But if you look to the middle third of the 20th century, you will see very high government debts and very high inflation. This period isn't the historical outlier your graphs make it appear to be.

Paul990

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Re: Capitalism, mercantilism and the gold standard.
« Reply #38 on: January 06, 2020, 03:43:47 AM »
Gold standard has no direct link with debt levels.
That literally true, but the message that you want to convey with that line is wrong : )
Gold standard has no direct link but an indirect one with debt levels, namely through money supply.

Gold standard has a direct link with money supply --> Money supply has a direct link with debt levels --> Gold standard has an indirect link with debt levels.

Look:



There is a positive correlation between money supply growth and public and corporate debt growth.
Why?

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #39 on: January 06, 2020, 11:47:11 AM »
There is a positive correlation between money supply growth and public and corporate debt growth.
Why?

I am not sure there is a sure-shot way to know for sure if there is a causation that you imply.

However, I think it is far more likely that the real cause of the debt expansion is because of demographics than gold standard - more people chasing "safe" yield vs less people using those funds to do something productive -> cheap Cost of Funding -> frivolous use of funding by zombie corporations.

Had you had gold standard, that imbalance would have shown up slightly differently perhaps.

AFAIK - both your guess and mine are equally impossible to prove..

However, it *is* known and established by long lines of economic research that gold standard execerbates economic crisis (like it did in great depression).

celerystalks

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Re: Capitalism, mercantilism and the gold standard.
« Reply #40 on: January 15, 2020, 06:46:31 PM »
Gold has been a store of wealth for thousands of years.  This has not changed with the modern use of fiat currency.  A little bit in a portfolio is probably a good thing as a diversifier since gold functions like a currency that no government has the power to debase.  It does its own thing independent of equities or debt.

Also here us some more food for thought

https://www.constitution.org/mon/greenspan_gold.htm

talltexan

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Re: Capitalism, mercantilism and the gold standard.
« Reply #41 on: January 17, 2020, 07:08:06 AM »
Thank you for sharing this piece. It is interesting to contemplate Greenspan's attacks on the Fed, written thirty years before he was basically (and incorrectly) hailed as having ended the business cycle by running that same institution. In fact, Greenspan's actions as Chair of the FRB--such as cutting reserve requirements from 4% to 0.25%--seem rather at odds with the writing presented here. He must have learned a thing or two about money and credit after he wrote this piece.

But I think it's important to treat the writing apart from the author: it certainly helps to explain the connection many libertarians between maintaining the gold standard and dismantling the welfare state.

celerystalks

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Re: Capitalism, mercantilism and the gold standard.
« Reply #42 on: January 17, 2020, 10:55:19 AM »
Thank you for sharing this piece. It is interesting to contemplate Greenspan's attacks on the Fed, written thirty years before he was basically (and incorrectly) hailed as having ended the business cycle by running that same institution. In fact, Greenspan's actions as Chair of the FRB--such as cutting reserve requirements from 4% to 0.25%--seem rather at odds with the writing presented here. He must have learned a thing or two about money and credit after he wrote this piece.

But I think it's important to treat the writing apart from the author: it certainly helps to explain the connection many libertarians between maintaining the gold standard and dismantling the welfare state.

Yes, I think it is an interesting perspective, too.  Greenspan even admits  in his 2007 memoir Age of Turbulence that his views on certain economic policies shifted as time went by.

One the way to look at it is that Greenspans actions at the FED kept the value of gold relatively stable mostly between 300-400/oz through much of his tenure at the Fed.  Perhaps his knowledge of the gold standard helped influenced his decision making in such a way that he also stabilized price of gold, thereby effectively providing a gold standard.  Or perhaps it's just a coincidence...

Sometimes I wonder if modern economic policy is definitively more enlighten or whether it is another example of the shifting Overton Window on policy ideas.

talltexan

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Re: Capitalism, mercantilism and the gold standard.
« Reply #43 on: January 20, 2020, 12:35:08 PM »
I don't think stabilizing the price of gold while having high inflation in the prices of other assets is the kind of stability gold standard advocates are promising us.

Greenspan's economy from 1989-2006 grew substantially, but also had a truly catastrophic bear market from 2000-2002, as well as an unsustainable housing bubble; both of these happened while Greenspan dramatically increased the money supply and decreased regulatory burdens on banking in a variety of ways. If your goal is to argue that something from that period justifies re-imposing the gold standard, what was it? And did Greenspan do the thing you want, or was he actually doing the opposite of the thing you want?

celerystalks

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Re: Capitalism, mercantilism and the gold standard.
« Reply #44 on: January 20, 2020, 06:03:19 PM »
I don't think stabilizing the price of gold while having high inflation in the prices of other assets is the kind of stability gold standard advocates are promising us.

Greenspan's economy from 1989-2006 grew substantially, but also had a truly catastrophic bear market from 2000-2002, as well as an unsustainable housing bubble; both of these happened while Greenspan dramatically increased the money supply and decreased regulatory burdens on banking in a variety of ways.If your goal is to argue that something from that period justifies re-imposing the gold standard, what was it? And did Greenspan do the thing you want, or was he actually doing the opposite of the thing you want?


A gold standard would have put natural limits on money and credit expansion.  Lack of these natural limits contributed to and exacerbated these events, in my opinion.  With a gold standard, it would not have been left up to humans to draw the line and determine when to take away the punch bowl.


talltexan

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Re: Capitalism, mercantilism and the gold standard.
« Reply #45 on: January 22, 2020, 01:19:29 PM »
It sure sounds like you're arguing Greenspan didn't follow his own advice.

vand

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Re: Capitalism, mercantilism and the gold standard.
« Reply #46 on: January 23, 2020, 03:38:45 AM »
Haven't really commented on this thread until now because the standard of analysis is frankly poor and demonstrates the fundamental misunderstanding of what money really is.

The question is not really if you believe an elastic or inelastic supply is better suited to serving the purposes of a monetary system. It is if you believe that the market does a better job of pricing the money markets than do central planners.

Money is a market itself. The price should be determined by the supply and demand of its individual players, just like anything else, in order to most efficiently allocate scarce resources. That is the whole point of having a discussion about economics - resources are always finite, whereas human needs and wants can be boundless.

It's easily demonstratable that the less government involvment in an economy there is the more efficiently it operates. Governments by and large stay out of areas like technology and consumer goods etc and the market does an excellent job of delivering quality goods and services at market clearing prices. Governments decide they want to get involved in healthcare and education and look at the results in those sectors.

Governments like to get involved in the money markets. What does this do? It destroys the most important pricepoint in the economy, the price of money, ie interest rate. The rate of interest is not simply some random number, it plays a defining role in aligning demand and production of goods and services across time. Austrians refer to this as Time Preference theory and it is a core tennent of their model.

It states that the balance between savers and borrowers in setting price of money is also a pricing signal for producers because it relect how much of their income they wish to consume in the present vs the future. 

If more people wish to save (ie defer consumption) vs people who wish to borrow (ie increase consumption) this pushes market rates of interest lower. Lower interest rates today make capital investment easier and are a market signal to producers to invest in more long term project, which are most sensitive to long term interest rates (think mortgage). This is the intertemporal coordination mechanism of the interest rate; it aligns present and future consumption with present and future production capacity.

What do we have today? The very opposite of this. We have an economy that is dependent on over-stimulated consumption, where interest rates should be high to reflect the complete lack of savers vs borrowers, yet the Fed has instead pushed interest rates to record lows, indicating a completely opposite thing to producers. The result is that we have a multitude of malinvestments festering in the economy which create no real value and instead simply use up the pool of finite resources.

I've always like this Reader's Digest version from Tom Woods: https://www.youtube.com/watch?v=9a-eUKjnDfM
« Last Edit: January 23, 2020, 03:40:39 AM by vand »

talltexan

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Re: Capitalism, mercantilism and the gold standard.
« Reply #47 on: January 23, 2020, 07:29:56 AM »
At the macro level, why do we need more saving? We have the most retirees we've ever had, their dissaving should be offsetting saving by young people to a greater extent than at any prior moment?

In my own personal life, obviously, I'm here, so I'm saving for retirement, although there's certainly room for improvement.

celerystalks

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Re: Capitalism, mercantilism and the gold standard.
« Reply #48 on: January 23, 2020, 07:38:06 PM »
At the macro level, why do we need more saving? We have the most retirees we've ever had, their dissaving should be offsetting saving by young people to a greater extent than at any prior moment?

In my own personal life, obviously, I'm here, so I'm saving for retirement, although there's certainly room for improvement.

Long term savings, in the modern era must be put into investments to preserve value, since holding cash will loose purchasing power to inflation over time.  But this results in an increase in supply of capital to businesses or governments and lowers the cost of capital inputs to the economy.

Or the other option is that the money is spent on consumption, which increases demand for outputs of the economy..

But there is no way to take purchasing power off the table while preserving its value for future use.  Enter gold.

Having a gold standard, or just owning a bit of gold, provides a third option.. stockpiling a value dense, durable, easily convertible, but low utility asset.  This provides the benefit where an individual does not want to consume more with their excess capital, but the prospective future return on capital is low because of too much easy money or credit in the system, so they don't want to invest it either. 

celerystalks

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Re: Capitalism, mercantilism and the gold standard.
« Reply #49 on: January 23, 2020, 07:50:29 PM »
It sure sounds like you're arguing Greenspan didn't follow his own advice.

Greenspan did not make all of the decisions for the fed. As chairman he could set the agenda and presided over FOMC meetings but rate decisions were put to a vote.