Author Topic: Capitalism, mercantilism and the gold standard.  (Read 7365 times)

Wrenchturner

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Re: Capitalism, mercantilism and the gold standard.
« Reply #50 on: January 23, 2020, 09:54:37 PM »
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

Thank you for this post.  It seems that sovereign debt(perhaps among others) is the elephant in the room with regard to this analysis; the fox is guarding the henhouse when it comes to rates.  Governments don't want to reduce spending or increase interest payments!

I find it rich that here in Canada, and perhaps elsewhere, our central bank governor will celebrate the liquidity created by lowered rates in the macro sense, when the general economy is considered, but will then disparage the private debt load willingly taken on by our citizens, as if the large lever of interest rates somehow allows for a disconnection of these two things.

A bloomberg reporter recently had the gusto to call our bank governor the "candyman", outlining this very contradiction.  This governor(Poloz) is stepping down in a few months and I can't help but think he is covering his ass in doing so.

If you'd care to indulge--where do you see this situation headed?  Thoughts on the repo market?

vand

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Re: Capitalism, mercantilism and the gold standard.
« Reply #51 on: January 27, 2020, 05:10:29 AM »
Thank you for this post.  It seems that sovereign debt(perhaps among others) is the elephant in the room with regard to this analysis; the fox is guarding the henhouse when it comes to rates.  Governments don't want to reduce spending or increase interest payments!

I find it rich that here in Canada, and perhaps elsewhere, our central bank governor will celebrate the liquidity created by lowered rates in the macro sense, when the general economy is considered, but will then disparage the private debt load willingly taken on by our citizens, as if the large lever of interest rates somehow allows for a disconnection of these two things.

A bloomberg reporter recently had the gusto to call our bank governor the "candyman", outlining this very contradiction.  This governor(Poloz) is stepping down in a few months and I can't help but think he is covering his ass in doing so.

If you'd care to indulge--where do you see this situation headed?  Thoughts on the repo market?

Yes, I agree that sovereign debt is a problem that will eventually lead to monetary reset. When that will be is anyone's idea. The current petrodollar system is now very long in the tooth and increasingy dysfunctional, but it has been able to last so long because it allows the current incumbents to kick the can down the road ever further without actually fixing any of the underlying issues, and the US likes to protect its interests by invading any country that threatens to bypass the system and do business in their own currencies.

Regarding the repo market, there is no doubt that the Fed has begun a new phase of quantitative easing. It won't be long before all of the previous tightening cycle has been fully reversed and the Fed's balance sheet is at new highs. QE was supposed to be temporary; the Fed sold in on the assumption that they would be able to return the balance sheet to pre-crisis level, but nobody thinks that will ever happen now. As Friedman says, "there is nothing so permanent as a temporary government programme." How long before the Fed is patching up other parts of the money markets? The financial crisis started in US subprime but that was just the tip of the iceberg , basically revealing contamination riddled all through the system.

Remember the US government is currently spending and increasing its debt at a rate that has never been seen an expansionary phase except during WWII. Here in the UK our new, supposedly conservative government has pledged to increase spending significantly. As the scars of the last financial crisis begin to fade, the narrative around the world is to abandon fiscal prudence and appease populist agendas. Debt is rising much faster than growth rates and incomes, from already near-record levels. It's difficult to see how it can't all end very badly.

These are paradigm-level changes that we are talking about, and maybe it won't even happen within my lifetime, but I would not be confident enough to say that I think it won't happen in my lifetime, and therefore I do the prudent thing which is to own some gold and be well diversified in my investments, while living a simplied life well within my means. 

L.A.S.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #52 on: January 27, 2020, 03:39:23 PM »
We quickly forget that global fiat currency is only 49 years old as this is when Bretton Woods ended.

What came before? gold.  What will come after? probably gold.

Wrenchturner

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Re: Capitalism, mercantilism and the gold standard.
« Reply #53 on: January 27, 2020, 05:05:14 PM »
We quickly forget that global fiat currency is only 49 years old as this is when Bretton Woods ended.

What came before? gold.  What will come after? probably gold.

I'm skeptical of gold.  Perhaps bitcoin?  I'm skeptical of that too.

I'm not sure the global economy can survive a monetary reset!

L.A.S.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #54 on: January 27, 2020, 05:08:03 PM »
We quickly forget that global fiat currency is only 49 years old as this is when Bretton Woods ended.

What came before? gold.  What will come after? probably gold.

I'm skeptical of gold.  Perhaps bitcoin?  I'm skeptical of that too.

I'm not sure the global economy can survive a monetary reset!

It won’t be Bitcoin. Of this I am certain. Bitcoin has already failed as a currency.

Wrenchturner

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Re: Capitalism, mercantilism and the gold standard.
« Reply #55 on: January 27, 2020, 05:14:23 PM »
We quickly forget that global fiat currency is only 49 years old as this is when Bretton Woods ended.

What came before? gold.  What will come after? probably gold.

I'm skeptical of gold.  Perhaps bitcoin?  I'm skeptical of that too.

I'm not sure the global economy can survive a monetary reset!

It won’t be Bitcoin. Of this I am certain. Bitcoin has already failed as a currency.

So has gold!

L.A.S.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #56 on: January 27, 2020, 05:46:08 PM »
We quickly forget that global fiat currency is only 49 years old as this is when Bretton Woods ended.

What came before? gold.  What will come after? probably gold.

I'm skeptical of gold.  Perhaps bitcoin?  I'm skeptical of that too.

I'm not sure the global economy can survive a monetary reset!

It won’t be Bitcoin. Of this I am certain. Bitcoin has already failed as a currency.

So has gold!

Care to elaborate? Gold has been used as money for thousands of years. Gold still exists and has value. Gold can still be used around the world in economic exchanges.  It is just currently driven out of circulation due to Gresham's law. Since credit and fiat are less valuable forms of money, they are used instead of gold, thereby driving it out of circulation.

Wrenchturner

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Re: Capitalism, mercantilism and the gold standard.
« Reply #57 on: January 27, 2020, 06:02:47 PM »
We quickly forget that global fiat currency is only 49 years old as this is when Bretton Woods ended.

What came before? gold.  What will come after? probably gold.

I'm skeptical of gold.  Perhaps bitcoin?  I'm skeptical of that too.

I'm not sure the global economy can survive a monetary reset!

It won’t be Bitcoin. Of this I am certain. Bitcoin has already failed as a currency.

So has gold!

Care to elaborate? Gold has been used as money for thousands of years. Gold still exists and has value. Gold can still be used around the world in economic exchanges.  It is just currently driven out of circulation due to Gresham's law. Since credit and fiat are less valuable forms of money, they are used instead of gold, thereby driving it out of circulation.

It's my understanding that gold fundamentally causes deflation since velocity of money tends towards zero.  It was also the case(as I recall) that the USD was getting too strong under a gold standard and made the export market problematic.


L.A.S.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #58 on: January 27, 2020, 07:30:47 PM »
We quickly forget that global fiat currency is only 49 years old as this is when Bretton Woods ended.

What came before? gold.  What will come after? probably gold.

I'm skeptical of gold.  Perhaps bitcoin?  I'm skeptical of that too.

I'm not sure the global economy can survive a monetary reset!

It won’t be Bitcoin. Of this I am certain. Bitcoin has already failed as a currency.

So has gold!

Care to elaborate? Gold has been used as money for thousands of years. Gold still exists and has value. Gold can still be used around the world in economic exchanges.  It is just currently driven out of circulation due to Gresham's law. Since credit and fiat are less valuable forms of money, they are used instead of gold, thereby driving it out of circulation.

It's my understanding that gold fundamentally causes deflation since velocity of money tends towards zero.  It was also the case(as I recall) that the USD was getting too strong under a gold standard and made the export market problematic.

Gold does not fundamentally cause deflation.  People will always need things and will use money to buy them.  If in gold they will have to use gold.  Gold does help balance present and future consumption though.  What most people observe when they see the price of gold increase, which some argue is a form of deflation, is actually changes in the value, and expectation of value, of the fiat dollar.  But if money is a limited commodity then this puts natural limits on the money supply and credit.  An example against inflation would be a car. In 1925 an economy Model T cost $300. At 20.67 per ozt of gold this is 14.5 ozt of gold.  This amount of gold today is worth about $21,000 which is about what an equivalent entry level car costs.  The quality of the modern car is vastly improved, but I don't see how pricing in terms of gold resulted in deflation.

Also, saying the dollar is "too strong" and that it made export markets problematic, contains many value judgements about how things ought to be.  Perhaps if the dollar is getting strong and exports are curtailed this is a valid market signal that should be heeded instead of being ignored. Either imports should increase to balance trade, or the economy should slow down and perhaps even have a recession and rejuvenate. But to today's academic economist, strengthening currency is viewed as a valid reason to manipulate a countries currency in order to juice exports and goose the economy.  Could this be responsible for some of the global unrest around the world?

Telecaster

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Re: Capitalism, mercantilism and the gold standard.
« Reply #59 on: January 27, 2020, 07:41:10 PM »

Gold does not fundamentally cause deflation.  People will always need things and will use money to buy them.  If in gold they will have to use gold.  Gold does help balance present and future consumption though.  What most people observe when they see the price of gold increase, which some argue is a form of deflation, is actually changes in the value, and expectation of value, of the fiat dollar.  But if money is a limited commodity then this puts natural limits on the money supply and credit.  An example against inflation would be a car. In 1925 an economy Model T cost $300. At 20.67 per ozt of gold this is 14.5 ozt of gold.  This amount of gold today is worth about $21,000 which is about what an equivalent entry level car costs.  The quality of the modern car is vastly improved, but I don't see how pricing in terms of gold resulted in deflation.

The gold and silver standards have cause both inflation and deflation.  If the money supply (on the gold standard) can't keep up with the economy you get deflation, vice versa for inflation. 

L.A.S.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #60 on: January 28, 2020, 05:53:50 AM »

Gold does not fundamentally cause deflation.  People will always need things and will use money to buy them.  If in gold they will have to use gold.  Gold does help balance present and future consumption though.  What most people observe when they see the price of gold increase, which some argue is a form of deflation, is actually changes in the value, and expectation of value, of the fiat dollar.  But if money is a limited commodity then this puts natural limits on the money supply and credit.  An example against inflation would be a car. In 1925 an economy Model T cost $300. At 20.67 per ozt of gold this is 14.5 ozt of gold.  This amount of gold today is worth about $21,000 which is about what an equivalent entry level car costs.  The quality of the modern car is vastly improved, but I don't see how pricing in terms of gold resulted in deflation.

The gold and silver standards have cause both inflation and deflation.  If the money supply (on the gold standard) can't keep up with the economy you get deflation, vice versa for inflation.

This is true. We have also had periods of both inflation and deflation under a fiat money system. But wrenchturner's original comment is that gold fundamentally causes deflation. I don't think this is the case.

Further, I don't think it is true that even if a period of deflation is experienced that this is necessarily a bad thing.  Perhaps it is a natural phase that is healthy for the economy as a whole to keep prices stable over time.  If currency is never allowed to go through periods of appreciation (i.e. price deflation) then we have an economic system tilted towards inflation. And, where money is no longer a good medium for long term savings, it has to be spent/consumed or lent/invested. But it cannot just be saved.

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #61 on: January 28, 2020, 06:37:02 AM »
And, where money is no longer a good medium for long term savings, it has to be spent/consumed or lent/invested. But it cannot just be saved.

That is a desirable feature, not a bug!

Economic velocity depends on making sure money is NOT a good medium for long term savings.
(Don't confuse this with money being an excellent short term savings medium. That is desirable and probably required for economic health.)

Money is inherently representative of the holder's trust in some sort of grantor (a government in case of fiat, a bigger fool in case of gold) to honor it's value at some future point of time. The existence of that value the grantor can grant is dependent on economic health, which requires economic velocity.

I'm not a big fan of the bigger fool being the arbiter of value. Thank god neither are most economists and governments.

talltexan

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Re: Capitalism, mercantilism and the gold standard.
« Reply #62 on: January 28, 2020, 09:57:08 AM »
Just a reminder that the ten-year yield has fallen below 1.7%.

People sure don't seem worried that the US government will fail to pay them back any time in the next decade.

L.A.S.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #63 on: January 28, 2020, 10:46:41 AM »
Just a reminder that the ten-year yield has fallen below 1.7%.

People sure don't seem worried that the US government will fail to pay them back any time in the next decade.

During the dot com bubble people thought that 30 was a reasonable P/E ratio for the S&P 500.

During the housing bubble people thought it was normal to borrow 95% of a home's purchase price and to use a loan which monthly payment they could only afford at the teaser rate.

People will overpay for anything if enough other people are doing it.

Perhaps people are overpaying for sovereign debt today?

Telecaster

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Re: Capitalism, mercantilism and the gold standard.
« Reply #64 on: January 28, 2020, 11:31:13 AM »
Further, I don't think it is true that even if a period of deflation is experienced that this is necessarily a bad thing.  Perhaps it is a natural phase that is healthy for the economy as a whole to keep prices stable over time.  If currency is never allowed to go through periods of appreciation (i.e. price deflation) then we have an economic system tilted towards inflation. And, where money is no longer a good medium for long term savings, it has to be spent/consumed or lent/invested. But it cannot just be saved.

Deflation is incredibly bad for the economy.   People become reluctant to spend money because things will just get cheaper, right?  Additionally, as prices fall businesses are forced to cut costs, which means cutting jobs.  This further reduces demand, putting additional downward pressure on prices, which means more job cuts... and five years later you are still in recession.   Not good. 

L.A.S.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #65 on: January 28, 2020, 11:37:45 AM »
Further, I don't think it is true that even if a period of deflation is experienced that this is necessarily a bad thing.  Perhaps it is a natural phase that is healthy for the economy as a whole to keep prices stable over time.  If currency is never allowed to go through periods of appreciation (i.e. price deflation) then we have an economic system tilted towards inflation. And, where money is no longer a good medium for long term savings, it has to be spent/consumed or lent/invested. But it cannot just be saved.

Deflation is incredibly bad for the economy.   People become reluctant to spend money because things will just get cheaper, right?  Additionally, as prices fall businesses are forced to cut costs, which means cutting jobs.  This further reduces demand, putting additional downward pressure on prices, which means more job cuts... and five years later you are still in recession.   Not good.

When has this happened due to having a gold standard?

Also, prices going down might be what is needed for economic correction. Eventually people will have to buy things, as they become cheaper this is more and more likely.  And if the economy is on a gold standard they will have to part with some gold.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #66 on: January 28, 2020, 01:11:06 PM »
When has this happened due to having a gold standard?

Also, prices going down might be what is needed for economic correction. Eventually people will have to buy things, as they become cheaper this is more and more likely.  And if the economy is on a gold standard they will have to part with some gold.

To be clear, I wasn't making the claim that the gold standard necessarily leads to deflation.  It can.  It can also lead it inflation. 

But since you asked here is one of many, many, examples of deflation caused by the gold or silver standard: 

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

Most gold proponents have the notion that gold standard somehow leads to price stability.  I do not understand how anyone could come to that conclusion.  It has never been true.

FWIW, throughout much of her history England (and parts of Europe as well) there general currency shortage due to lack of gold and silver.  What happened is that people would issue their own currency,  often in the form of tally sticks denominated in pounds, schillings, pence, etc.   The tally sticks weren't backed by any physical metal, or even by the government.  People just agreed the sticks were worth a pound (or whatever) and they'd circulate just like money.    And there has been a lot nuttier stuff than tally sticks used for money over the centuries as well.  Point is, you don't need gold to have money. 

L.A.S.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #67 on: January 28, 2020, 01:35:10 PM »
When has this happened due to having a gold standard?

Also, prices going down might be what is needed for economic correction. Eventually people will have to buy things, as they become cheaper this is more and more likely.  And if the economy is on a gold standard they will have to part with some gold.

To be clear, I wasn't making the claim that the gold standard necessarily leads to deflation.  It can.  It can also lead it inflation. 

But since you asked here is one of many, many, examples of deflation caused by the gold or silver standard: 

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

Most gold proponents have the notion that gold standard somehow leads to price stability.  I do not understand how anyone could come to that conclusion.  It has never been true.

FWIW, throughout much of her history England (and parts of Europe as well) there general currency shortage due to lack of gold and silver.  What happened is that people would issue their own currency,  often in the form of tally sticks denominated in pounds, schillings, pence, etc.   The tally sticks weren't backed by any physical metal, or even by the government.  People just agreed the sticks were worth a pound (or whatever) and they'd circulate just like money.    And there has been a lot nuttier stuff than tally sticks used for money over the centuries as well.  Point is, you don't need gold to have money.

Hmm... seems like there were lots of causes.  I didn't see that the gold standard specifically caused it..

And further it seems that the return to the gold standard helped with the recovery. From the wikipedia article in the Recovey section:

Quote
In the United States, the National Bureau of Economic Analysis dates the recession through March 1879. In January 1879, the United States returned to the gold standard which it had abandoned during the Civil War; according to economist Rendigs Fels, the gold standard put a floor to the deflation, and this was further boosted by especially good agricultural production in 1879.[47]

Telecaster

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Re: Capitalism, mercantilism and the gold standard.
« Reply #68 on: January 28, 2020, 08:16:42 PM »
Hmm... seems like there were lots of causes.  I didn't see that the gold standard specifically caused it..

Read the first three sentences under "Causes."  I'll get you started:

In 1873, during a decline in the value of silver—exacerbated by the end of the German Empire's production of thaler coins—the US government passed the Coinage Act of 1873 in April.

ChpBstrd

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Re: Capitalism, mercantilism and the gold standard.
« Reply #69 on: January 29, 2020, 11:07:59 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.

This is why we have a disinflationary environment today. The elderly population and the rich population do not cycle through their money the way a working class family does. They hoard money in investments. As the amount of money controlled by these demographics grows, less and less of the monetary base is actually active in the economy, being traded for things. Because inflation and deflation are functions of the velocity of money, not the monetary base, having trillions of dollars parked on the sidelines does not affect prices. It is as if those funds don’t exist in the real marketplace.

As an analogue, many tons of gold and silver are sitting at the bottom of the ocean in shipwrecks. Because they are at the bottom of the ocean, and not being traded in a market, their existence does not affect the market supply, demand, or price. How could they? These tons of metal essentially don’t exist unless salvaged and brought to market. Even when salvaged, if the salvager hoards the gold personally, it still doesn’t make it to the market and therefore doesn’t exist as far as the market is concerned. Supply and demand only function in the market, not under mattresses. Investments can take cash out of circulation.

Someone operating under a classical or Austrian paradigm will look at the situation in the US today, or Japan in 1991 (or, as it was, the US in ‘91), and declare that rising inflation is imminent because their model of inflation is based on supply rather than velocity. They see the (nominal and context free) chart of money supply and debt going up, but they lack a theoretical concept (like velocity of money) to link the supply of cash to demand for goods and services. Thus, a $1,000 increase in the supply money is assumed to lead directly to a $1,000 change in the market for goods and services, instead of indirectly by having a possible effect on velocity. Without a concept of velocity, a rising supply of money is always seen as inflationary, when the correct answer might be disinflationary if the velocity is slowing despite the change. This is how classical / Austrian predictions have been wrong for so many decades. What actually happened was money supply creation has barely kept pace with the increasing velocity of money. A potentially inflationary phenomenon is almost entirely cancelled out by a definitely deflationary one.

So yes, demographics and wealth inequality matter to the inflation rate because they affect velocity.

Also, one should never get one’s medical advice or economic education from YouTube or other social media (including here). This should go without saying, but here we are.

L.A.S.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #70 on: January 29, 2020, 01:33:53 PM »
I think a lot of the comments here look through the wrong lens.

Gold ownership is not productive. Gold proponents will give you that.. Its value derives from its status as a fundamentally limited luxury item.  It has held this status for thousands of years and will likely hold it into the future. As described in the Greenspan essay, this makes it a natural candidate for use as commodity money since human desires for luxury items are unlimited. 

Now the benefit of holding gold in a portfolio derives from its ability to act like a currency that governments cannot easily manipulate.  Because of this, it acts as money historically did: as a store of wealth.  It is a third option between consumption and investment.

It is useful to consider that it doesn't take much gold to provide its benefits.  In a $1,000,000 portfolio 3% or $30k is represented by about 20 1-oz gold coins (one roll/tube of gold eagles) and 5% or $50k is represented by about 30-35 1-oz gold coins. And thats it.  These coins do not need to be bought all at once... In fact I would suggest spreading out the purchases and building the position slowly. No network of computers needs to be furiously hashing to maintain them.  And then once they are owned the holder doesn't need to do anything except for keep quite about it. But, most likely as the portfolio grows, the holder may add a few coins to the stack or may sell some in the event cash is needed or to rebalance.

The modern economy based in fiat currency and credit thereof has a dark side, which is that at any time the market for financial assets or ability to access and convert them to cash can seize, be wildly inaccurate, or disappear.  Credit cards are canceled. Banks freeze assets (properly or improperly). Frauds are uncovered. Financial assets get stolen or go missing. During these times it is nice to have something else one could sell in a pinch.  What would you do if you were in a Madoff, or MF Global, or the flash crash, or auction rate securities freeze situation? What if Vanguard or Fidelity got hacked? What if trading in bond funds froze because of a rush to the exits at a time when you and everyone else needs cash, and so stocks get spillover selling and are clobbered; do you sell your stocks too?  What if the U.S. defaults and all hell breaks loose? What if the inflation rate runs of 10% per year as it did some years during the 70s? Panics happened in the past to, but with a gold standard were always backstopped by people being able to get their hands on gold.

A small position in physical gold provides an extraordinarily simple solution to weathering these problems and enhances ones ability to ride out more different types of storms. 

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #71 on: January 29, 2020, 01:42:58 PM »
The modern economy based in fiat currency and credit thereof has a dark side, which is that at any time the market for financial assets or ability to access and convert them to cash can seize, be wildly inaccurate, or disappear.

The total loss risk for gold is significantly higher than properly diversified paper or fiat assets.

I had posted something on this exact point in another thread.

Quote
Also recommended viewing for the goldbugs:

https://www.youtube.com/watch?v=45NygYIj_D0

Huh!! I am mad that I wasted 20+ minutes on that youtube video.

The entire argument of the speaker is that financial assets suffer frequent "total loss" probability, and Gold does not!!

Presumably he has never lived in a world where ship-wrecks, lost treasures, armed robbery etc happen!!

Physical gold has MUCH higher probability of total loss. It is an asset that almost never passes through generations intact - simply because of the physical aspect of it. How many old families have you heard of WITHOUT it's own "lost treasure" story?

This is what I find so infuriating with the crank conspiracy theorists. For three fourths of the video he makes entirely reasonable points. And then suddenly springs the big bombshell that Gold, in his make-believe world, is akin to "seating in the parking lot and not playing", where it IS the most high-stakes-gambit-of-all-in-the-long-run with the highest and most frequent chance of total loss!!

They make you waste so much time before they spring such nonsense!!!

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Re: Capitalism, mercantilism and the gold standard.
« Reply #72 on: January 29, 2020, 01:53:46 PM »
The modern economy based in fiat currency and credit thereof has a dark side, which is that at any time the market for financial assets or ability to access and convert them to cash can seize, be wildly inaccurate, or disappear.

The total loss risk for gold is significantly higher than properly diversified paper or fiat assets.

I had posted something on this exact point in another thread.

Quote
Also recommended viewing for the goldbugs:

https://www.youtube.com/watch?v=45NygYIj_D0

Huh!! I am mad that I wasted 20+ minutes on that youtube video.

The entire argument of the speaker is that financial assets suffer frequent "total loss" probability, and Gold does not!!

Presumably he has never lived in a world where ship-wrecks, lost treasures, armed robbery etc happen!!

Physical gold has MUCH higher probability of total loss. It is an asset that almost never passes through generations intact - simply because of the physical aspect of it. How many old families have you heard of WITHOUT it's own "lost treasure" story?

This is what I find so infuriating with the crank conspiracy theorists. For three fourths of the video he makes entirely reasonable points. And then suddenly springs the big bombshell that Gold, in his make-believe world, is akin to "seating in the parking lot and not playing", where it IS the most high-stakes-gambit-of-all-in-the-long-run with the highest and most frequent chance of total loss!!

They make you waste so much time before they spring such nonsense!!!

This isn't the argument I am making, but apparently it is the argument you would rather address.  Did someone call for a straw man?

  I am not making a total loss argument.  This argument is one in which the prices of everything go to zero. Unlikely. Instead, I am making a prices "go away" argument, its about liquidity.  What if for a period of time a holder of financial assets doesn't have access to them or cannot convert them in the market to cash? Madoff, MF Global, auction rate securities?  At times similar to these and at other times it is nice to have something else that can be sold, i.e. gold.

Gold provides a little bit of hedge against prices of all assets going down; and it provides a great deal of protection when markets are not functioning and prices disappear.

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #73 on: January 29, 2020, 06:52:59 PM »
I am not making a total loss argument.  This argument is one in which the prices of everything go to zero. Unlikely. Instead, I am making a prices "go away" argument, its about liquidity.  What if for a period of time a holder of financial assets doesn't have access to them or cannot convert them in the market to cash? Madoff, MF Global, auction rate securities?  At times similar to these and at other times it is nice to have something else that can be sold, i.e. gold.

Gold provides a little bit of hedge against prices of all assets going down; and it provides a great deal of protection when markets are not functioning and prices disappear.

I keep an emergency fund for 6-month expenses split across a credit union where I have my mortgage, a bank where I get my paycheck deposited, and fidelity where I have have a part of my investment assets.

If your point is that we should beef up emergency money from 6 months to 2 years, and hedge it across multiple banks and CUs (to hedge against one of events like  madoff/MF Global etc), that is not such a terrible idea. It's something I may do myself *after* I am fat-FI. I just don't see what advantage gold gives you for that.

If you are rather speculating a situation where ALL banks are insolvent and there is zero liquidity in the system, then the federal government has presumably ceased to exist. Fiat money is backed by the faith into the federal government, if that money (including digital money in the banks) disappear, so does the government. If this situation is not resolved within hours, the entire financial system will seize up. If it is the US going through this - the entire world financial system will be dead before you cross the weekend.

(Interesting tidbit - I read somewhere, don't remember where, that a 1-day disaster recovery delay in restoring banking systems after a major disaster that kills *all* electronic systems can cause a few hundred years of work for the court systems to sort through all the default events and their snowball effects. Needless to say, the concept of money as we know today will likely disappear in such a situation, and it will likely take down the concept of property rights along with it.)

So net net, there is no "prices go away" or system-wide "liquidity" issue without a "total loss". Once banking systems seize up, your supermarkets will go empty withing days, and your tap will run out of water in a couple of weeks, or maybe 4.

You *were* making a total loss argument, possibly without realizing, when you were invoking the seizing up of the the markets and the pricing mechanism.

I've written disaster recovery plans for banks and financial institutions in a professional capacity. So the above is not just empty blather. Banks design critical systems with utmost degree of redundancy possible, as well as an extreme degree of disaster recovery tolerance, for this reason. Walk into any bank and every 1 GB of "system of record" data creates 40-100 GB of direct physical backups, and backups of backups and so on. Last time I was a consultant working on a disaster recovery plan for a banking system, the partner gave me a hard time for not including a section of how that plan will work in case of a Carrington Event (https://en.wikipedia.org/wiki/Solar_storm_of_1859) that has destroyed all production data centers.
« Last Edit: January 29, 2020, 07:03:33 PM by ctuser1 »

vand

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Re: Capitalism, mercantilism and the gold standard.
« Reply #74 on: January 30, 2020, 03:30:59 AM »
Just as an aside, the supply of gold is not fixed.. it expands at the rate of about 2%pa.Despite all the changes in technology that should make it easier to get it out of the ground this hasn't really changed since the industrial revolution.

https://static.bullionstar.com/blogs/uploads/2018/08/Annualgoldproduction004.png


No spikes, no dips...

If you are planning for the next 100 year, as opposed to the next election cycle, why would you not want something this boring, consistent and predictable to form the backbone of your monetary system?

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #75 on: January 30, 2020, 04:46:34 AM »
If you are planning for the next 100 year, as opposed to the next election cycle, why would you not want something this boring, consistent and predictable to form the backbone of your monetary system?
Economic cycles.
Boom and bust.

vand

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Re: Capitalism, mercantilism and the gold standard.
« Reply #76 on: January 30, 2020, 07:47:20 AM »
Economic cycles.
Boom and bust.

Which are exaggerated by an elastic money supply that allow the festering accumulation of malinvestments by the systematic increases in debt.

There will always been economic cycles. Fiat money  is able to smooth over the shorter term downcycles but this stores up the excesses which makes the long term cycle more extreme.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #77 on: January 30, 2020, 08:14:19 AM »

If you are rather speculating a situation where ALL banks are insolvent and there is zero liquidity in the system, then the federal government has presumably ceased to exist. Fiat money is backed by the faith into the federal government, if that money (including digital money in the banks) disappear, so does the government. If this situation is not resolved within hours, the entire financial system will seize up. If it is the US going through this - the entire world financial system will be dead before you cross the weekend.

No.  This isn't the argument I was making.  Yet another straw man.  I agree that it is unlikely for everything to collapse.  Nevertheless, even in your straw man you haven't shown how gold would not be helpful.

Instead the argument I am making and continue to make is that it can be helpful to have something else to sell when markets are not functioning properly or an individual does not have access to assets or credit that they normally do.  This can happen for any number of reasons:

1.) Spouse dies, and the surviving spouse has credit cards cut-off and all or part of a their bank balance frozen temporarily (depending how the account is titled).  Investment accounts cannot be easily accessed.
2.) Market for a type of asset that is supposed to be "cash" or "cash-like" seizes.  I.e. auction rate securities. 
3.) Client funds are stolen or simply never really existed.  In the case of MF Gobal, client funds were invaded.  And Madoff was a ponzi scheme.
4.) Bank receives a court order seizing assets.  The order is improper and can be contested.  Or it is applied to the wrong account.  But bank applies order until it receives another court order correcting mistake.
5.) Someone erroneously reports to SSA that a person has died.
6.) Market for liquid asset seizes or becomes wildly inaccurate.  Mortgage backed securities, so folks who needed cash from investments were required to sell other assets where the markets still functioned.
7.) War or civil unrest breaks out and people (although liikely not in the U.S.) need to leave with whatever they can carry, right now (yes, this still happens around the world).

This is not an exclusive list.   I'm sure there are many other circumstances where there could be temporary disruption or interference with a person accessing their assets or in a market for a type of assets. Further most of these problems are solvable and the individual will eventually have access to their assets. But that doesn't help someone who has been frozen out of the "system" for the time being.

Quote
You *were* making a total loss argument, possibly without realizing, when you were invoking the seizing up of the the markets and the pricing mechanism.

No I wasn't. Total loss means the value goes to zero and there is no hope of recovery.  This is not the argument I am making.

Quote
I've written disaster recovery plans for banks and financial institutions in a professional capacity. So the above is not just empty blather. Banks design critical systems with utmost degree of redundancy possible, as well as an extreme degree of disaster recovery tolerance, for this reason. Walk into any bank and every 1 GB of "system of record" data creates 40-100 GB of direct physical backups, and backups of backups and so on. Last time I was a consultant working on a disaster recovery plan for a banking system, the partner gave me a hard time for not including a section of how that plan will work in case of a Carrington Event (https://en.wikipedia.org/wiki/Solar_storm_of_1859) that has destroyed all production data centers.

Thank you for this.  I'm glad the powers that be have thought of everything and employed talented individuals like yourself to make sure there will never be another financial crisis again. 

@ctuser1, look, no one is going to tell you that you are wrong for avoiding gold.  Do whatever you like.  I'm sure you will be fine.  But, you are participating in a thread that explores the nexus between gold, capitalism, and mercantilism.  So there are going to be pro-gold comments.  Instead of dismissing them all as laughably out-dated or trying to stuff other peoples mouths with cooky straw man arguments perhaps you could take a step back and look at the modern economic climate.

Fiat currency removes complete settlement from purchases that are made in cash.  Fiat cash is just a promise.  Under a gold standard, it was linked to promise to deliver gold.  Since 1971 that has no longer been the case.  When a seller is  paid cash through a credit transaction, this is obviously use of a promise.  When you pay by check this is your bank taking their promise to you and promising it to someone else; and your promise balance is deducted accordingly.  When you hand someone paper cash, this carries a promise that they can use it to pay debts ("good for all debts...").  And that person can take the paper cash and pay forward the promises.  In all of these transactions there needs to be either an implicit or explicit underwriting by a third party, be it the government that requires fiat cash is accepted for settlement of debts, or a third party credit card processor who extends credit and agrees to accept transfer of promises from a bank later, or a bank which maintains a balance which is a promise to the account holder.  Financial assets too are promises.  Either promises to deliver a certain number of dollars on a fixed schedule (bonds) or a promise to divide profits (stocks).

 And it is this way for in every fiat currency system...  But, the system works until it doesn't.  When people get it in their heads, for whatever reason, that a person or group of people are not entitled to the promises they have normally been afforded, then either an entire portion of the system will grind to a halt.  Or in the case of an individual, the individual will be froze out of the system and might not have an ability to participate in economic transactions, be it selling financial assets they own, or withdrawing cash from a bank, use using a credit card to buy gas, or paying by check.

Gold does not needing a third party to implicitly underwrite transactions settled in gold.  The parties to the transaction can agree themselves on the quality, fineness, and amount of gold to be delivered at a future date and can easily verify that this has been delivered.  And because of this, an amount of gold can be very easily sold and converted to fiat currency at any point in the future.  I agree it's not the prettiest solution.  (And just to be sure, I do not think people are going to start walking around with leather coin purses holding their gold wealth in the future.) But when the going gets tough, it is nice to be able to reach into a safe and have the ability to sell something of value at a reasonable price to make it through a rough patch.



« Last Edit: January 30, 2020, 08:17:03 AM by celerystalks »

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #78 on: January 30, 2020, 10:24:55 AM »
Economic cycles.
Boom and bust.

Which are exaggerated by an elastic money supply that allow the festering accumulation of malinvestments by the systematic increases in debt.

There will always been economic cycles. Fiat money  is able to smooth over the shorter term downcycles but this stores up the excesses which makes the long term cycle more extreme.

Any empirical evidence from thousands of years of it's history that the long term cycle with gold standard was milder due to gold standard?

Roman empire had gold standard. When the long term worst case happened, and Rome fell, the roman empire lost 90% of it's population. Would they have lost 91% without gold standard? 100%? What is the "more extreme" long term cycle that you speak of?

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Re: Capitalism, mercantilism and the gold standard.
« Reply #79 on: January 30, 2020, 11:10:27 AM »
Hmm... seems like there were lots of causes.  I didn't see that the gold standard specifically caused it..

Read the first three sentences under "Causes."  I'll get you started:

In 1873, during a decline in the value of silver—exacerbated by the end of the German Empire's production of thaler coins—the US government passed the Coinage Act of 1873 in April.

silver and gold are different. Silver is very volatile.

vand

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Re: Capitalism, mercantilism and the gold standard.
« Reply #80 on: January 30, 2020, 12:26:51 PM »
Economic cycles.
Boom and bust.

Which are exaggerated by an elastic money supply that allow the festering accumulation of malinvestments by the systematic increases in debt.

There will always been economic cycles. Fiat money  is able to smooth over the shorter term downcycles but this stores up the excesses which makes the long term cycle more extreme.

Any empirical evidence from thousands of years of it's history that the long term cycle with gold standard was milder due to gold standard?

Roman empire had gold standard. When the long term worst case happened, and Rome fell, the roman empire lost 90% of it's population. Would they have lost 91% without gold standard? 100%? What is the "more extreme" long term cycle that you speak of?

You cite history without actually having studied it. , Rome by all accounts operated on a gold/silver standard. It was their eventual bankruptcy due to countless miliatary expansion over the latter period of the Empire that eventually contributed to its downfall, which is also the period where the currency was continually debased, with the Denari being first clipped and then the silver content diluted almost to zero and replaced with base metals.




Do you see a link with fiat and war yet? Governments hate fiat because it constrains their spending. Whenever they needed to fund a war they would abandon the gold standard and not even pretend that it wasn't inflationary.
« Last Edit: January 30, 2020, 12:29:57 PM by vand »

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #81 on: January 30, 2020, 01:24:26 PM »
You cite history without actually having studied it. , Rome by all accounts operated on a gold/silver standard. It was their eventual bankruptcy due to countless miliatary expansion over the latter period of the Empire that eventually contributed to its downfall, which is also the period where the currency was continually debased, with the Denari being first clipped and then the silver content diluted almost to zero and replaced with base metals.

Do you see a link with fiat and war yet? Governments hate fiat because it constrains their spending. Whenever they needed to fund a war they would abandon the gold standard and not even pretend that it wasn't inflationary.

You claimed that "Fiat money  is able to smooth over the shorter term downcycles but this stores up the excesses which makes the long term cycle more extreme". Rome *had* credible gold/silver standard at one point of time. What benefit did that bring? Would anything have been actually worse if it followed fiat currency from the get go? Did that prevent it's fall (seems not)? Did it decrease the magnitude of the fall? Would their "long term cycle" have been more extreme than losing 90% of the population if they had never attempted gold standard?

There were thousands of years of history with gold standard, right? So there has to be periods and events that should clearly show the benefit of having that over the fiat regime we have since the last 5 decades. Isn't it?


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Re: Capitalism, mercantilism and the gold standard.
« Reply #82 on: January 30, 2020, 04:05:04 PM »
You cite history without actually having studied it. , Rome by all accounts operated on a gold/silver standard. It was their eventual bankruptcy due to countless miliatary expansion over the latter period of the Empire that eventually contributed to its downfall, which is also the period where the currency was continually debased, with the Denari being first clipped and then the silver content diluted almost to zero and replaced with base metals.

Do you see a link with fiat and war yet? Governments hate fiat because it constrains their spending. Whenever they needed to fund a war they would abandon the gold standard and not even pretend that it wasn't inflationary.

You claimed that "Fiat money  is able to smooth over the shorter term downcycles but this stores up the excesses which makes the long term cycle more extreme". Rome *had* credible gold/silver standard at one point of time. What benefit did that bring? Would anything have been actually worse if it followed fiat currency from the get go? Did that prevent it's fall (seems not)? Did it decrease the magnitude of the fall? Would their "long term cycle" have been more extreme than losing 90% of the population if they had never attempted gold standard?

There were thousands of years of history with gold standard, right? So there has to be periods and events that should clearly show the benefit of having that over the fiat regime we have since the last 5 decades. Isn't it?

I'm sorry I don't follow your logic here.

Shouldn't you be the one concerned that you are defending modern fiat currency with only five decades of questionable results as a monetary system.

In the past, whenever people have adhered to a gold standard it seemed to work. Sure there were cycles... periods of inflation, and periods of deflation. But this was just the economy at work balancing supply and demand, present and future. But, it was when people left the gold standard in the past that seemed to cause the most harm.

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #83 on: January 30, 2020, 04:29:18 PM »
In the past, whenever people have adhered to a gold standard it seemed to work. Sure there were cycles... periods of inflation, and periods of deflation. But this was just the economy at work balancing supply and demand, present and future. But, it was when people left the gold standard in the past that seemed to cause the most harm.

The cycles were worse and more frequent. Since leaving gold standard, they have become much milder and less frequent. Just google all the depressions in 1800's and all the way till the Great Depression - when US finally started to discuss moving away from gold standard.


>> it was when people left the gold standard in the past

This is tortured logic designed to fit a pre-ordained conclusion.

Why did people leave gold standard if that was the best option, even when doom awaited them? Perhaps the simplest explanation is that the alternative, of staying in gold standard, was worse? If this happened in one or two cases, all others succeeding with gold standard, then you could blame something external. When nobody succeeded with gold standard, then the problem is with gold standard itself, perhaps?

You are claiming we should re-try something that was tried for a few thousand years and NEVER succeeded.

vand

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Re: Capitalism, mercantilism and the gold standard.
« Reply #84 on: January 31, 2020, 05:15:31 AM »
You cite history without actually having studied it. , Rome by all accounts operated on a gold/silver standard. It was their eventual bankruptcy due to countless miliatary expansion over the latter period of the Empire that eventually contributed to its downfall, which is also the period where the currency was continually debased, with the Denari being first clipped and then the silver content diluted almost to zero and replaced with base metals.

Do you see a link with fiat and war yet? Governments hate fiat because it constrains their spending. Whenever they needed to fund a war they would abandon the gold standard and not even pretend that it wasn't inflationary.

You claimed that "Fiat money  is able to smooth over the shorter term downcycles but this stores up the excesses which makes the long term cycle more extreme". Rome *had* credible gold/silver standard at one point of time. What benefit did that bring? Would anything have been actually worse if it followed fiat currency from the get go? Did that prevent it's fall (seems not)? Did it decrease the magnitude of the fall? Would their "long term cycle" have been more extreme than losing 90% of the population if they had never attempted gold standard?

There were thousands of years of history with gold standard, right? So there has to be periods and events that should clearly show the benefit of having that over the fiat regime we have since the last 5 decades. Isn't it?

What on earth are you talking about? They didn't have fiat money back in ancient Rome, but they had the equivilent which was currency debasement by zinc and other common metals.

Do you bother studying history at all? The purity of the Denarius largely reflects the ascent of Rome as the dominant world power and its period of debasement can be seen to align with the Empire's crippling debt burden and eventual downfall. Roman society flourished upon a period of sound money and collapsed amid continual currency debasement.

You have got it the wrong way round; it is fiat currency that never succeeds. There have been literally thousands of different currencies used throughout world history and only a handful of them still survive, the oldest is the GBP which is merely a few centuries old, but even that was fixed to gold for most of its history. Gold itself by contrast has been considered money since the earliest records of trade and today it still fulfills the most important roles of money remarkably well.
« Last Edit: January 31, 2020, 05:21:27 AM by vand »

ctuser1

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Re: Capitalism, mercantilism and the gold standard.
« Reply #85 on: January 31, 2020, 05:41:28 AM »
What on earth are you talking about? They didn't have fiat money back in ancient Rome, but they had the equivilent which was currency debasement by zinc and other common metals.

Do you bother studying history at all? The purity of the Denarius largely reflects the ascent of Rome as the dominant world power and its period of debasement can be seen to align with the Empire's crippling debt burden and eventual downfall. Roman society flourished upon a period of sound money and collapsed amid continual currency debasement.

You have got it the wrong way round; it is fiat currency that never succeeds. There have been literally thousands of different currencies used throughout world history and only a handful of them still survive, the oldest is the GBP which is merely a few centuries old, but even that was fixed to gold for most of its history. Gold itself by contrast has been considered money since the earliest records of trade and today it still fulfills the most important roles of money remarkably well.

Well, history is not just a sequence of events. You’ll need to apply a little more critical thinking to understand what you are talking about.

So you claim purity of Denarius had a great correlation with the zenith of Pax Romana. Granted! No dispute with this data point.

How did it go *with gold standard* when things went bad? Were they *forced* to debase Denarius then? Were *everyone* who tried that forced to do the same?

Is there *any* example of a thousands of years old continuous space-faring civilization that succeeded with gold standard? Gold standard has been tried for thousands of years - so there should be a couple of them, right?

Or do you mean *ALL* of them failed???!!!

Did their fall somehow get cushioned because they had tried gold standard? Would their fall have been harder if they never tried gold standard at all??

See, logic isn’t hard. You just need to learn to apply yourself. I’m hopeful you’ll get there, eventually.
« Last Edit: January 31, 2020, 07:53:50 AM by ctuser1 »

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Re: Capitalism, mercantilism and the gold standard.
« Reply #86 on: January 31, 2020, 08:07:09 AM »
The fact that societies (e.g. Rome, Britain, the US) are eventually forced to give up a PM-based currency should raise questions.

If commodity based money must and will be abandoned when crisis strikes, how “sound” and eternal are such systems after all? What does it mean to live in a society whose economic system will collapse if certain mines run out, if certain trade lines are cut, or if total war erupts?

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Re: Capitalism, mercantilism and the gold standard.
« Reply #87 on: January 31, 2020, 11:29:11 AM »
How do you get any kind of price stability with gold?  The price of a loaf of bread swinging from 60mg of gold to about 120mg of gold in the space of 5 years seems like it would make it really hard to plan. 

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Re: Capitalism, mercantilism and the gold standard.
« Reply #88 on: January 31, 2020, 12:58:36 PM »
How do you get any kind of price stability with gold?  The price of a loaf of bread swinging from 60mg of gold to about 120mg of gold in the space of 5 years seems like it would make it really hard to plan.

The cost of bread doubles in five years? forgive me, but this could happen under any monetary system given that bread is produced primarily from an agricultural commodity, and so there is price volatility. I guess if margins are increasing for bread, then more people will bring bread to market.  Additionally,  if consumers can obtain another stable more effectively, then maybe the this will reduce demand for bread, and shift consumption to a more economical substitute.


dougules

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Re: Capitalism, mercantilism and the gold standard.
« Reply #89 on: January 31, 2020, 03:18:32 PM »
How do you get any kind of price stability with gold?  The price of a loaf of bread swinging from 60mg of gold to about 120mg of gold in the space of 5 years seems like it would make it really hard to plan.

The cost of bread doubles in five years? forgive me, but this could happen under any monetary system given that bread is produced primarily from an agricultural commodity, and so there is price volatility. I guess if margins are increasing for bread, then more people will bring bread to market.  Additionally,  if consumers can obtain another stable more effectively, then maybe the this will reduce demand for bread, and shift consumption to a more economical substitute.

I was just using bread as an example, although it does look like the price of bread in dollars been reasonably stable over the past couple of decades. Pick any item that has not had any factors driving any serious price volatility.  If you reprice it into mg of gold, it will have had a pretty wild price swing through the last couple decades.  The price swing had nothing to do with the item you were buying, but all about what you were buying it with. 

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Re: Capitalism, mercantilism and the gold standard.
« Reply #90 on: January 31, 2020, 09:51:40 PM »
How do you get any kind of price stability with gold?  The price of a loaf of bread swinging from 60mg of gold to about 120mg of gold in the space of 5 years seems like it would make it really hard to plan.

The cost of bread doubles in five years? forgive me, but this could happen under any monetary system given that bread is produced primarily from an agricultural commodity, and so there is price volatility. I guess if margins are increasing for bread, then more people will bring bread to market.  Additionally,  if consumers can obtain another stable more effectively, then maybe the this will reduce demand for bread, and shift consumption to a more economical substitute.

The issue is that if the dollar is fixed to gold then the price of bread is based primarily on fluctuations on the price of gold, and decoupled from the price of the underlying commodity.  This leads to wild price swings.  This is not theoretical.  This is what really happened under the gold standard.

Which raises the question:  What problem does the gold standard solve?  It doesn't prevent inflation.  It doesn't prevent deflation.  It most definitely does not provide any form of price stability. 

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Re: Capitalism, mercantilism and the gold standard.
« Reply #91 on: February 01, 2020, 06:06:11 AM »
How do you get any kind of price stability with gold?  The price of a loaf of bread swinging from 60mg of gold to about 120mg of gold in the space of 5 years seems like it would make it really hard to plan.

The cost of bread doubles in five years? forgive me, but this could happen under any monetary system given that bread is produced primarily from an agricultural commodity, and so there is price volatility. I guess if margins are increasing for bread, then more people will bring bread to market.  Additionally,  if consumers can obtain another stable more effectively, then maybe the this will reduce demand for bread, and shift consumption to a more economical substitute.

The issue is that if the dollar is fixed to gold then the price of bread is based primarily on fluctuations on the price of gold, and decoupled from the price of the underlying commodity.  This leads to wild price swings.  This is not theoretical.  This is what really happened under the gold standard.

Which raises the question:  What problem does the gold standard solve?  It doesn't prevent inflation.  It doesn't prevent deflation.  It most definitely does not provide any form of price stability.

Under a gold standard, the price of gold does not change. An amount of dollars is defined by a fixed amount of coined gold.  For example in the period just prior to 1933 in the US gold was set at one oz = $20.67.

ChpBstrd

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Re: Capitalism, mercantilism and the gold standard.
« Reply #92 on: February 01, 2020, 07:59:23 AM »
How do you get any kind of price stability with gold?  The price of a loaf of bread swinging from 60mg of gold to about 120mg of gold in the space of 5 years seems like it would make it really hard to plan.

The cost of bread doubles in five years? forgive me, but this could happen under any monetary system given that bread is produced primarily from an agricultural commodity, and so there is price volatility. I guess if margins are increasing for bread, then more people will bring bread to market.  Additionally,  if consumers can obtain another stable more effectively, then maybe the this will reduce demand for bread, and shift consumption to a more economical substitute.

The issue is that if the dollar is fixed to gold then the price of bread is based primarily on fluctuations on the price of gold, and decoupled from the price of the underlying commodity.  This leads to wild price swings.  This is not theoretical.  This is what really happened under the gold standard.

Which raises the question:  What problem does the gold standard solve?  It doesn't prevent inflation.  It doesn't prevent deflation.  It most definitely does not provide any form of price stability.

Under a gold standard, the price of gold does not change. An amount of dollars is defined by a fixed amount of coined gold.  For example in the period just prior to 1933 in the US gold was set at one oz = $20.67.
So the objective is to ensure people who invested in gold can always exchange them for a set number of dollars? All the other alleged benefits have been debunked.

L.A.S.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #93 on: February 01, 2020, 08:09:11 AM »
How do you get any kind of price stability with gold?  The price of a loaf of bread swinging from 60mg of gold to about 120mg of gold in the space of 5 years seems like it would make it really hard to plan.

The cost of bread doubles in five years? forgive me, but this could happen under any monetary system given that bread is produced primarily from an agricultural commodity, and so there is price volatility. I guess if margins are increasing for bread, then more people will bring bread to market.  Additionally,  if consumers can obtain another stable more effectively, then maybe the this will reduce demand for bread, and shift consumption to a more economical substitute.

The issue is that if the dollar is fixed to gold then the price of bread is based primarily on fluctuations on the price of gold, and decoupled from the price of the underlying commodity.  This leads to wild price swings.  This is not theoretical.  This is what really happened under the gold standard.

Which raises the question:  What problem does the gold standard solve?  It doesn't prevent inflation.  It doesn't prevent deflation.  It most definitely does not provide any form of price stability.

Under a gold standard, the price of gold does not change. An amount of dollars is defined by a fixed amount of coined gold.  For example in the period just prior to 1933 in the US gold was set at one oz = $20.67.
So the objective is to ensure people who invested in gold can always exchange them for a set number of dollars? All the other alleged benefits have been debunked.

except the benefits of gold haven't been debunked.

What you have here are a group of people expressing their preference for a fiat currency and have therefor chosen to assign the blame for past economic crises that occurred during a gold standard period on the gold standard, and gold, itself.  None of these allegations are proven. Perhaps some of them can't be because there were so many contributing factors--- i.e. fall of Rome.

Look.  fiat currency has certain benefits, immediate use, cash accounting, wide acceptance.  And gold has certain benefits, preservation of value, inability to be manipulated by governments, ability to be taken and accepted any where in the world after being exchanged into local currency. So, it makes sense to have some of each in a portfolio.

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Re: Capitalism, mercantilism and the gold standard.
« Reply #94 on: February 02, 2020, 02:09:33 AM »
So much utter idiocy being spouted on here. The point of commodity-based money is NOT to have stable prices. It is to have true market-determined prices. The price of bread can double or halve under gold, just as it can under any monetary system, and it is desirable that it does so because prices are the market's way of indicating excess profit or loss to dynamically reallocate capital to or from those areas. Under government-controlled monetary supply you have no idea if the price signals are correct or the result of interference - is overnight repo rate supposed to be 1%? or should it be 5%, or something else? Nobody knows because the Fed is intervening to supress true market price discovery. Market prices are the interaction of supply and demand - always have been, always will be. If market prices are being supressed, then somewhere in the economy there is an oversupply or undersupply of resources that could be better allocated elsewhere but is allowed to fester because of the actions of the central bank.

Not directly related to gold, but worth watching this interview from with Charlie Munger who touches upon some points discussed:
https://www.youtube.com/watch?v=RFxXl9eAWV4

In it he:
- acknowledges that there are limits to monetary stimulus and at some point you can have "too much"
- says that China increased its wealth by having a nation of poor people SAVE half their income (previous point about savings being the key to economic growth)

The ironic thing about people who follow the Keynesian model is that everything they acknowledge to increase wealth and prosperity on an individual level they think is reversed on a country-level. On this forum we all have high savings rates and eschew spending it on Lamborghinis and we recognise this behaviour is the key to growing our wealth, yet on a aggregate level they somehow end up making the opposite argument, that a country needs to live beyond its means to keep getting richer..

The Austrian model is far more consistent and sees the economy as simply the sum of all its individual players. You do not find any such contradictions when studying the Austrian model of economics; what works on an individual level works for on household level, firm level, municipal and national level. All human entities become richer when they produce more than they consume, and become poorer when they consume more than they produce.
« Last Edit: February 02, 2020, 02:53:11 AM by vand »

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Re: Capitalism, mercantilism and the gold standard.
« Reply #95 on: February 02, 2020, 09:32:57 AM »
So much utter idiocy being spouted on here. The point of commodity-based money is NOT to have stable prices. It is to have true market-determined prices. The price of bread can double or halve under gold, just as it can under any monetary system, and it is desirable that it does so because prices are the market's way of indicating excess profit or loss to dynamically reallocate capital to or from those areas. Under government-controlled monetary supply you have no idea if the price signals are correct or the result of interference - is overnight repo rate supposed to be 1%? or should it be 5%, or something else? Nobody knows because the Fed is intervening to supress true market price discovery. Market prices are the interaction of supply and demand - always have been, always will be. If market prices are being supressed, then somewhere in the economy there is an oversupply or undersupply of resources that could be better allocated elsewhere but is allowed to fester because of the actions of the central bank.

Not directly related to gold, but worth watching this interview from with Charlie Munger who touches upon some points discussed:
https://www.youtube.com/watch?v=RFxXl9eAWV4

In it he:
- acknowledges that there are limits to monetary stimulus and at some point you can have "too much"
- says that China increased its wealth by having a nation of poor people SAVE half their income (previous point about savings being the key to economic growth)

The ironic thing about people who follow the Keynesian model is that everything they acknowledge to increase wealth and prosperity on an individual level they think is reversed on a country-level. On this forum we all have high savings rates and eschew spending it on Lamborghinis and we recognise this behaviour is the key to growing our wealth, yet on a aggregate level they somehow end up making the opposite argument, that a country needs to live beyond its means to keep getting richer..

The Austrian model is far more consistent and sees the economy as simply the sum of all its individual players. You do not find any such contradictions when studying the Austrian model of economics; what works on an individual level works for on household level, firm level, municipal and national level. All human entities become richer when they produce more than they consume, and become poorer when they consume more than they produce.
Yes, the idiocy at display is indeed mind-boggling!!!

>>The Austrian model is far more consistent and sees the economy as simply the sum of all its individual players

Yay. If only real world is so linear. How dare non-linear processes - like supply and demand - intrude.

We'd would of course also ignore a few thousand years of results.

Ways to go for goldbugs.



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Re: Capitalism, mercantilism and the gold standard.
« Reply #96 on: February 02, 2020, 12:38:15 PM »
So much utter idiocy being spouted on here. The point of commodity-based money is NOT to have stable prices. It is to have true market-determined prices.

I agree with you on the first part.   You cannot have true market-determined prices and be on the gold standard because the price of stuff is based on part on the value of gold.  This is not theoretical.  There are only about a bazillion examples of this from history.  Notably the United States after the California gold rush.   

A secondary problem is that interest rates should equal inflation + risk.   That is decoupled on the gold standard because banks start to run short of convertible gold, they must raise interest rates to attract more gold.  Now interest rates are primarily based on the amount of gold, not based on risk or inflation based.  This causes obvious economic problems, namely slowing down the economy.  During slow economic times, people tend to horde gold, which drives interest rates higher, which slows down the economy, on and on.  Back when the US was on the gold standard or the bimetallic standard, it was common for recessions to last five or ten years.  An example is the Great Depression, when one third of banks failed, a period of strong deflation followed, yet interest rates remained relatively high which exacerbated the deflationary spiral. 

Another problem is the whole system requires banks, and countries for that matter, to play by the honor system and actually raise interest rates when gold reserves become low.  However, there is always some bank somewhere with inadequate reserves and fails.  Even a single bank failure can cause a cascading series of failures of what would be otherwise healthy banks.  Again, this is not hypothetical.  There many examples of this, notably the Panic of 1907 when a single brokerage house failed and sent the entire country into recession.

At this point gold bugs say something like "Yeah, but no inflation!"   And that's sort of true, while the US was on the gold standard long term inflation was pretty low (sorry for all the US centric examples, but they are the ones I am most failure with and are generally well documented).  Key phrase "long term."  Short term prices had wild fluctuations, both inflationary and deflationary, and as noted above some of these fluctuations send the country in recession.   Hence, recessions were more common back then, were deeper, and lasted longer.   No thanks. 


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Re: Capitalism, mercantilism and the gold standard.
« Reply #97 on: February 02, 2020, 12:58:14 PM »
except the benefits of gold haven't been debunked.

What you have here are a group of people expressing their preference for a fiat currency and have therefor chosen to assign the blame for past economic crises that occurred during a gold standard period on the gold standard, and gold, itself.  None of these allegations are proven. Perhaps some of them can't be because there were so many contributing factors--- i.e. fall of Rome.

Look.  fiat currency has certain benefits, immediate use, cash accounting, wide acceptance.  And gold has certain benefits, preservation of value, inability to be manipulated by governments, ability to be taken and accepted any where in the world after being exchanged into local currency. So, it makes sense to have some of each in a portfolio.

Seems like you are conflating two different concepts: the gold standard, and owning physical gold. 

You made the extraordinary claim that whenever the gold standard was used it worked out.  How about the example I just gave about of the Great Depression?  Banks failed, unemployment increased, yet interest rates remained high, which caused more unemployment, etc.  What ultimately happened is an ounce of gold was raised from about $20/oz to $35/oz and Americans were prohibited from owning physical gold to prevent hording.    How does that fit your definition of working out?  How about not being manipulated by the government?  That sure seems like manipulation to me. 

Question:  If the gold standard is so awesome, how come every country that has ever used it has subsequently abandoned it?  Maybe there are reasons for this. 

ChpBstrd

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Re: Capitalism, mercantilism and the gold standard.
« Reply #98 on: February 02, 2020, 07:38:58 PM »
If a commodity standard currency could deliver superior economic performance and end the inflation/disinflation cycle, imagine the opportunity for small developing economies. Argentina and Zimbabwe could become the next miracle markets. Hati and Honduras could become safe havens for assets - the new Switzerlands - just by deciding to constrain their monetary base and setting up an exchange desk. Why don’t they do it?

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Re: Capitalism, mercantilism and the gold standard.
« Reply #99 on: February 02, 2020, 07:39:28 PM »
except the benefits of gold haven't been debunked.

What you have here are a group of people expressing their preference for a fiat currency and have therefor chosen to assign the blame for past economic crises that occurred during a gold standard period on the gold standard, and gold, itself.  None of these allegations are proven. Perhaps some of them can't be because there were so many contributing factors--- i.e. fall of Rome.

Look.  fiat currency has certain benefits, immediate use, cash accounting, wide acceptance.  And gold has certain benefits, preservation of value, inability to be manipulated by governments, ability to be taken and accepted any where in the world after being exchanged into local currency. So, it makes sense to have some of each in a portfolio.

Seems like you are conflating two different concepts: the gold standard, and owning physical gold. 

You made the extraordinary claim that whenever the gold standard was used it worked out.  How about the example I just gave about of the Great Depression?  Banks failed, unemployment increased, yet interest rates remained high, which caused more unemployment, etc.  What ultimately happened is an ounce of gold was raised from about $20/oz to $35/oz and Americans were prohibited from owning physical gold to prevent hording.    How does that fit your definition of working out?  How about not being manipulated by the government?  That sure seems like manipulation to me. 

Question:  If the gold standard is so awesome, how come every country that has ever used it has subsequently abandoned it?  Maybe there are reasons for this.

First, the depression was caused by rampant speculation in just about every type of asset fueled by an over extensions of credit, not gold.

During the depression the gold standard was suppressed in 1933 so the government could go on a politically popular massive spending binge of the New Deal. I think this exacerbated and prolonged the depression.  1920-21 is a better example of a recession on the gold standard.  The 1920-21 recession was bad but the economy recovered while staying on it.

The gold standard had to abandoned so that governments could engage in massive entitlement spending programs.  Are these good things?