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the gold standard and the myths of stability and inflation

i hope that this provides some people with the knowledge they have been sorely lacking in recent threads concerning various economic conspiracy theories or other 'alternative' viewpoints. i am merely bringing the horse to water though...



Thanks in large part to the hype surrounding Ron Paul's candidacy within the Republican Party, the notion of a US return to the Gold Standard has enjoyed renewed popularity as of late. Mr Paul supports the dissolution of the United States Federal Reserve and a return to the Gold Standard. Others in his ideological camp would take the matter yet further, and some have gone so far as to suggest that the United States do away with paper currency altogether and return to the practice of using coins minted from actual precious metals as currency.

Like many of the solutions seized upon by hobbiest libertarians, these monetary policies are concise, simplistic, and - unfortunately - completely wrong. A return to the Gold Standard is not only profoundly inadvisable for the United States, but also impractical, unnecessary, and unrepresentative of the problems and solutions put forth by the dicitfuls of Dr. Paul. In an effort to inject some sanity into the debate, this article will address the first of three myths and misunderstandings upon which the Gold Standard movement is based.

Myth: Gold Ensures A Stable Currency

Take a dollar bill out of your wallet or purse and look just to the right of George Washington's head. Printed in small black letters should be the phrase "This note is legal tender for all debts public and private." These words, and the guarantee of the United States Government, are the only things that give the US Dollar weight as a currency, either domestically or on the international currency markets.

Some 30 years ago, in 1972, this was not the case. Under a system called Bretton Woods, the US Dollar was, for some time, pegged at $35/ounce of gold, meaning that one dollar was worth, by decree of the United States Federal Government, 1/35 of an ounce of gold. The Bretton Woods system was brought to an end in 1972 as the unequal market pressures forced a rapid movement of dollars (and thus liabilities for the sale of gold at $35/ounce) out of the United States. Since that time the United States has operated on a fiat currency, meaning that the dollar is no longer pegged to the price of gold nor guaranteed by it. Rather, dollars have value because the government of the United States says that they have value.

Such a notion is troubling to many as the notion of a government controlling anything, much less money, through an exercise in self restraint seems a joke at best and a recipe for financial disaster at worst. Critics of the fiat system question what motive such a government has that would compel it not to simply print money as it sees fit, thus inadvertently destroying overnight the value of its own currency. Gold or silver, by comparison, can not be simply produced, and thus acts as a natural check upon this assumed tendency to expand the money supply without consideration for the hyper-inflationary pressures such a move would have.

The problem with this argument is not one of its accuracy, but rather a matter of degree. A fiat system is more prone to governmental expansion of the money supply, but such expansion is neither unique to it nor a probable course of action for its economic governors. A gold based system is less prone to hyper-inflationary tendencies, but by no means immune from them and, as demonstrated under Bretton Woods, is less able to respond to rapid changes in the market. As such, the opposition between Gold Standard and Fiat is neither a binary one nor nearly so clear cut in its costs and benefits as laid out by critics of the existing system.

Gold's value comes primarily from its high demand and low supply. There are many uses and applications for gold in the modern world and a limited supply of it. Currencies pegged to or backed by gold will remain stable provided these two economic realities remain true. Such monetary systems are, however, at the mercy of the global gold market. History teaches that, should demand for gold drop significantly or if world-wide gold production suddenly increased, gold backed currencies would immediately and irrevocably collapse.

This is exactly the fate suffered by the Spanish (and by extension European) economy during the early era of New World Colonialism. As Spanish galleons hauled tons of silver and gold across the Atlantic, the European precious metals markets went into hyper-inflation. Dutch traders, then profoundly concerned for the long term stability of the European continent, bought and buried gold and silver en masse in a desperate attempt to keep the entire European continent from slipping into a depression, but their economic sacrifice was neither large nor timely enough to save Spain herself, which suffered the brunt of the economic consequences of her wealth. Even Spain's gold standard could not save her economy from the massive influx of gold and silver brought about by her exploitation of the Americas. Indeed, Spain still suffers some of the consequences of that economic collapse today.

The risk of a Spanish style collapse can be mitigated by allowing a government to re-adjust the rate at which gold is pegged to a currency. A US gold standard would, by Constitutional mandate, incorporate such a safeguard as Article I, Section 8 clearly states:[Congress shall have the power] To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.
(Emphasis added) This safeguard and power, however, nullifies the initial advantages listed for a gold-standard system: namely the difficulty of devaluation and political stability.

In short, the constraints and limitations placed upon monetary governance by a gold standard system serve as little more than speed bumps should government seek to actively set about the devaluation of currency. In actuality, a gold standard offers only ineffectual protection for the money supply against incompetence and malice while profoundly limiting the ability of well informed and well meaning governments to enact substantive and beneficial monetary policy.

Far from ensuring a stable currency, a gold standard is a primitive relic serving only to hamper modern monetary regulation.

http://www.nowpublic.com/debunking_..._myth_stability

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The popular children's television network Nickelodeon derives its name from the early movie theaters that appeared across the United States near the turn of the 20th Century. For the price of a shiny nickel, patrons could take in news reels and catch the latest film entertainment on the silver screen. By the time the Baby Boomers were flocking to theaters the price of admission had gone up nearly five times and the Atomic Horror films of the early Cold War brought a quarter for every seat sold. Today, nation wide, movie tickets sell for about $6.55, 131 times what audiences payed to see Charlie Chaplin in Modern Times and 26 times the cost of admission for The Bells of St. Mary's in 1945. The notion that prices go up over time is fairly foundational to economic theory yet one of the most persistent critiques of a fiat based monetary system is the loss of purchasing power over time.

Since Uncle Tom's Cabin debuted in 1914, the American Dollar has lost the overwhelming majority of its purchasing power. Alongside 5 cent movie tickets, the America of 1914 saw milk at eight cents a quart and flour at 3 cents a pound. This represents an inflation rate approaching 2,000% for the intervening 93 year period --meaning that were one to find a dollar bill from 1914, its buying power today would be just 0.0005% of its real value when it was printed. By all accounts, this is a staggering drop in value and Gold Standard advocates point to it as a ready and obvious example of the dangers of a fiat currency.

But then again, who keeps 93 year old money around anyway?

The key assumption is all of this debate is that inflation is a bad thing. It is not. Inflationary pressures spur economic growth, encourage investment, and allow for the massive development, infrastructure, and expansion that the United States has enjoyed since 1914. Alongside inflation comes growth, and without this companion, the scales seem unbalanced indeed.

Inflation creates, in a word, risk. The sequestration of capital is a risk-free enterprise in a world with no inflation. Inflation deters hording and encourages the rapid deployment of that capital. As inflationary pressures increase, so also does the velocity of money which itself relates directly to the propensity of an economy to both consume and invest. The converse is also true, as inflationary pressures approach zero individuals are more likely to horde capital than they are to invest it. This results in deflationary pressures which themselves reinforce the impetus to horde.

Inflation and deflation are both natural aspects of market economics, and though inflation is exacerbated somewhat by the dominance of a fiat currency, it is not eliminated in its absence. The Federal Reserve, created in the early 20th century, serves and served to regulate and to some degree mitigate the fluctuations of international monetary markets. Though the Fed was created to help defend the US Dollar on the international stage, it proved unequal to the task after the collapse of the stock market in 1929.

In the aftermath of the 1929 collapse, a banking crisis struck the United States. With a run on the banks came a halt to lending. The money supply, tied firmly to the price of gold, dried up and massive deflation set in. Prices dropped and profits and wages drooped with them. As Jeffry Frieden explains in Global Capitalism, the Federal Reserve's hands were tied:

Governments searching for alternatives to deflationary paralysis and financial ruin ran into an apparently immovable international object, gold. Attempts to halt deflation and raise prices were blocked by government commitments to the gold values of their currencies. As two economic historians put it, the gold standard's "rhetoric was deflation and its mentality was one of inaction."

While gold standard economies experience constant oscillation between inflation and deflation, resulting in long term stability but short term immobility, fiat based systems experience deflation only under very unusual circumstances but retain extensive flexibility as a consequence. As a result fiat based systems, though subject to the hypothetical malice and incompetence of government, are better prepared to to maximize growth and innovation, spur investment, and generate wealth. Moreover, it is through the ebb and flow of this constant inflation that fiat currencies are regulated and through this constant inflationary pressure that their economies grow. As Berry Eichengreen, economist and historian, wrote in Golden Fetters:

The gold standard is the key to understanding the Depression. The gold standard of the 1920s set the stage of the Depression of the 1930s by heightening the fragility of the international financial system. The gold standard was the mechanism transmitting the destabilizing impulse from the United States to the rest of the world. The gold standard magnified that initial destabilizing shock. It was the principal obstacle to offsetting action. It was the binding constraint preventing policymakers from averting the failure of banks and containing the spread of financial panic. For all these reasons, the international gold standard was a central factor in the worldwide Depression. Recovery proved possible, for these same reasons, only after abandoning the gold standard.


http://www.nowpublic.com/debunking_..._myth_inflation

edit: fixed formatting.

Pfft, JREF link anyone?

gold is pretty.

and shiny

lmao...and was not the cause of the depression. The cause was an enormous fiat money BUBBLE that was inflated then popped by the central bank...followed by a myriad of government interventions designed to prevent prices from falling (as they should during recessions). I love how gold takes the blame when central bankers are the ones who caused the crash. Keep up the faith though pk. Your heroes across the globe are doing a bang-up job right now.

quote:

Originally posted by Capitalizt lmao...and was not the cause of the depression. The cause was an enormous fiat money BUBBLE that was inflated then popped by the central bank...followed by a myriad of government interventions designed to prevent prices from falling (as they should during recessions). I love how gold takes the blame when central bankers are the ones who caused the crash. Keep up the faith though pk. They are doing a bang up job right now.

How was it a fiat bubble, if the currency was the gold standard?

quote:

Originally posted by Krypton How was it a fiat bubble, if the currency was the gold standard?

Exactly. Capitalizt doesn't know what he's talking about. his paragraph of excrement doesn't even make any sense.

The federal reserve was in existence 16 years before the crash of 29. That effectively ended hard money in the USA. They were the ones that expanded the money supply tremendously in the 1920s and set ridiculously low lending requirements and margin rates that led to the big stock bubble. This certainly caused the crash, but it was the "cure" from Washington what ultimately caused the depression. All of the price fixing and other distorting nonsense supported by FDR is what prevented the natural correction. It made the situation far worse than it otherwise would have been.

quote:

Originally posted by Capitalizt The federal reserve was in existence 16 years before the crash of 29. That effectively ended hard money in the USA.

completely incorrect. the US didn't abandon "hard" money until well after the depression.

FYI: central banks != fiat money.

quote:

Ben Bernanke and Harold James, in a paper called "The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison" published in 1991 (NBER working paper version here), noted that 13 other countries besides the U.K. had decided to abandon their currencies' gold parity in 1931. Bernanke and James' data for the average growth rate of industrial production for these countries (plotted in the top panel above) was positive in every year from 1932 on. Countries that stayed on gold, by contrast, experienced an average output decline of 15% in 1932. The U.S. abandoned gold in 1933, after which its dramatic recovery immediately began. The same happened after Italy dropped the gold standard in 1934, and for Belgium when it went off in 1935. On the other hand, the three countries that stuck with gold through 1936 (France, Netherlands, and Poland) saw a 6% drop in industrial production in 1935, while the rest of the world was experiencing solid growth.

http://www.econbrowser.com/archives...old_standa.html

quote:

Originally posted by Capitalizt lmao...and was not the cause of the depression.

id like to point out that im not contending that it was the cause of the depression, just that it prolonged it and made it far more severe.

Pk, 1929 was made inevitable by the vast bank credit expansion throughout the Western world during the 1920s: A policy deliberately adopted by the Western governments, and most importantly by the federal reserve in the United States.

Now I will grant you that it is easier for governments to "pump up" the economy in the absence of a gold standard. It was easier for them to reinflate the economy after abandoning it. Nobody is denying that. The real question is...Is the cost worth it? The dollar today is worth just .04 of the 1920's dollar. Our purchasing power has collapsed, the national debt has exploded, and the government has unprecedented power and control over the economy in all areas. A true gold standard is the enemy of activist government. It forces governments to run tight financial ships, balance their budgets, and generally stay out of areas that don't concern them.

This is reason enough to oppose the fed IMO...but let's look at the fed's noble mandate..to maintain "economic stability". Has the business cycle been eradicated by leaving the gold standard and embracing central banking? Nope. If anything the booms and busts are far more severe today than they were in the late 1800 and early 1900s. When the cost of money is largely determined by central planning rather than market forces, you are going to see the results of imperfect knowledge on the part of the central bankers. The crisis we have today across the globe is a direct result of their imperfect knowledge and poor policy decisions.

I'm sorry Pk...You can provide a million more links from authors that worship the fed and fawn over the brilliance of intervention and central banking, but I refuse to accept that such a small group of unelected people should have such a huge influence over what happens to billions of people. It's that damn stubborn capitalist in me I suppose.

quote:

Originally posted by Capitalizt The federal reserve was in existence 16 years before the crash of 29. That effectively ended hard money in the USA. They were the ones that expanded the money supply tremendously in the 1920s and set ridiculously low lending requirements and margin rates that led to the big stock bubble. This certainly caused the crash, but it was the "cure" from Washington what ultimately caused the depression. All of the price fixing and other distorting nonsense supported by FDR is what prevented the natural correction. It made the situation far worse than it would otherwise have been.

The currency standard still was not that of fiat. The Federal Reserve was managing the gold standard. So you cannot say that fiat money was responsible for the Great Depression. Additionally, that excludes the gold standard from being somehow the golden egg, why? Because depressions and recessions happen whether you're on the gold standard or not.

Now, when the Great Depression hit, interest rates were very low, and inflation was very high. The Fed/government was forced to raise interest substantially, and to reduce the money supply. This ultimately led to DEFLATION, which is much worse than inflation, because everything loses value. Homes, stocks, and all that good stuff. People begin losing confidence in the currency, and begin to demand gold instead of dollars. This is a secondary runaway panic effect just like a stock market crash, in which a flood of buyers clamor for gold, and quickly deplete the gold reserves of the nation. This is why President Roosevelt made it illegal to own any gold at all. This was the only way to maintain the value of the currency, because at the time, there was rampant panic buying of gold and this devaluing the currency.

I would also make known to you that during the Great Depression, a number of countries actually abandoned the gold standard, and guess what happened? They recovered much more quickly than the US did.

quote:

In September 1931, following a period of financial upheaval in Europe that created concerns about British investments on the Continent, speculators attacked the British pound, presenting pounds to the Bank of England and demanding gold in return. Faced with the heavy demands of speculators for gold and a widespread loss of confidence in the pound, the Bank of England quickly depleted its gold reserves. Unable to continue supporting the pound at its official value, Great Britain was forced to leave the gold standard, allowing the pound to float freely, its value determined by market forces. ... If declines in the money supply induced by adherence to the gold standard were a principal reason for economic depression, then countries leaving gold earlier should have been able to avoid the worst of the Depression and begin an earlier process of recovery. The evidence strongly supports this implication. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which stubbornly remained on gold. As Friedman and Schwartz noted in their book, countries such as China--which used a silver standard rather than a gold standard--avoided the Depression almost entirely. The finding that the time at which a country left the gold standard is the key determinant of the severity of its depression and the timing of its recovery has been shown to hold for literally dozens of countries, including developing countries. This intriguing result not only provides additional evidence for the importance of monetary factors in the Depression, it also explains why the timing of recovery from the Depression differed across countries.

I highly suggest you read this lecture by Ben Bernanke (2004) to the H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia ... you'de learn a lot about the gold standard. I hope colorut and trancer x are open-minded enough to read this.

http://www.federalreserve.gov/board...022/default.htm

quote:

Originally posted by Capitalizt The federal reserve was in existence 16 years before the crash of 29. That effectively ended hard money in the USA. They were the ones that expanded the money supply tremendously in the 1920s and set ridiculously low lending requirements and margin rates that led to the big stock bubble. This certainly caused the crash, but it was the "cure" from Washington what ultimately caused the depression. All of the price fixing and other distorting nonsense supported by FDR is what prevented the natural correction. It made the situation far worse than it otherwise would have been.

quote:

Before the creation of the Federal Reserve, Friedman and Schwartz noted, bank panics were typically handled by banks themselves � for example, through urban consortiums of private banks called clearinghouses. If a run on one or more banks in a city began, the clearinghouse might declare a suspension of payments, meaning that, temporarily, deposits would not be convertible into cash. Larger, stronger banks would then take the lead, first, in determining that the banks under attack were in fact fundamentally solvent, and second, in lending cash to those banks that needed to meet withdrawals. Though not an entirely satisfactory solution � the suspension of payments for several weeks was a significant hardship for the public � the system of suspension of payments usually prevented local banking panics from spreading or persisting. Large, solvent banks had an incentive to participate in curing panics because they knew that an unchecked panic might ultimately threaten their own deposits. It was in large part to improve the management of banking panics that the Federal Reserve was created in 1913. However, as Friedman and Schwartz discuss in some detail, in the early 1930s the Federal Reserve did not serve that function. The problem within the Fed was largely doctrinal: Fed officials appeared to subscribe to Treasury Secretary Andrew Mellon's infamous 'liquidationist' thesis, that weeding out "weak" banks was a harsh but necessary prerequisite to the recovery of the banking system. Moreover, most of the failing banks were small banks (as opposed to what we would now call money-center banks) and not members of the Federal Reserve System. Thus the Fed saw no particular need to try to stem the panics. At the same time, the large banks � which would have intervened before the founding of the Fed � felt that protecting their smaller brethren was no longer their responsibility. Indeed, since the large banks felt confident that the Fed would protect them if necessary, the weeding out of small competitors was a positive good, from their point of view. In short, according to Friedman and Schwartz, because of institutional changes and misguided doctrines, the banking panics of the Great Contraction were much more severe and widespread than would have normally occurred during a downturn. � Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again. - Fed Chairman "Helicopter" Ben Bernanke http://www.federalreserve.gov/BOARD...108/default.htm

In discussing the current crisis...

There are two options for the Federal Reserve.

OPTION 1: Capitalitz argument...Let the banks fail. Leave interest rates alone. Don't increase the money supply.

OPTION 2: The actions the Federal Reserve did take. Pump liquidity into markets/banks, lower interest rates, increase money supply.

The problem with option 1 is the resultant effect. DEFLATION would set in, which is the mark of a recession, but in this case, we would be in more than a recession, we'de be in a depression (severe recession). We can see it right now. Plummeting stock, house, and other values. Prices are falling. When inflation is rampant, prices RISE. That is no what's happening. Prices are PLUMMETING. So the Federal Reserve is at liberty to increase the money supply to stem the plummeting asset values within the economy. Another effect of deflation is higher unemployment, businesses collapsing, and an increase in defaulting debtors. All of this is occurring as we speak. So, with all this mind, it was essential for the Federal Reserve to inject more liquidity into the economy, and the government to do this bailout. Otherwise, we'de be in the midst of a massive deflationary spiral the likes of which are rivalled only by the deflationary Great Depression. My friend, this would be 1929 all over again, you really don't know how close we are to it. If we were on the gold standard, God only knows the dog doo doo we would be in right now.

So the main point is...inflation right now is good. Increase in money supply right now is good. Why? Because the alternative. Deflation. Would be a much meaner, nastier, bear to wrestle with. You really must let go of this idea that all inflation is bad all the time. Too much inflation, hyper-inflation, yes that's bad. But we need an economy which can adjust the money supply the way it sees fit. And right now, it's very very fit, to increase the money supply. The risk of inflation is substantially offset by the risk of deflation, and so the Fed acted. I am very glad they did what they did.

I responded to pk one second before your post krypt, lol. My response is the same. And you need to do a bit more reading I'm afraid.. Yes, dollars will still redeemable in gold in 1929, but that did not stop the fed from expanding the money supply and extending credit to businesses and speculators on a huge scale. I think this is one of the reasons that caused people to lose faith in the currency.

You should really be asking yourself...Why was there was such a panicked rush into gold? If the government were on a true gold standard, there would have been no panic, because every dollar would have literally been "good as gold". Those dollars should have been backed by gold..but they weren't! This is because the fed had already inflated money supply WELL BEYOND the gold reserves of the nation's banks. Paper floating around without gold to back it up = major cause of the panic and bank runs.

I also take issue that deflation is necessarily worse than inflation. If we had a healthy economy and a positive savings rate rather than a negative one, a little moderate deflation wouldn't be bad at all. It would mean that a nation's currency is strong, and that your savings would hold value over time. The purchasing power of your savings would be maintained..while prices on goods and services gradually decline. I personally don't mind deflation on the prices of computer parts or other high tech stuff. It's nice to be able to buy new products for cheaper prices than they were a few years ago. Deflation wouldn't be such a bad thing if our economy wasn't built on a mountain of personal and government debt.

quote:

Originally posted by Capitalizt I responded to pk one second before your post krypt, lol. My response is the same. And you need to do a bit more reading I'm afraid.. Yes, dollars will still redeemable in gold in 1929, but that did not stop the fed from expanding the money supply and extending credit to businesses and speculators on a huge scale. I think this is one of the reasons that caused people to lose faith in the currency. You should really be asking yourself...Why was there was such a panicked rush into gold? If the government were on a true gold standard, there would have been no panic, because every dollar would have literally been "good as gold".. Every dollar would have been backed by gold. As you know this wasn't the case because the fed had already inflated money supply WELL BEYOND the gold reserves of the nation's banks. Paper floating around without gold to back it up = major cause of the panic and bank runs.

Did you read everything I posted? I explained in pretty fine detail the effects of the gold standard during the Great Depression, and even provided examples of nations abandoning it in 1931, only to recover much faster the US did.

The gold reserves of the country are largely fixed. The gold-backed currency is not. Now, if there was no increase in the supply of currency, the inevitable effect is the deflation of asset values, which is a very bad thing. Small to moderate inflation is an indication of a healthy economy.

Why was there a panicked rush into gold? Because people lost faith in the GOLD-BACKED currency, and they just wanted gold. Every dollar was backed by gold, and as good as gold, but the system fell apart in deflationary chaos, hence the reason Roosevelt took all the gold. The alternative was the complete collapse of the currency.

Now what do you suggest? That we completely abandon paper currency in favor of 100% pure gold coins? Come on man...That's as utopian as a perfect socialist society in which everyone is equal. The economics of it just does not work...on a fundamental level...

quote:

Originally posted by Capitalizt I also take issue that deflation is necessarily worse than inflation. If we had a healthy economy and a positive savings rate rather than a negative one, a little moderate deflation wouldn't be bad at all. It would mean that a nation's currency is strong, and that your savings would hold value over time. The purchasing power of your savings would be maintained..while prices on goods and services gradually decline. I personally don't mind deflation on the prices of computer parts or other high tech stuff. It's nice to be able to buy new products for cheaper prices than they were a few years ago. Deflation wouldn't be such a bad thing if our economy wasn't built on a mountain of personal and government debt.

Deflation is worse than inflation. I'll tell you why. When prices are falling, because of a decrease in the money supply, this crimps demand. Because demand is reduced, economic output is also reduced. Businesses start laying off workers because of the reduced economic activities. Because prices are falling, this provides incentive for consumers to delay purchases and consumption until prices fall further, and soon a runaway effect takes shape, called the Deflationary Spiral CLICK. The Great Depression is a perfect example of this phenomenon. A gold standard makes it worse and longer lasting.

The reduction in the price of computer is not caused by deflation. Deflation is a reduction in money supply. The reason computer parts become cheaper and cheaper, while at the same time becoming better and better, is because each unit produced by computer parts manufacturors is increasingly packed with more and more processing power. Because they can increase processing power for each unit produced, they can produce more and more powerful units, for the same price. This pricing effect is not the result of deflation.

krypt..a deflationary spiral is taking things to an extreme just like the hyperinflation example in Germany. It would be possible to have a healthy deflationary environment..but sadly not in today's economy. Our economy is built on a mountain of debt and consumption. Consume Consume Consume...save nothing....don't plan for the future...live for today. That is the attitude of the modern world, and as long as we want to keep borrowing up to our eyeballs to maintain this style of living, I agree deflation isn't good. It is only good when we have a positive savings rate..not when people, businesses, and governments are deep in debt.

Now back to the other issue..As far as I know, a gold standard is one of the few ways to truly bind the federal government..to force them to live within their means. When money can be printed out of thin air there is no limitation on what your government can do. If you can find an alternative that accomplishes this objective, I'd be glad to hear it..

Personally I like the idea of competing currencies. I know we will never voluntarily get rid of the federal reserve.. But why not just legalize competition to the dollar? It's been tried a few times...most recently last year. http://en.wikipedia.org/wiki/Liberty_Dollar

The liberty dollar group was a small operation...but if a few banks or large investors got together and decided to issue a hard currency backed by a basket of commodities or something else, why not let them? If the feds were being prudent with our money and were determined to maintain it's value, they should have nothing to fear from a little competition.

quote:

Originally posted by Capitalizt A true gold standard is one of the only way to bind the federal government..to force them to live within their means. When money can be printed out of thin air there is no limitation on what they can do. If you can find an alternative that accomplishes this objective, I'd be glad to hear it..

A true gold standard would not only bind the federal government, but would you, me, and the entire economy. The idea of it is truly on the scale of communist utopia in which everyone in society is truly equal.

quote:

Personally I like the idea of competing currencies. I know we will never voluntarily get rid of the federal reserve.. But why not just legalize competition to the dollar?. It's been tried a few times...most recently last year. http://en.wikipedia.org/wiki/Liberty_Dollar

So you want other currencies to be considered "legal tender" within the USA? It's never going to happen. Anyways, you can buy commodities on the open market any time you want. What's stopping you?...well, nothing, me and you have traded gold/silver. You don't need to buy some commodities backed currency. You can already buy the commodity itself.

quote:

The liberty dollar group was a small operation...but if a few banks or large investors got together and decided to issue a currency backed by a basket of commodities or something else, why not let them? What harm could it do? If the feds were being prudent with our money and were determined to maintain it's value, they should have nothing to fear from a little competition.

To maintain the value of the dollar, the public's confidence in the dollar's value must be maintained. Having a competing currency undercuts this goal. Additionally, who would control the money supply of this new currency, if not the Federal Reserve? One of the primary reasons the Fed was even created was to consolidate all the competing currencies floating around into one. Having a competing currency inside the USA would do much more damage than good.

Anyways, you can already...buy commodities like gold and silver on the open market...and...buy other currencies on the open market. You need to realize that the dollar already is competing with other international currencies. No need to have one competing domestically. I've been buying some Iraqi Dinars recently. It's not that hard at all. If you don't have faith in the dollar, start buying Euros, or gold. Your options are limitless...

quote:

Originally posted by Capitalizt krypt..a deflationary spiral is taking things to an extreme just like the hyperinflation example in Germany. It would be possible to have a healthy deflationary environment..but sadly not in today's economy. Our economy is built on a mountain of debt and consumption. Consume Consume Consume...save nothing....don't plan for the future...live for today. That is the attitude of the modern world, and as long as we want to keep borrowing up to our eyeballs to maintain this style of living, I agree deflation isn't good. It is only good when we have a positive savings rate..not when people, businesses, and governments are deep in debt.

If deflation is present in the economy, that means people lose jobs, economic output decreases, productivity decreases, asset values decrease, etc. None of this is good. There is no such thing as a "healthy deflationary environment". It doesn't exist. Such an environment means the economy is in a recession. The only good thing to come out of a recession is an increase in savings. But I believe there are ways to increase savings without having a deflationary economy. One thing is, making it illegal to borrow money using savings, 401k, IRA, as collateral.

oh believe me krypt I am getting out of the dollar as fast as I can. Every other pay day I visit the local coin shop to grab a few generic silver bars.. As I've said before though, my main interest is putting a harness on the federal government. Anything that might sedate them (even temporarily) is good in my book.

quote:

Originally posted by Capitalizt oh believe me krypt I am getting out of the dollar as fast as I can. Every other pay day I visit the local coin shop to grab a few generic silver bars.. As I've said before though, my main interest is putting a harness on the federal government. Anything that might sedate them (even temporarily) is good in my book.

I agree, but a gold standard is not the answer. I mean, look at what Bill Clinton did. A government surplus is completely feasible.

quote:

Originally posted by Krypton If deflation is present in the economy, that means people lose jobs, economic output decreases, productivity decreases, asset values decrease, etc.

Deflation is nothing more than a decline in the general price level. You are associating it with recessions because that is what we've seen in the past, but these two things aren't necessarily linked. Money/credit contractions are a bad cause of deflation, I agree...but prices can also fall when the economy is doing well and productivity rises. When new methods of production are developed and more can be produced at a lower cost, prices drop and this is a positive type of deflation.

P.S. Bill Clinton rocked.

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Originally posted by Capitalizt Deflation is nothing more than a decline in the general price level. You are associating it with recessions because that is what we've seen in the past, but these two things aren't necessarily linked. Money/credit contractions are a bad cause of deflation, I agree...but prices can also fall when the economy is doing well and productivity rises. When new methods of production are developed and more can be produced at a lower cost, prices drop and this is a positive type of deflation. P.S. Bill Clinton rocked.

I'm sorry to say, but you're wrong about deflation. Deflation is not a decrease in price levels. The decrease in price levels is one of the effects of deflation. But that is not deflation itself.

If we go back to the computer manufacturers, the reason why we seem to get better performance for the same price, is not because of deflation. But it's because of higher productivity. So when you say, "When new methods of production are developed and more can be produced at a lower cost, prices drop and this is a positive type of deflation." This is wrong, because...

1. Producing more at lower cost is increased productivity, not deflation.
2. Prices dropping is also not deflation, but rather, an effect of deflation.

Prices can drop for a variety of reasons. In relevance to our debate here, deflation is one of them, and so is increased productivity. There are others too.

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