Pros and Cons of a Gold Standard

[moda0306]

So it's illegal for a us business to do business in another currency and/or not accept US dollars?

[Tortoise]

Yes, the definition of "legal tender" in the U.S. makes it illegal for a U.S. business to refuse to accept dollars as payment.

The business is free to accept payments in other currencies, and to state that it prefers to receive payments in other currencies, but it is not allowed to refuse dollars as payment.

Jorg Guido Hulsmann explains in his book The Ethics of Money Production:

A legal tender is money or a money certificate that may be used to make payments against the will of one of the exchange partners. Thus the law overrides private contract and provides that the legal tender shall be accepted as payment, rather than the money (or money certificate) promised to the seller or creditor.

Because the U.S. government does not enforce the payment of non-dollar debts stipulated in private contracts, the resulting risk and uncertainty to most businesses strongly incentivizes them to deal in dollars (if they want to stay in business).

[moda0306]

Thanks, Tortoise.  I really wasn't aware of that.  It's funny how these nuances (and that there was a gold confiscation) are rarely taught in history, economics, or law classes.

TBV,

More than ever, private property is probably made up, today, of non-land assets, but it's still pretty significant, especially considering the fact that under the land are natural resources, and crossing land is necessary for travel.  And obviously, as a realistic view of our world today, I'm not suggesting that land contracts not be enforced by our government.

I'm simply stating that the whole philisophical view of private property being sacred and representing reality is inherantly flawed because it assumes, at its outset, simply planting a flag and claiming resources as ones own.

[TBV]

Thanks, Tortoise.  I really wasn't aware of that.  It's funny how these nuances (and that there was a gold confiscation) are rarely taught in history, economics, or law classes.

TBV,

More than ever, private property is probably made up, today, of non-land assets, but it's still pretty significant, especially considering the fact that under the land are natural resources, and crossing land is necessary for travel.  And obviously, as a realistic view of our world today, I'm not suggesting that land contracts not be enforced by our government.

I'm simply stating that the whole philisophical view of private property being sacred and representing reality is inherantly flawed because it assumes, at its outset, simply planting a flag and claiming resources as ones own.

When all that's involved is flag-planting, I can see your point.  However, when I look at the numerous acts of land dispossession taking place in China today (carried out by government officials w/o benefit of transparency), I see the great moral hazard in failing to secure land tenure as a private property right.  The current scenario puts the lie to the notion that socializing land tenure means equitable treatment will ensue.

[AgAuMoney]

My point is that a gold standard is pointless. In a lot of ways it hinders good governance because a lot of government borrowing and spending is beneficial. A gold standard hinders government spending and borrowing.

A gold standard removes control from the gov't, that is the point.

A gold standard definitely hinders gov't spending ASSUMING that people do not want the gov't to spend.  But if the people want the gov't to spend, they would loan money to the gov't, or give money to the gov't or encourage the gov't to pass new taxes.

All those are possible today, the only thing a gold standard does is prevent the politicians from using inflation as a hidden/secret tax, giving more control to the people.  And isn't that the point?

[moda0306]

I think a big part of whether the gold standard is a good idea is the degree to which certain market failures need to and can be addressed by government.

For instance, if you believe that the paradox of thrift and certain macroeconomic fallacies create dangerous self-fulfilling economic situations, then you're probably more likely to be in favor of a monetary policy (fiat currency) that allows more fiscal flexibility (Keynesianism & Modern Monetarism).

If you think that an economy should reach its own, unmassaged equilibrium, and that the paradox of thrif isn't a paradox at all but a necessary evil to a free populace, then the gold standard fits much more with that philosophy.

I think a lot of economic opinion starts with philosophy, and seeks to find the math and history to back it up, unfortunately... not to say that refers to you folks... in fact one thing that makes economics such a wonderful study are all the moral and philisophical implications between equality & private property.

[Tortoise]

If you think that an economy should reach its own, unmassaged equilibrium, and that the paradox of thrif isn't a paradox at all but a necessary evil to a free populace, then the gold standard fits much more with that philosophy.

The idea that the entire economy should ideally be in some kind of "equilibrium" is the antithesis of the free market concept. Due to human action and the inherent uncertainty of the world in which we live, the ideal free market is a fundamentally dynamic--not static--thing.

I'm not sure what you mean by gold standard advocates accepting the paradox of thrift as a "necessary evil to a free populace." I'm an advocate of a gold standard (or at least free competition in currency), but I don't think the so-called paradox of thrift is a paradox at all. It is based on economic fallacy.

The act of saving does not extinguish demand; it merely moves it from the present into the future. Money that is saved is lent out to businesses or invested in them in the form of equity shares. As saving increases, it becomes more affordable for businesses to borrow and easier for them to raise capital, because interest rates decrease and stock prices rise. They will therefore borrow and raise more capital to fund the expansion of their businesses--and this is the key--to support anticipated future consumer demand. And it makes sense to support anticipated future consumer demand if people are currently saving rather than spending. If they are not spending now, it is for the sole reason that they plan to spend later.

The "signal" that allows the above process to work correctly is interest rates. If the supply of money is fixed, then interest rates will rise or fall to the appropriate level such that money's supply will match its demand. It works like any other supply-demand relationship. It is self-regulating, like a thermostat, a servo, or any other negative feedback loop.

When the interest rate "signal" is corrupted by government intervention or fractional-reserve banking--i.e., when the supply of money is not allowed to remain fixed--the stability of the negative-feedback loop is compromised, usually resulting in oscillations (sometimes uncontrollable oscillations that grow with each cycle) of credit expansion and contraction, i.e., boom-bust cycles.

You get a similar result if you take just about any optimized negative-feedback loop and garble the feedback signal.

[stone]

Tortoise "If they are not spending now, it is for the sole reason that they plan to spend later."

Tortoise, I'm all for a non-expanding currency system but I really think that it is vital to face up to and address the perils that it would entail.
"Net saving" means more saving going on in aggregate across the whole economy than dis-saving. Is your point that falling interest rates due to "net saving" would cause would-be-savers to decide to bring forward consumption. It might be nice if that happened but that is very different from saying that it does or that it would. If it didn't, then without monetary expansion the consequence would be unsold inventory that perished as waste. Remember, unsold inventory counts as "investment" under the economic definition of the word and in the accounting identity equations people show.
I currently save now because I have money in excess of what I want to spend. I'm not making a trade off between future and current consumption. I have zero inclination to consume more now. Even if return on capital were massively negative, I would endeavor to maintain some value for the uncertain future when I might actually have some use for the savings (or even be dependent on them). Someone like Warren Buffet could never consume his savings. Do you really think that someone like that who has tens of billions of dollars is saving for future consumption? I guess people who are extremely rich like that are so because they are adept and enthusiastic about accumulating money in much the same way as people are adept and enthusiastic about playing golf or chess or whatever. I think such "saving as a sport" mentality is not confined to the mega rich at all.
Me saving now does absolutely nothing to aid productive investment. Saving only aids investment if the economy is running at full capacity. Currently the economy is running massively under full capacity. There are plenty of unemployed people and idle machines that could and would be deployed for capital creation if only there were customers who wanted and were able to afford whatever that capital creation might be used for.

[Tortoise]

Tortoise "If they are not spending now, it is for the sole reason that they plan to spend later."

Tortoise, I'm all for a non-expanding currency system but I really think that it is vital to face up to and address the perils that it would entail.
"Net saving" means more saving going on in aggregate across the whole economy than dis-saving. Is your point that falling interest rates due to "net saving" would cause would-be-savers to decide to bring forward consumption.

Not necessarily. My point was that falling interest rates and rising stock prices due to net saving and investment by would-be consumers would give businesses a greater incentive to invest in equipment, factories, etc. to meet anticipated future consumer demand since the cost of borrowing and raising financial capital would then be lower.

It might be nice if that happened but that is very different from saying that it does or that it would. If it didn't, then without monetary expansion the consequence would be unsold inventory that perished as waste. Remember, unsold inventory counts as "investment" under the economic definition of the word and in the accounting identity equations people show.

Unsold inventory isn't a necessary consequence of an increase in savings. In a free market, the price mechanism matches supply and demand such that if people in general start saving more and consuming less, prices will adjust downward to clear the market. Inventory only goes unsold and perishes as waste if the business owner is unwilling or unable to lower prices in response to the reduced demand.

I currently save now because I have money in excess of what I want to spend. I'm not making a trade off between future and current consumption. I have zero inclination to consume more now. Even if return on capital were massively negative, I would endeavor to maintain some value for the uncertain future when I might actually have some use for the savings (or even be dependent on them).

So you're basically saying the reason you save isn't because you plan to spend later, but rather because you simply don't feel the need or desire to spend now. That makes sense, and that's fine. The point I'm making is simply that eventually, at some point in the future, virtually every dollar of money being saved will be spent by someone. With a fixed money supply, it is impossible for net saving to continue indefinitely, and likewise for net spending.

Someone like Warren Buffet could never consume his savings. Do you really think that someone like that who has tens of billions of dollars is saving for future consumption?

Absolutely, just not his personal future consumption. It will likely be Buffett's heirs and various philanthropic organizations that will consume his fortune after receiving it. I believe that in the book The Millionaire Next Door, the authors pointed out that typically, the fortune amassed by a millionaire doesn't last more than one generation; the heirs typically fritter it away quite rapidly. In the case of billionaires, the process might take several more generations and involve a lot more people, but undoubtedly the same thing eventually happens. All the money is eventually spent.

Even if a given fortune were to last virtually forever without being spent, that would be an extremely unusual (one might even say pathological) case that splits hairs rather than disproves the general trend that increased saving under a fixed money supply encourages businesses to invest in future productive capacity.

Me saving now does absolutely nothing to aid productive investment. Saving only aids investment if the economy is running at full capacity. Currently the economy is running massively under full capacity. There are plenty of unemployed people and idle machines that could and would be deployed for capital creation if only there were customers who wanted and were able to afford whatever that capital creation might be used for.

My point was focused on how the relationship between saving and businesses' investment in future productive capacity would work under a fixed money supply. The fact that very strange and wasteful things are happening currently in the U.S. does not refute my point, because the U.S. does not have a fixed money supply; far from it. In fact, our current climate of uncertainty and business contraction in the U.S. is due to the bursting of a massive credit bubble that was enabled and inflated by a fractional-reserve banking system.

To rephrase and condense my point: When businesses expand and invest in future productive capacity in response to low interest rates caused by people saving more than they are spending, capital is being allocated appropriately. By contrast, when businesses expand and invest in future productive capacity in response to artificially low interest rates caused by a central bank's monetary policy, capital is being misallocated since people are not saving enough to purchase all of those future goods and services. That results in a boom-bust cycle.

[stone]

Tortoise, I totally agree that the current crop of billionaires are an artifact of our expanding monetary system that has allowed customers to continue purchasing the goods from the companies that the billionaires own at prices that are not deflated by the saving of the billionaires. I think we also agree that in a non-expanding monetary system, prices and wages would need to be extremely flexible much as stock prices are now. Instead of shops you would have to have haggling markets like the traditional Arab method. I still can't see it working unless ownership were actively and continuously redistributed. Don't you fear a feudal dead end scenario where some people own everything and that totally stifles the economy. From where I'm sitting that has plenty of precedent and is what was behind expanding monetary systems getting introduced.

[stone]

Tortoise, the absolutely crucial point about a non-expanding monetary system is that it is totally impossible to have debt under such a system. All finance would have to be equity finance. If prices and earnings in general fall as a result of net saving then debts would not get the corresponding fall in value. That would provide a perverse incentive towards people with money saving and lending so as to grab everything leaving a wasteland of debt peons.

[stone]

Tortoise, I'm skeptical about philanthropy leading to a reversal of net saving. The foundation I'm most familiar with has capital gains over and above inflation and its spendings. From what I can see what stops net saving is either war, massively progressive taxation (as in the 1950s) or economy wide impoverishment due to the damaging effects of a debt peon/ peasant/oligarch system building up.

[Tortoise]

Stone, I don't think saving necessarily leads to deflated prices under a fixed money supply. It can, but it doesn't have to.

For example, unless most of the money being saved is being stuffed under mattresses (unlikely), it is being lent out by banks and being invested in equity shares. Those loans and financial capital are then used by businesses to purchase various goods and services as they invest in future productive capacity. That business spending will tend to offset the saving by would-be consumers.

As for your assertion that a fixed money supply requires Arab-style haggling markets, I'm afraid I don't understand your reasoning. Haggling seems to be more of a function of culture than of the money system. For example, the U.S., Mexico, and the Middle East all use fiat currencies, but haggling is only prevalent in the latter two--the U.S. simply has a different culture in which most consumers prefer not to haggle for most of what they buy.

Regarding your point about debt being impossible under a fixed money supply, that's simply incorrect. I think what you are missing is that when someone saves money, it gets lent out to a borrower so he or she can spend it. In other words, one person spends less so that another person can spend more. It balances out. Now, there may certainly be net saving so that people are generally saving more than is being lent out and spent, but that situation must by necessity be only temporary. It is logically impossible for it to last forever under a fixed money supply. At some point, the deflation in prices and wages would make things so affordable in terms of the money unit that it would be absurd for consumers not to switch over to spending more than they save. Supply and demand in action.

Finally, regarding your opinion that a fixed money supply would eventually lead to a winner-takes-all peasant/oligarch society due to deflating prices punishing debtors: Recall that human beings are not automatons. They respond to economic incentives. Under a fixed money supply, there will simply be less of an incentive to borrow and more of an incentive to save compared to a money supply that is being steadily inflated. If borrowing is very expensive, and banks have to take default risk into account since they know they will not be bailed out by the government, many would-be borrowers simply will not be able to borrow, thus forcing them to cut back on spending and perhaps even giving them motivation to become savers to earn some of that generous interest.

The main reason so many people are currently up to their eyeballs in consumer debt is because the cost of borrowing is WAY lower than it would be under a fixed money supply and the absence of government bailouts. It is by no means necessary for most of a society's borrowers to be "peasant" consumers. Under a fixed money supply, most borrowers would likely be businesses, and consumer debt would be far less common than it is today.

[stone]

Tortoise, thanks for your thoughtful reply about points that have puzzled and troubled me about our expanding monetary systems versus potential non-expanding ones. I'm still yet to get my head around some aspects of all of this.

If I buy a share of a company in the secondary market (rather than in an initial public offering) then I don't see how that contributes to a company investing in productive capacity. The equity money the company uses for investing in productive capacity is typically  retained earnings. That comes from the company deciding not to return money to shareholders in the form of share buybacks or dividends but instead to invest it. Me buying a share keeps the share price up but I don't see how a higher share price influences the decision of the company to invest or return capital. The pharma industry is the one I'm most familiar with (but still know very little). From what I can see, in that industry the flow of money is from health insurers to pharma companies who use some of that money for investment and some for dividends. The flow of money has been entirely in the direction towards share holders and there has not been a public offering of shares for many years. There are investors who's money contributes to developing technologies etc rather than adding to the pool of net saving. They are venture capitalists. But venture capital is very much a minor player only used by specialized investors.

A totally non-expanding monetary system would have short sharp deflations and inflations that, as you say, would quickly revert and correct. Nevertheless it would be a bumpy ride. Even if you look at data from the US "free banking era" there were very sharp (but short) deflations and inflations. The Bank of England used to decide monetary policy on the basis of the wind direction as that would determine whether sailing merchant ships left or arrived. If you did not have fractional reserve banking nor a central bank, the system would be even more jerky. Short term price volatility does not matter if all sides bump up and down in unison. It does matter a lot if the effects are unequal and feed into a positive feed back loop. Debt arrangements agreed before a deflation get transformed into being unsustainable by a deflation. Such a benefit to the creditor furthers net saving because by definition a creditors are those with money to spare. Net saving is deflationary creating a positive feedback.
The current situation in Greece demonstrates how a deflation leads to debtors handing over real hard assets to creditors. Greece is privatizing state assets so as to attempt to service debt. In previous centuries people would sell their farms and homes in an attempt to pay off debts. That is what led to anti-usury laws and religious prohibitions on usury. You say that the potential perils of debt will prevent people from taking on debt unless it is sustainable. People make mistakes. I suppose the difference would be whether the "winner takes all" asset grab leads to a situation where no one has the ability to take on debt or whether fear and caution prevent people from taking on debt before that happens. If someone is putting every penny they earn towards servicing debt and yet still needing to take on debt to eat, then they can not just decide to become a saver rather than a debtor. In 1800s UK there were debtor's prisons. Do you think the prisoners hadn't thought that they would be in a better position as savers rather than debtors?
If a creditor has an ever more valuable income stream from the debt that they own and they are able to use that income stream to aquire ever more valuable assets then that would make them even less inclined to stop the bonanza. Some people have an inclination to consume and some to aquire. The key thing to remember is that it only takes a minority having a desire to accumulate more than they will ever be able to consume in order to derail the economy. As you say our current system is extremely accommodating for debt. You seem to say that a non-expanding system would work well with debt but at a higher interest rate. I think debt just doesn't work unless the system is cushioned in the way ours is and that our system has evolved so as to favor debt.

America used to be proud that in America ownership was dispersed with farmers owning the land they farmed etc. That was a very big contrast to Europe and Latin America where an aristocracy owned huge estates. America used to view that contrast as being key to the American way with prosperity and economic dynamism. When General McArthur tried to mold Japan along the American model a key aspect was dissolution of the power of the aristocracy.
http://en.wikipedia.org/wiki/Occupation_of_Japan

"Between 1947 and 1949, approximately 5,800,000 acres (23,500 km2) of land (approximately 38% of Japan's cultivated land) were purchased from the landlords under the government's reform program and resold at extremely low prices (after inflation) to the farmers who worked them. By 1950, three million peasants had acquired land, dismantling a power structure that the landlords had long dominated.[18]

I think an enormously significant economic and political development is that America no longer cherishes the fact that it is not dominated by an aristocracy and instead is doing everything to create an aristocracy to dominate over everyone.

[moda0306]

Tortoise,

I think if you would look at real economies, not theories, you'd realize the Paradox of Thrift is real.  When people start choosing to save, businesses anticipate LESS demand for the future, and invest LESS than they otherwise would have.  I think this is where the Austrians are extremely weak... the short-run dynamics of policy and economics.

Austrians can say that "eventually" the expansion of credit will lead to a credit collapse or economic disaster or that prosperity now at the hand of the government MUST come at the expense of future prosperity, and then some, but I think they totally lose hold of short-term dynamics that drastically change long-term outcomes.  The fact that increased saving without government spending actually REDUCES, not expands, business investment, highlights an environment of extreme difficulty for the very young, striving population you are attempting to free from future federal debt burdens.  The fact is that businesses don't want loans when demand is decreasing... they want DEMAND.  They want loans when demand is increasing.  This is where the paradox of thrift lies.  Is it the government's job to try to engineer equilibrium?  That's up for debate, but to act like people suddenly saving encourages businesses about future demand is hogwash in my opinion.  Ask someone who runs a business if that's true, and I doubt you'll get that answer.

I was referring to equilibrium in a very loose sense... that basically MAYBE the natural demand and supply of a free populace, however uneven and dynamic, IS the equilibrium we want... not something that is engineered by government to appear more smooth and resulting in less short-term volatility.  Even left on its own, the dynamics of of a lazzais fair economy have their own equilibrium... it's just different than that of our government and those of even more centrally-controlled governments.

[HB Reader]

I don't know if this adds to the discussion and I may have missed something earlier in the thread, but it should be pointed out that a gold standard doesn't really represent a "non-expanding" money system.  The stock of gold increases every year through mining output, although probably not as much as many people would like the money supply expand. 

[stone]

HB reader, what you are saying about mining to my mind accentuates the challenges  posed for any limited-expansion monetary system. Such systems have persisted when they have had the lucky accident of having expansion from mining. Silver became popular and successful as a medium of exchange when huge silver deposits were found in Bolivia and Mexico by the Spanish in the 1500s.  Later gold became successful when large gold deposits were found in the North American West. People saying that we could use a gold standard now (without fractional reserve banking) need to factor in that we don't have such a gold mine. Personally I do think a non-expanding monetary system might be the best possible system but I've failed to follow the line of argument that firms respond to deflations by investing in anticipation of a spending splurge to come. To my mind any firm that had any sense of self preservation would see that deflation leads to money being a turbo-charged store of value whilst investment in creating productive capacity should wait until more of it can be bought with the money to hand. That is the deflationary positive feedback spiral that has led to monetary expansion time and again throughout history. To my mind that destructive spiral could be prevented by having a flat tax on assets (as the entire tax burden) and a citizen's dividend. Without such measures, a non-expanding monetary system would be tracing a path to ruin at least as well trodden as the path to fiat currency collapse.

[HB Reader]

HB reader, what you are saying about mining to my mind accentuates the challenges  posed for any limited-expansion monetary system. Such systems have persisted when they have had the lucky accident of having expansion from mining. Silver became popular and successful as a medium of exchange when huge silver deposits were found in Bolivia and Mexico by the Spanish in the 1500s.   Later gold became successful when large gold deposits were found in the North American West. People saying that we could use a gold standard now (without fractional reserve banking) need to factor in that we don't have such a gold mine. Personally I do think a non-expanding monetary system might be the best possible system but I've failed to follow the line of argument that firms respond to deflations by investing in anticipation of a spending splurge to come. To my mind any firm that had any sense of self preservation would see that deflation leads to money being a turbo-charged store of value whilst investment in creating productive capacity should wait until more of it can be bought with the money to hand. That is the deflationary positive feedback spiral that has led to monetary expansion time and again throughout history. To my mind that destructive spiral could be prevented by having a flat tax on assets (as the entire tax burden) and a citizen's dividend. Without such measures, a non-expanding monetary system would be tracing a path to ruin at least as well trodden as the path to fiat currency collapse.

Stone --

I'm not suggesting that gold (or silver) would create economic nirvana.  I just think it leads to (perhaps more immediate, but ultimately) smaller problems than a completely fiat system, especially when placed at the center of the world's economy.  I'm less "pro-gold" than I am "anti-fiat."   I'm well aware of what happened with the influx of precious metals, particularly silver, in Spain in the 1500's and many of the adjustment problems relating to the gold standard in more recent times.  I also understand the issue of "sticky prices" on the downside and the fear of a destructive deflationary spiral, although I don't completely agree with all the concerns.  I'll have to think through your flat tax and citizen's dividend ideas.     

But as I said in a earlier post, I am deeply skeptical about the long term viability of a completely fiat currency that is dependent on the honesty and competence of political man, however well-intentioned.  Especially in a country (or world) where he can gain power by promising and delivering more in the short run while disquising that it is being financed by a national credit card in the long run.  I know the US and the world experienced booms and busts long before the creation of the Federal Reserve, but the effects of these booms and busts tended to be more localized.  In the long run, it seems to me that by placing our Federal Reserve System at the middle of the world's economic system, we are taking what used to be smaller regional problems and turning them into bigger worldwide problems.

To paraphrase Sir John Templeton, "In a democracy with a fiat currency, all roads lead to inflation."  (I assume by inflation he meant the "inflation process" which carries with it the seeds of an equally devastating deflation.)   

[stone]

HB reader, I agree with your concerns. I wonder whether all that the central bank intervention does is to convert short term boom bust cycles into multi-decade long boom bust cycles with the result that  mal-investment  becomes almost impossible to unwind from. If all manufacturing expertise moves to China and then decades later Chinese wages become higher than Western wages, it is very hard for Western people to re-gain that expertise and infrastucture.

By an asset tax I meant moving the tax burden so that there was just one tax that applied equally to every citizen's gross assets where-ever they were held in the world and in whatever form. In order to legally own anything you would have to be up to date on the tax for it. So if you had cash, bonds, stocks, land, collectables etc, you would have to pay a fixed percentage of its market value each year. That would lead investors to seek a yield that would pay for the tax. It would reverse the current perverse bubble inducing influence where increasing asset prices actually make an asset more rather than less attractive. Investors seeking asset yield rather than bubbling asset prices would better align investment towards what benefited the wider economy.
By a citizens' dividend I meant moving the welfare budget to being a fixed payout to everyone whether they needed the money or not. Anything you earned would be in addition to citizen's dividend. There would then be no  situation where an unemployed person starting work actually had most of their earnings offset by the reduction in the welfare they received.
That system would be extremely simple and have a low administrative cost. Asset values are already assessed for estate taxes and in the case of cash, stocks etc could be collected automatically. The citizen's dividend would mean that new firms could start up with the workers living off the citizens' dividend until the firm started making money in return for the workers getting an equity stake in the company. Venture capital investments in developing new technologies etc would be favored because spending money on developing a technology creates little asset value unless and until it pays off.
The current system directs money towards pushing up the value of pre-existing real estate. What is needed is a system that directs money towards developing the technologies that will allow us to make the most of the future.

[Tortoise]

Stone and Moda, the reason I'm saying the Paradox of Thrift is based on economic fallacy is because it asserts the condition of net saving and business contraction is not temporary. It claims the process continues in a downward spiral until the economy completely implodes.

I fully agree that when people in general suddenly increase saving at the expense of consumer spending, that will certainly cause businesses to scale back their operations. And I agree fully that the contraction in business will tend to lower wages and raise unemployment, thus tending to drive down consumer spending yet further.

However, the process only continues in this way up to a point. Think about it: People never cease all of their consumer spending, no matter how much they'd prefer to save 100% of their income. They will forsake various luxuries and comforts, but they will not stop purchasing basic necessities like food, clothing and shelter until their income has disappeared and all of their savings have been depleted. That hypothetical "black hole" point will not be reached due to the demand "floor" for basic necessities. At the lowest possible point of the spiral, people are only buying basic necessities, and the prices of most goods and services--including labor--have fallen so low that it now makes financial sense for people to start spending some of what they saved, and for businesses to start hiring people on the cheap to meet some of that nascent demand.

The massive contraction in many businesses we see whenever a credit bubble finally bursts is not necessarily a bad thing from a common-sense point of view. The businesses that are hardest-hit are not the ones selling basic necessities; those are the ones that typically weather recessions the best. The businesses that get slammed the hardest in a sharp recession are the ones selling the most frivolous, luxurious crap to the people who can least afford it. The bursting of the bubble exposes the fact that those people never really had the resources saved up to afford all that crap in the first place. If a bunch of people in those industries get laid off and have to think about retooling to enter industries that are actually in demand by consumers spending actual money (think basic necessities and simpler pleasures), I would argue that's probably a good thing.

[stone]

Tortoise,  "the reason I'm saying the Paradox of Thrift is based on economic fallacy is because it asserts the condition of net saving and business contraction is not temporary. It claims the process continues in a downward spiral until the economy completely implodes."

I guess the question is what is meant by "implodes". The other thing to bear in mind is that saving can be very unequal across the population. In the USA, Apple is saving billions and billions of dollars. People who own large amounts of Apple stock are doing plenty of saving as a consequence. That is the kind of saving that is taking place.
Nigeria for the 1980s and 1990s is the classic case of net saving. Oil, timber, coco beans were exported, the money went to a wealthy elite who saved the money by buying real estate in London and Paris, cash and gold deposits in Switzerland and stock in developed world companies. There are trillions of USD worth of African owned assets in the UK and in Switzerland. You could say that that net saving is temporary. I guess some of those assets might one day be returned to Nigeria and spent. You could say that the Nigerian economy has not imploded but just found a level. Watch the TV series "welcome to Lagos" to make your mind up. They have no sewerage system, no power supply, almost non-existent roads. 

[Tortoise]

The TV series "Welcome to Lagos" looks like it could be interesting; I'll be sure to check it out.

I suspect the situation you're describing in Nigeria in the 1980s and 1990s may have had more to do with corrupt government and sketchy business practices than the so-called Paradox of Thrift, but I'll reserve judgment until I watch "Welcome to Lagos."

[stone]

Gumby, that "welcome to Lagos" TV program was just about the lives of ordinary people there. It wasn't directly about economics. Sorry if I gave a misleading impression about that. I agree with you about corruption -but what is corruption? It is true that some people might be put off investing in Nigeria because they would be scared of having their property confiscated. But the situation there shows what comes from having all the money going to a few people and then not being re-invested in that country. My guess is that the wealthy elite in Nigeria actually have excellent property rights since the wealthy elite who control the money are the same people who corruptly control the police and the courts. I thought that the reason why they choose not to invest in Nigeria is because ordinary Nigerians can not afford to pay for goods and services. I'm intrigued by all of this and very open to being put right if I seem in a muddle about it.

[Tortoise]

Gumby, that "welcome to Lagos" TV program was just about the lives of ordinary people there. It wasn't directly about economics. Sorry if I gave a misleading impression about that.

No problem. But I should point out that I am merely Tortoise, not the venerable Gumby

I agree with you about corruption -but what is corruption? It is true that some people might be put off investing in Nigeria because they would be scared of having their property confiscated. But the situation there shows what comes from having all the money going to a few people and then not being re-invested in that country. My guess is that the wealthy elite in Nigeria actually have excellent property rights since the wealthy elite who control the money are the same people who corruptly control the police and the courts. I thought that the reason why they choose not to invest in Nigeria is because ordinary Nigerians can not afford to pay for goods and services.

I'm not sufficiently familiar with the background and details of the Nigeria situation to discuss it intelligently. The little I know of Sub-Saharan Africa is that it would be an understatement to say that most parts of it are generally not considered very pleasant places in which to live. They tend to be war-torn, mired in poverty, and rife with human rights violations. There are numerous reasons for this, each of which could probably spark its own heated political discussion.

It looks like the Nigerian economy is one of the fastest-growing in the world right now, but in an absolute sense Nigeria's political and economic freedom are still probably a far cry from those of most developed Western economies. In that sense, using a situation in Nigeria as an illustration of the Paradox of Thrift--or any other economic theory, for that matter--might be a bit problematic. Many of the key assumptions on which most economic theories depend (consistently-enforced private property rights for everyone, not just the well-connected, for example) might not hold true in Nigeria.

If you or anyone else on this forum happens to know of a good real-world example of the Paradox of Thrift taken from a developed economy, I'm open to hearing it. I admit Austrian economics does not necessarily have a monopoly (pun intended) on economic truth, so it won't cause my entire world to come crashing down if someone pokes a big, gaping hole through a particular Austrian theory.

I'm intrigued by all of this and very open to being put right if I seem in a muddle about it.

Likewise. I enjoy discussing economics and usually take a confidently pro-Austrian position, but I've fallen flat on my face enough times to cultivate at least the beginnings of a sense of humility. I wouldn't have found my way to Harry Browne's ideas and this forum otherwise.

Now I'll attempt to steer this thread back towards its original topic of weighing the pros and cons of a gold standard: What do people here think about the pros and cons of a private-sector gold standard? One of Ludwig von Mises's students, the anarcho-capitalist Murray Rothbard, was a staunch advocate of that approach.

One of the key advantages of a private-sector gold standard is that it avoids what I see as the main pitfall of a government gold standard: the temptation for the government to break its promise by devaluing the currency. If multiple private-sector businesses compete with each other to offer money backed 100% by gold, it would be very difficult for a single business or cartel to obtain a monopoly over the money supply and then devalue it. I suppose the government could still devalue it by force, but that would require first nationalizing the entire private-sector money supply. That would be neither easy nor politically feasible if private-sector money were ingrained in the culture for many years.

[stone]

Tortoise, do you think 1930s USA (or even the developed world at the present time) show no signs of the paradox of thrift phenomenon? From what I can see there are idle machines and unemployed workers and all that is preventing them from being put to use is the lack of customers able to afford what is on offer.
I realize that economics is like one of those ink blot psychological tests where what one sees ends up just being a reflection of personal prejudice etc. I might just be seeing lack of aggregate demand because that is where my prejudice lies but I'm still seeing it.
The Nigeria 1980-2000 impoverishment is an astonishing economic phenomenon whatever its cause may have been. I'm sure there is a cautionary tale in there and it is much less talked about here than Weimer etc. I also think we need to take note of the fact that the recent rapid economic growth in SubSaharan Africa has not come about subsequent to any reduction in corruption or improvement in enforcement of property law. Those headwinds are just as strong as ever.  What has happened is vast amounts of Chinese money flooding in. The Chinese government gives interest free loans to Chinese companies or individuals to set up enterprises or build roads and railways in Africa and they employ local Africans to do much of the work and buy stuff from local African suppliers. Its all bogus credit created money from an Austrian perspective. BUT the difference is that there is no debt attached. The Chinese government literally does not care whether the loans default and many do. They do not charge interest and they do not have the objective of making money. The Chinese government only wants to create jobs as they view that as being how to keep themselves in power. I'm not saying the Chinese are good I'm just saying we need to open our eyes to what is going on. If there is stuff in the UK or US that is not done simply due to lack of funding rather than due to it being stupid, then perhaps we need to wonder whether we simply have a demand shortfall situation (ie a paradox of thrift situation).