Gyroscopic Investing

Kshartle wrote:

moda0306 wrote: A limited supply of gold DOES limit the size of economic growth, otherwise we'll reach a point of full-on deflation, and more financial crises and unemployment as a result of limited liquidity in a monetized economy.  Being able to buy more and more goods with the same amount of money is not conducive to economic growth.

The economy will likely fight to find ways around it, such as using other metals or barter, but this will cause huge unnatural restraints on our growth.

Price of gold will go up as the economy grows.

Here's the equation:

General price level = Money supply/available goods and services

Let's call them.....GP, MS and AGS

GP = MS/AGS

When AGS goes up and the money supply stays the same GP goes down. That's all. No constraint. Money gets more valuable because it's scarce. This facilitates trade and growth because it provides an incentive to save. When people save they don't bury it in the backyard. They loan it out or invest it rather than consuming. That grows the economy.

Incidently did a dollar buy more in 1800 or 1900? I don't have the hard data, but I suspect you could buy more for a dollar in 1900 than 1800. Could be wrong here.

When money is too plentiful (ran off a press) it's a disincentive to save. It enoucourages artificial overconsumption that destroys growth. This is the current system.

Please feel free to refute with logic and reason and teach me.

I fully understand that the price of gold will grow as the economy grows, which is exactly why it will limit that growth well-below what it otherwise would be.  A real return on a risk-free asset is a disincentive to investment and spending.

To be clear, I'm not saying that gold will stop growth completely, but just severely limit it after it becomes obvious that our medium of exchange is getting a real rate of return, risk free.

Einstein was against gold for similar reasons...

Albert Einstein wrote:“The gold standard has, in my opinion, the serious disadvantage that a shortage in the supply of gold automatically leads to a contraction of credit and also of the amount of currency in circulation, to which contraction prices and wages cannot adjust themselves sufficiently quickly.”?

And trade surplus nations became hoarders of gold while trade deficit nations were generally in shortage. The more global trade became, the worse that problem became.

Kshartle wrote:

moda0306 wrote: A limited supply of gold DOES limit the size of economic growth, otherwise we'll reach a point of full-on deflation, and more financial crises and unemployment as a result of limited liquidity in a monetized economy.  Being able to buy more and more goods with the same amount of money is not conducive to economic growth.

The economy will likely fight to find ways around it, such as using other metals or barter, but this will cause huge unnatural restraints on our growth.

Price of gold will go up as the economy grows.

Here's the equation:

General price level = Money supply/available goods and services

Let's call them.....GP, MS and AGS

GP = MS/AGS

When AGS goes up and the money supply stays the same GP goes down. That's all. No constraint. Money gets more valuable because it's scarce. This facilitates trade and growth because it provides an incentive to save. When people save they don't bury it in the backyard. They loan it out or invest it rather than consuming. That grows the economy.

Incidently did a dollar buy more in 1800 or 1900? I don't have the hard data, but I suspect you could buy more for a dollar in 1900 than 1800. Could be wrong here.

When money is too plentiful (ran off a press) it's a disincentive to save. It enoucourages artificial overconsumption that destroys growth. This is the current system.

Please feel free to refute with logic and reason and teach me.

In a real coin standard, the "price" of gold is 1 oz/oz. Of course, the purchasing power can and will fluctuate, but the "price" never changes.

moda0306 wrote:

Kshartle wrote:

moda0306 wrote: A limited supply of gold DOES limit the size of economic growth, otherwise we'll reach a point of full-on deflation, and more financial crises and unemployment as a result of limited liquidity in a monetized economy.  Being able to buy more and more goods with the same amount of money is not conducive to economic growth.

The economy will likely fight to find ways around it, such as using other metals or barter, but this will cause huge unnatural restraints on our growth.

Price of gold will go up as the economy grows.
Here's the equation:

General price level = Money supply/available goods and services

Let's call them.....GP, MS and AGS

GP = MS/AGS

When AGS goes up and the money supply stays the same GP goes down. That's all. No constraint. Money gets more valuable because it's scarce. This facilitates trade and growth because it provides an incentive to save. When people save they don't bury it in the backyard. They loan it out or invest it rather than consuming. That grows the economy.

Incidently did a dollar buy more in 1800 or 1900? I don't have the hard data, but I suspect you could buy more for a dollar in 1900 than 1800. Could be wrong here.

When money is too plentiful (ran off a press) it's a disincentive to save. It enoucourages artificial overconsumption that destroys growth. This is the current system.

Please feel free to refute with logic and reason and teach me.

I fully understand that the price of gold will grow as the economy grows, which is exactly why it will limit that growth well-below what it otherwise would be.  A real return on a risk-free asset is a disincentive to investment and spending.

See the post about us disagreeing on human nature for the answer to this quandry.

People aren't going to horde money and lock it away never to be used. This is nonsense.  There is enough in this thread and dozens of others that you've been a part of to demonstrate all this ad nauseum.


Nevermind. I have no idea what i'm talking about. You're right. I surrender. I can shoot down all this hogwash all day like it's a shooting gallery but that's already been demonstrated to my satisfaction. If no one else is satisfied I can live with that.

Last post on this thread for me. We should move on to more interesting topics at this point. What's everyone's favorite color?!?!?!?

Libertarian666 wrote:

Kshartle wrote:

moda0306 wrote: A limited supply of gold DOES limit the size of economic growth, otherwise we'll reach a point of full-on deflation, and more financial crises and unemployment as a result of limited liquidity in a monetized economy.  Being able to buy more and more goods with the same amount of money is not conducive to economic growth.

The economy will likely fight to find ways around it, such as using other metals or barter, but this will cause huge unnatural restraints on our growth.

Price of gold will go up as the economy grows.

Here's the equation:

General price level = Money supply/available goods and services

Let's call them.....GP, MS and AGS

GP = MS/AGS

When AGS goes up and the money supply stays the same GP goes down. That's all. No constraint. Money gets more valuable because it's scarce. This facilitates trade and growth because it provides an incentive to save. When people save they don't bury it in the backyard. They loan it out or invest it rather than consuming. That grows the economy.

Incidently did a dollar buy more in 1800 or 1900? I don't have the hard data, but I suspect you could buy more for a dollar in 1900 than 1800. Could be wrong here.

When money is too plentiful (ran off a press) it's a disincentive to save. It enoucourages artificial overconsumption that destroys growth. This is the current system.

Please feel free to refute with logic and reason and teach me.

In a real coin standard, the "price" of gold is 1 oz/oz. Of course, the purchasing power can and will fluctuate, but the "price" never changes.

the price of goods in gold terms will go down.

That is what I mean by price will go up.

If you measure gold in chickens and more chickens are produced the price in chickens will go up.

Sorry for being unclear. It's difficult to break through the programming of talking about the price of gold since we always talk like that.

Same principle as the price of the dollar. It's always one dollar, it just gains value against other things (well...not that often hah! )

Kshartle wrote:People aren't going to horde money and lock it away never to be used. This is nonsense.

Are you saying you're smarter than Einstein?

The fact of the matter is...

Trade surplus nations hoarded gold.

Trade deficit nations were generally in shortage (unless they happened to be lucky enough to live over gold mines).

I was thinking about the farmers in the midwest and the gold standard bankers in the cities. How come the farmers didn't recognize that their food was worth more than the bankers gold? If the farmers had colluded like the bankers did, they could have strangled the cities by refusing to sell their crops for gold and instead demanded payment in something that the bankers had no access to....like blue jay toenails or something. Seems like farmers didn't realize that they really had the power in this situation.

Kshartle wrote: Incidently did a dollar buy more in 1800 or 1900? I don't have the hard data, but I suspect you could buy more for a dollar in 1900 than 1800. Could be wrong here.

doodle wrote: I was thinking about the farmers in the midwest and the gold standard bankers in the cities. How come the farmers didn't recognize that their food was worth more than the bankers gold? If the farmers had colluded like the bankers did, they could have strangled the cities by refusing to sell their crops for gold and instead demanded payment in something that the bankers had no access to....like blue jay toenails or something. Seems like farmers didn't realize that they really had the power in this situation.

I believe the problem was that they were screwed by the time they figured out what was happening. Bankers tightened the gold/money supply and drove them into a depression and bought up all their property. By that time, most farmers had already fallen into a debt trap, with prices falling, and their farms were getting foreclosed on.

Pointedstick wrote:

Kshartle wrote: Incidently did a dollar buy more in 1800 or 1900? I don't have the hard data, but I suspect you could buy more for a dollar in 1900 than 1800. Could be wrong here.

Economic growth is possible even if the unit of money gains value clearly.

I realize this is not the same as a completely static money supply. I would argue that the line would just be steeper and growth not impeeded. But you guys debate that please. I'm beat.

Gumby wrote:

doodle wrote: I was thinking about the farmers in the midwest and the gold standard bankers in the cities. How come the farmers didn't recognize that their food was worth more than the bankers gold? If the farmers had colluded like the bankers did, they could have strangled the cities by refusing to sell their crops for gold and instead demanded payment in something that the bankers had no access to....like blue jay toenails or something. Seems like farmers didn't realize that they really had the power in this situation.

I believe the problem was that they were screwed by the time they figured out what was happening. Bankers tightened the gold/money supply and drove them into a depression and bought up all their property. By that time, most farmers had already fallen into a debt trap, with prices falling, and their farms were getting foreclosed on.

Gumby wrote:

doodle wrote: I was thinking about the farmers in the midwest and the gold standard bankers in the cities. How come the farmers didn't recognize that their food was worth more than the bankers gold? If the farmers had colluded like the bankers did, they could have strangled the cities by refusing to sell their crops for gold and instead demanded payment in something that the bankers had no access to....like blue jay toenails or something. Seems like farmers didn't realize that they really had the power in this situation.

I believe the problem was that they were screwed by the time they figured out what was happening. Bankers tightened the gold/money supply and drove them into a depression and bought up all their property. By that time, most farmers had already fallen into a debt trap, with prices falling, and their farms were getting foreclosed on.

Right, that's how things happened. But if Kshartle is arguing that people should be able to freely decide whatever they want to use for money, then essentially money doesn't really work because it can easily be abused. Like my example, if the farmers were indebted to the bankers for gold coins (what the bankers  accept as payment) then the farmers can just as easily change the form of payment which they will accept for their crops to (blue jay toenails) and starve the bankers. Ultimately the only group in this scenario that has done any real work are the farmers and somehow those that have done the work and produced something tangible are also in debt to those who have really done nothing at all...the bankers. That doesn't seem very fair to me.

In general, I don't tend to believe that deflation is really so bad. In our current economy, we have gazillions of products whose price has fallen and people didn't avoid purchasing them. It happens all around us.

Did people hoard their money and avoid buying computers in 1995 because they cost $2,000? No, they bought them like crazy. And now that you can get a good computer for $600, people still buy them. Do people hoard their money out of the hope that the price will fall to $500? I don't think so. I think people buy what they want or need when they feel like they want or need it.

This is just observational of course, not at all scientific or backed up by any study or survey or anything. But the people I've known in my life almost never delayed purchases due to the perception of the price falling, unless the price falling was for a market reason (a sale, impending launch of a new product, a speculative bubble popping, etc). People don't say, "oh, the rate of deflation is 3%, I'd better wait a year and buy this later because I'll get 3% off!" Such a small diminution in price just isn't worth waiting for; it has to be like 15%, 25%, 50% off, stuff like that. Nobody ever hurried to a sale at a store for a measly 3% off.

Pointedstick wrote:

Kshartle wrote: Incidently did a dollar buy more in 1800 or 1900? I don't have the hard data, but I suspect you could buy more for a dollar in 1900 than 1800. Could be wrong here.

Let's see the last 100 years of that graph, then we can talk about whether gold or paper is more disruptive to the economy. 

Pointedstick wrote:In general, I don't tend to believe that deflation is really so bad.

Aren't you forgetting that your wages and the value of your home would decline over time? It's really hard for people to justify buying a home that will be worth less, nominally, in a few years — while their wages are going down, nominally. People just have a hard time with the psychology.

It's called Money Illusion...

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

Wikipedia.org wrote:In economics, money illusion, or price illusion, refers to the tendency of people to think of currency in nominal, rather than real, terms...

...Money illusion can also influence people's perceptions of outcomes. Experiments have shown that people generally perceive an approximate 2% cut in nominal income with no change in monetary value as unfair, but see a 2% rise in nominal income where there is 4% inflation as fair, despite them being almost rational equivalents. However, this result is consistent with the 'Myopic Loss Aversion theory'. Furthermore, the money illusion means nominal changes in price can influence demand even if real prices have remained constant.


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

Libertarian666 wrote: Let's see the last 100 years of that graph, then we can talk about whether gold or paper is more disruptive to the economy. 

Sure:



However, it's been a while since I made those graphs, and in retrospect, I should re-do them to additionally plot wages and interest rates.

It's scary to see the dollar losing 90% of its value, but if during the same time period, the average wage increases 10 times, and the interest rate about equals the inflation rate, what's the problem?

Of course, we know those things didn't happen. Wages didn't keep up and interest rates were always lower.

Pointedstick wrote:Of course, we know those things didn't happen. Wages didn't keep up and interest rates were always lower.

Right, but it's a lot cheaper to buy an incandescent light bulb now.

The standard of living is dramatically higher now.

Gumby wrote:

Pointedstick wrote:In general, I don't tend to believe that deflation is really so bad.

Aren't you forgetting that your wages and the value of your home would decline over time? It's really hard for people to justify buying a home that will be worth less, nominally, in a few years. People just have a hard time with the psychology.

It's called Money Illusion...

I know, but to be honest, I don't really buy it in most cases. People are totally comfortable with a lot of the things they buy decreasing in value, even really big expensive things like motor vehicles. There are people who blow $50,000 on luxury SUVs and trucks, only to see the value cut in half or more within a few short years. People expect a negative price movement on their furniture, electronics, clothes, books... really everything that's not cash in the bank or houses. And the expectation that houses are investments that increase in value is something that I think is a recent phenomenon.

As for wages, I suppose you're right. But most non-exceptional people typically receive a raise equal to about the rate of inflation, maybe a little bit more. The fact that people don't like seeing their wages cut ("sticky wages") would mean that probably nobody average would receive a raise at all, but their purchasing power would actually rise!

Gentle deflation would actually be a great benefit to the average worker due to sticky wages!

doodle wrote: Ultimately the only group in this scenario that has done any real work are the farmers and somehow those that have done the work and produced something tangible are also in debt to those who have really done nothing at all...the bankers. That doesn't seem very fair to me.

I'm with the bankers. They risked their cash on these loser farmers.

These economic principles you are expressing were put on a flag. It had a hammer and sickle. The results are absolutely horrifying. Millions starving to death and thrown into slave labor. All in the name of "fairness" to the worker over the bankers and their money.

Heaven help us if this welfare economic sickness continues to spread. Please, do yourself and everyone a favor by not spreading this mental disease. I don't need my kids in re-education and labor camps that result from the crusade for workers. It's a freakin scam. An obvious one.

Essentially, long-term, we can expect gold to maintain its real value, until the point where our economy grows and gold supply stops growing.

Then, our expectation would be that gold will gain value every year in real terms.

How can this NOT hamper investment and growth...

Even without the aforementioned unsustainable framework of having more principal and interest needing to be paid back.

If you take two completely identical societies, one with a money supply that grows about even with the economy, and the other with a fixed money supply, the former is going to grow more rapidly than the former.  I'm surprised there's debate about that.

Pointedstick wrote:

Gumby wrote:

Pointedstick wrote:In general, I don't tend to believe that deflation is really so bad.

Aren't you forgetting that your wages and the value of your home would decline over time? It's really hard for people to justify buying a home that will be worth less, nominally, in a few years. People just have a hard time with the psychology.

It's called Money Illusion...

I know, but to be honest, I don't really buy it in most cases. People are totally comfortable with a lot of the things they buy decreasing in value, even really big expensive things like motor vehicles. There are people who blow $50,000 on luxury SUVs and trucks, only to see the value cut in half or more within a few short years. People expect a negative price movement on their furniture, electronics, clothes, books... really everything that's not cash in the bank or houses. And the expectation that houses are investments that increase in value is something that I think is a recent phenomenon.

As for wages, I suppose you're right. But most non-exceptional people typically receive a raise equal to about the rate of inflation, maybe a little bit more. The fact that people don't like seeing their wages cut ("sticky wages") would mean that probably nobody average would receive a raise at all, but their purchasing power would actually rise!

Gentle deflation would actually be a great benefit to the average worker due to sticky wages!

Right... but over time, as the economy grew, the cost of banana would be like $.000002. That would be some really weird currency.

And shareholders wouldn't appreciate a nominal loss each quarter! That would make taxes pretty weird too.

Pointedstick wrote:

Libertarian666 wrote: Let's see the last 100 years of that graph, then we can talk about whether gold or paper is more disruptive to the economy. 

Sure:



However, it's been a while since I made those graphs, and in retrospect, I should re-do them to additionally plot wages and interest rates.

It's scary to see the dollar losing 90% of its value, but if during the same time period, the average wage increases 10 times, and the interest rate about equals the inflation rate, what's the problem?

Of course, we know those things didn't happen. Wages didn't keep up and interest rates were always lower.

The problem is that devaluation of the currency impairs the obligation of contracts. That was specifically prohibited to the States in the Constitution, for good reason:

The Contract Clause prohibits states from enacting any law that retroactively impairs contract rights. The Contract Clause applies only to state legislation, not court decisions.

'The Framers of the Constitution added this clause in response to the fear that states would continue a practice that had been widespread under the Articles of Confederation—that of granting "private relief." Legislatures would pass bills relieving particular persons (predictably, influential persons) of their obligation to pay their debts. It was this phenomenon that also prompted the framers to make bankruptcy law the province of the federal government.'

(from http://en.wikipedia.org/wiki/Contract_Clause)

Of course, no one thought that the federal government needed to be prohibited from doing that, because they were not granted that power, and anything not granted was reserved via the 9th and 10th Amendments. Unfortunately, this exposes the major flaw in all pro-governmental philosophies: it is impossible to hold the government to its supposed limits if its agents don't want to be limited.

Kshartle wrote:loser farmers.

??

Gumby wrote: Right... but over time, as the economy grew, the cost of banana would be like $.000002. That would be some really weird currency.

And shareholders wouldn't appreciate a nominal loss each quarter! That would make taxes pretty weird too.

By the same token, today a banana is $0.50, instead of a penny. Is that really any weirder? I mean, this stuff is all a human social construction anyway. None of it is natural. We adapt to what works well enough.

Gumby wrote:

Kshartle wrote:loser farmers.

??

Said purely for dramatic purposes. The farmers aren't better than the bankers. This type of thought pattern leads to the horrors of the gulags and pitchfork wielding masses crusading to their own doom.

moda0306 wrote: Essentially, long-term, we can expect gold to maintain its real value, until the point where our economy grows and gold supply stops growing.

Then, our expectation would be that gold will gain value every year in real terms.

How can this NOT hamper investment and growth...

Even without the aforementioned unsustainable framework of having more principal and interest needing to be paid back.

If you take two completely identical societies, one with a money supply that grows about even with the economy, and the other with a fixed money supply, the former is going to grow more rapidly than the former.  I'm surprised there's debate about that.

I'm also surprised there is debate about that. It has been established beyond any reasonable doubt that printing money retards rather than assists economic growth, but obviously some people don't know that.

See http://austrianeconomics.wikia.com/wiki ... aper_money for a brief explanation.