Gyroscopic Investing

This article gives a nice overview of various "heterodox" economic schools
http://www.economist.com/node/21542174

That was a really interesting article, but I am just rolling my eyes at the "market monetarism".  They're just clueless how the system really works, preferring their alternative reality.  If their policies eventually get implemented by the Fed as the next fad dogma, gold will really skyrocket.

And again, this is exactly why central banking should not be centralized and politicalized.  It will be co-opted by extremist elements every time with no checks and balances to kill off such bad ideas before doing great harm to society.

MG

stone wrote: This article gives a nice overview of various "heterodox" economic schools
http://www.economist.com/node/21542174

It appears the Austrians are truly the ones who don't understand how the monetary system works.  How often have I heard Ron Paul explain how broke the US government is?

I'm not sure whether "market monetarists" are the same as MMT'ers, but MMT is hands down the most complete explanation of our monetary system, IMO.  Keynesians want us to arm ourselves against a fake alien invasion to recover our economy, and Austrians want us to act like we have limitations we don't really have just to fulfill their moral agenda, inciting countless logical fallacies.

MMT really gets to the core of what all these "assets" and "liabilities" really are... ways of more efficiently pulling real value out of the economy with the efficiency that a properly-managed medium of exchange can bring.

Austrian was like the school of pre-behavioral finance before there was behavorial finance.  I wouldn't give much stock to anything else in the school as its a bit too anarchronistic now, stuck in the old mechanistic, industrial, tangible, fixed exchange rate, era.  I'm not sure, though, if theres an economic school that has incorporated behavioral finance other than Rational Economics (this is the school that shows how people nullify the Fed's actions and make it irrelevant).  Austrians also believe that central banking causes the business cycle which is just silly as the business cycle has been around for centuries long before central banking!  I do like the "moral force" of Austrian that the other schools lack, it gives it a feeling of strong conviction rather than ignoring morality as always being relative.  But that just means it becomes an issue of faith rather than facts from the scientific method.  We all know algorithms are B.S. for modeling reality, but it does gives a comfortable sense of security vs where there is none at all.

"Market Monetarists" seems to me to be basically Friedman's Monetarism dressed up in a fancy new name with fancy new rationalizations and fancy new irrationalities.  Targeting the monetary base was a disaster.  I can't imagine going further...  some academics just do not learn, but hey they just don't get "profit or loss" feedback like normal people.

I can't learn more about MMT yet or my brain is going to simply explode!

Just rememeber, "properly-managed medium of exchange" is an oxymoron unless it is done by the voluntary actions of billions of individuals in a free market instead of a 7-member Politiburo of ivory tower academics aka the "Board of Governors of the Federal Reserve".  I'm gonna go throw up now.

MG

moda0306 wrote: It appears the Austrians are truly the ones who don't understand how the monetary system works.  How often have I heard Ron Paul explain how broke the US government is?

I'm not sure whether "market monetarists" are the same as MMT'ers, but MMT is hands down the most complete explanation of our monetary system, IMO.  Keynesians want us to arm ourselves against a fake alien invasion to recover our economy, and Austrians want us to act like we have limitations we don't really have just to fulfill their moral agenda, inciting countless logical fallacies.

MMT really gets to the core of what all these "assets" and "liabilities" really are... ways of more efficiently pulling real value out of the economy with the efficiency that a properly-managed medium of exchange can bring.

MG,

Yeah MMT is tough to swallow in a short period. 

I also completely agree that trying to goof around with monetary policy is just missing the point... the act of buying "blue" money (bonds) with "green" money (cash) hardly moves mountains.  As you've mentioned, you're simply exchanging one form of gov't "liability" (though we may disagree on what "liability" means in this instance) for another.

I believe a fiat medium of exchange, like our military, can be extreme well run or extremely abused.  I like the idea that we have our government do both, but try, try, try to get them to do a better job and not just reward their buddies.

moda0306 wrote:I believe a fiat medium of exchange, like our military, can be extreme well run or extremely abused.

Fiat money systems are always abused. This is what history shows and over again. I recently found this paper that goes over the Nixon tapes where pressure was put on Arthur Burns in the late 60's early 70's to print a bunch of money to help Nixon get elected even though they knew it would cause inflation.

In essence, Nixon made every holder of dollars fund his campaign as he artificially boosted the economy for a short  period of time.

http://cba.unomaha.edu/faculty/mwohar/w ... n42006.pdf

I tend to agree with the Austrians. Economies are not easily modeled and humans are always learning and adapting in ways that can't be predicted by Ivy tower economists and Federal Reserve Board members who jerk the money supply around. Leaving the levers of the printing press in control of politicians has always been a very bad idea historically.

The crux of the gold standard argument is often lost in the debates I see. But the kernel of truth remains which is that gold, for all its faults, has proven to be a better form of money than any paper standard has been so far. Paper money utopias will never exist as long as humans are calling the shots behind the scenes.

It doesn't take Ivory Tower fed Governors to tell you need an expanding money supply based on the economy's natural will to grow and be productive.  Nature, unfortunately, doesn't give us that... there's only so much gold.

I like Warren Mosler's description of how we should run our country's finances, since deficit spending, not flipping cash for treasuries, is what drives what we hold in the form of "net financial assets."

1) Spend based on public purpose: There may be disagreements on what this means, but basically, based on whatever the level of private-sector activity is, engage in the proper level of public activity, and don't worry about "deficits" or "paying for it."  If the economy needs a road, courthouse, or sewer system, we build them.  Let's not act like pieces of paper are holding us back.

2) Tax based on economic need for money (or "net financial assets": Since taxation is what gives a fiat currency value, if an economy is overheating into inflation, then adjust short-term taxation to meet the economy's needs.  If we're suffering recession, then we need to lower taxes.

He goes on to discuss how he thinks we should avoid cronyism in spending/taxation and monetary policy.  Governments have engaged in very stupid behavior well before we started going off the gold standard.  Attaching our well-being to a monetary metal isn't going to make otherwise unaccountable congressmen get religion.

moda0306 wrote: 1) Spend based on public purpose: There may be disagreements on what this means,

That's an understatement!

but basically, based on whatever the level of private-sector activity is, engage in the proper level of public activity, and don't worry about "deficits" or "paying for it."  If the economy needs a road, courthouse, or sewer system, we build them.

How does the government figure out what this proper figure of spending is to match the private-sector? Seems that much of the time what a politician thinks the economy needs just happens to be the biggest and most wasteful project that is in their voting district.

Let's not act like pieces of paper are holding us back.

They do though. The people buying the bonds are going to have a say in these matters in terms of what the interest rates on the loans will be.

2) Tax based on economic need for money (or "net financial assets": Since taxation is what gives a fiat currency value, if an economy is overheating into inflation, then adjust short-term taxation to meet the economy's needs.  If we're suffering recession, then we need to lower taxes.

And again philosophically some people think higher taxes in a bad economy are what's needed to help the downtrodden (and of course win re-election for them). Other's think taxes should be as low as possible all the time. You will never reach agreement on this.

Attaching our well-being to a monetary metal isn't going to make otherwise unaccountable congressmen get religion.

No, but it does bring accountability to their actions.

As discussed before, we can solve the "What is a better money? Fiat or Specie?" argument very easily. Simply legalize gold completely by removing all taxes and restrictions it has in terms of trading in the free economy against the dollar. Get rid of the collectibles tax, allow contracts to be written with payment in gold as before, etc. Let it compete against the dollar on every level. If we were to do this two things would probably happen:

1) People would probably prefer the stability of gold vs. the constant inflation of the dollar each year.
2) It would limit overspending by government because direct and unencumbered competition against gold would allow citizens to easily sell dollars and buy gold with no penalties if they felt the people running the show were messing up.

There is a reason why gold was not allowed to be owned by US Citizens from 1933-1971 and why it has taxes on it today to make it an uncompetitive monetary unit inside the US. The reason is if the dollar had to compete against it in a fair match up it would probably lose. Or at least be punished so severely that they couldn't get away with this idea that inflation must happen each and every year for an economy to grow.

craigr wrote: There is a reason why gold was not allowed to be owned by US Citizens from 1933-1971 and why it has taxes on it today to make it an uncompetitive monetary unit inside the US. The reason is if the dollar had to compete against it in a fair match up it would probably lose. Or at least be punished so severely that they couldn't get away with this idea that inflation must happen each and every year for an economy to grow.

Exactly right.

You don't have to predict which way things would go in order to understand why your idea would be beneficial.  This competition from gold would act to naturally discipline the dollar.

craig,

Your point about bond-holders "having a say" over spending is pretty false when you look at the role bonds really play.  They are simply a tool to reach the fed's target rate.  They don't exist as they did during the gold standard, where they guaranteed the gov't didn't have to pay back gold until bonds matured.  Bonds are nothing like this any more.  Unlike the gold standard days, our government isn't simply a user of currency, but the monopoly issuer of it.  That means, as MG agreed, that both bonds and cash in a fiat system are "liabilities" of our government, but of different forms.

Our infrastructure projects shouldn't have so much cronyism involved, and should definitely be more geared towards public purpose, but using a gold standard to produce that is simply using the wrong tool for the job.  I don't think a gold standard will limit cronyism, but it will severly hamper to do those things that DO make a difference.  Recently you said that a bunch of countries shouldn't go onto the same currency (referring to Europe).  That's basically what the gold standard is.  Look at Europe now, and look at the economic recovery of countries after WWII as they went off the gold standard, and you'll realize that a pegged currency is simply a bad idea due to self-fulfilling macroeconomic instability that can result.

The gold standard simply puts default risk in our lap (our nations, not the congressmen themselves).  The same politicians that don't really care about non-productive projects are supposed to care if we eventually default?  What we need is free gold ownership... I agree... but current laws hardly truly hamper someone who wants to save their money in gold.  For me, I'm going to keep my emergency funds mostly in our domestic currency, not gold, which has proven remarkably volatile.  I'll hold some gold for when I need it in the future as a form of insurance, but I'm not going to go to the grocery store with the stuff.  This is 2011... neither will most other people.  They'll use their debit card.

Further, Gold ETFs, while not perfect, act as a great way to hold some of your gold savings in a tax-deferred or tax-free space, and in a form that's easier for people to use in a modern economy.

You're telling me that if not for taxes and legal tender laws people would save their emergency fund and try to spend in something that can go down 20%-30% per year against the price of goods they by vs cash, which tends to only lose 1-3% to inflation?  I simply don't think so.

Well gold IS free to own now, and, to be honest, quite easy to avoid most of the taxes on.  I also agree that this should be a part of everyone's portfolio to hedge against debasing the dollar and the harm that could do to your finances.

I think we all can agree that confiscation of gold in the 30's was wrong, and definitely gave the government undue power.

I guess we can't really test this, but a tax on the eventual sale of gold isn't what keeps people out of it, for the most part... ask most citizens why they don't have more gold in their safe and it's not "well because the gov't taxes it too much."  It's because it's a shiny yellow metal that the super-market doesn't accept that has a tendancy to drop 20%-30% in a year.

I would add there's probably a large bit of lack of knowledge of economics as part of the reason more people don't own more gold, but we simply have 95% of the opportunity we need to have gold compete freely and fairly.  I think to peg the non-use of gold to taxes and legal tender laws is a stretch.

moda0306 wrote:You're telling me that if not for taxes and legal tender laws people would save their emergency fund and try to spend in something that can go down 20%-30% per year against the price of goods they by vs cash, which tends to only lose 1-3% to inflation?  I simply don't think so.

If goods were priced in Fiat Dollars and Gold Dollars (e.g. two prices on the shelf), then the price in gold would not fluctuate 20-30% a year at all. It would be the dollar that was doing the bobbing up and down. Doing this would just point out to people that it really isn't gold moving at all. It's simply the dollar moving against gold based on market expectations on how much it will be worth in gold in the future. Not to mention that I bet many contracts would like to be written so they would be redeemed in gold as they could in the past instead of being forced to take dollars under legal tender laws.

As for the rest of the points. All well and good. But I have to live in the world I have, not the one I want. While it would be nice to have the Milton Friedman dream of an irrational computer controlling the money supply precisely as required to match economic growth. The reality is we have people like Obama, Bush, Clingon, Bush, Reagan, Carter, Ford, Nixon, FDR, all of Congress, etc. doing it. And at that level of power they are always going to look out for Numero Uno. And that ain't you and me!

craigr wrote:How does the government figure out what this proper figure of spending is to match the private-sector?

craigr wrote:The people buying the bonds are going to have a say in these matters in terms of what the interest rates on the loans will be.

Waren Mosler answers these questions in the Seven Deadly Innocent Frauds of Economic Policy:

http://moslereconomics.com/wp-content/p ... s/7DIF.pdf

With respect to interest rates, Mosler recommends that the Treasury simply stop issuing longer Treasuries...

Interest Rates and Monetary Policy

It is the realm of the Federal Reserve to decide the nation's interest rates. I see every reason to keep the "risk free" interest rate at a minimum, and let the market decide the subsequent credit spreads as it assesses risk.

Since government securities function to support interest rates, and not to finance expenditure, they are not necessary for the operation of government. Therefore, I would instruct the Treasury to immediately cease issuing securities longer than 90 days. This will serve to lower long-term rates and support investment, including housing. Note, the Treasury issuing long term securities and the Fed subsequently buying them, as recently proposed, is functionally identical to the Treasury simply not issuing those securities in the first place.

I would also instruct the Federal Reserve to maintain a Japan like 0% fed funds rate. This is not inflationary nor is it the cause of currency depreciation, as Japan has demonstrated for over 10 years. Remember, for every $ borrowed in the banking system, there is a $ saved. Therefore, changing rates shifts income from one group to another. The net income effect is zero. Additionally, the non government sector is a net holder of government securities, which means there are that many more dollars saved than borrowed. Lower interest rates mean lower interest income for the non-government sector. Thus, it is only if the borrower's propensity to consume is substantially higher than that of savers does the effect of lower interest rates become expansionary in any undesirable way. And history has shown this never to be the case. Lower long term rates support investment, which encourages productivity and growth. High risk-free interest rates support those living off of interest payments (called rentiers), thereby reducing the size of the labor force and consequently reducing real national output.

The Role of Government Securities

It is clear that government securities are not needed to "fund" expenditures, as all spending is but the process of crediting a private bank account at the Fed. Nor does the selling of government securities remove wealth, as someone buying them takes funds from his bank account (which is a U.S. financial asset) to pay for them, and receives a government security (which is also a U.S. financial asset). Your net wealth is the same whether you have $1 million in a bank account or a $1 million Treasury security. In fact, a Treasury security is functionally nothing more than a time deposit at the Fed.

Nearly 20 years ago, Soft Currency Economics was written to reveal that government securities function to support interest rates, and not to fund expenditures as generally perceived. It goes through the debits and credits of reserve accounting in detail, including an explanation of how government, when the Fed and Treasury are considered together, is best thought of as spending first, and then offering securities for sale. Government spending adds funds to member bank reserve accounts. If Govt. securities are not offered for sale, it's not that government checks would bounce, but that interest rates would remain at the interest rate paid on those reserve balances.

In the real world, we know this must be true. Look at how Turkey functioned for over a decade - quadrillions of liras of deficit spending, interest rate targets often at 100%, inflation nearly the same, continuous currency depreciation and no confidence whatsoever. Yet government "finance" in lira was never an issue. Government lira checks never bounced. If they had been relying on borrowing from the markets to sustain spending, as the mainstream presumed they did, they would have been shut down long ago. Same with Japan – over 200% total government debt to GDP, 7% annual deficits, downgraded below Botswana, and yet government yen checks never bounced, and 3-month government securities fund near 0%. Again, clearly, funding is not the imperative.

The U.S. is often labeled "the world's largest debtor." But what does it actually owe? For example, assume the U.S. government bought a foreign car for $50,000. The government has the car, and a non-resident has a U.S. dollar bank account with $50,000 in it, mirroring the $50,000 his bank has in its account at the Fed that it received for the sale of the car. The non-resident now decides that instead of the non-interest bearing demand deposit, he'd rather have a $50,000 Treasury security, which he buys from the government. Bottom line: the US government gets the car and the non-resident holds the government security. Now what exactly does the U.S. government owe? When the $50,000 security matures, all the government has promised is to replace the security held at the Fed with a $50,000 (plus interest) credit to a member bank reserve account at the Fed. One financial asset is exchanged for another. The Fed exchanges an interest bearing financial asset (the security) with a non-interest bearing asset. That is the ENTIRE obligation of the U.S. government regarding its securities. That's why debt outstanding in a government's currency of issue is never a solvency issue.

Source: Seven Deadly Innocent Frauds of Economic Policy

Fundamentally, I have far more faith in Gresham than I do in Keynes.

I also think the Federal Reserve should go away. They are the third central bank we've had. We got rid of two of them and can get rid of this one, too. We should bring back Andrew Jackson to assist if needed.

moda0306 wrote: Well gold IS free to own now, and, to be honest, quite easy to avoid most of the taxes on.

It is?  What if I want to "spend" my gold in order to buy something?  I have to realize a gain and pay up to 28% tax on any "gains" (aka the dollar losing value against gold.)  That's an incredible disincentive.

If you have a way to legally avoid this incredible tax burden, I'm all ears.

moda0306 wrote:I would add there's probably a large bit of lack of knowledge of economics as part of the reason more people don't own more gold, but we simply have 95% of the opportunity we need to have gold compete freely and fairly.  I think to peg the non-use of gold to taxes and legal tender laws is a stretch.

I'm surprised that you view this as a "stretch".  You can't use it to buy anything without getting taxed, draw up any contracts in which gold is the prescribed unit of payment, and you can't pay taxes in it.  Outside of outright banning or some kind of sales tax, what further disincentives could there possibly be?

The typical "dollars are denominated in gold, not the other way around" argument has a little truth to it but is mostly a stretch.  Try telling that who bought gold in 1980 to save vs someone who held a treasury MM account through the 70's.

Yes, there's some loss to holding cash in a domestic currency, but all-in-all it's usually worth it to not risk losing 20-35% of your REAL wealth in a year when you're hoping to have the same purchasing power.  In fact, the PP spells this out loud and clear... gold will go on for very long periods losing nominal and real value.  Gold lost value 12 of 13 consecutive years in the 80's and 90's.

Dollars are much more stable than gold when compared to a basket of goods.  This is the MAIN consideration of intelligent savers when they choose to save more in dollars than in gold.

LW,

You are paid by your boss in dollars, so engaging in commerce in dollars after you've stashed away your "gold savings" that month should hardly be an issue.

Just because you can't transact every day transactions with gold doesn't mean you have been shot in the leg and will forever be bent at the whim of a debasing government.  You have strategies to avoid this... we discuss this every day on this forum.

PS, with Andrew Jackson should we reinstate slavery and move some Indians to somewhere nobody wants to live?

Also, per Wikipedia...

"In January 1835, Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished.[26][27] The accomplishment was short lived. A severe depression from 1837 to 1844 caused a tenfold increase in national debt within its first year."

Maybe austerity doesn't work after all?

I'm half kidding.  I like what Andrew Jackson did to bring us a bit closer to democratic rule and less "republic."  I can't imagine not being able to vote for my senators or president.

moda0306 wrote: You are paid by your boss in dollars, so engaging in commerce in dollars after you've stashed away your "gold savings" that month should hardly be an issue.

Just because you can't transact every day transactions with gold doesn't mean you have been shot in the leg and will forever be bent at the whim of a debasing government.  You have strategies to avoid this... we discuss this every day on this forum.

In other words, with our current laws, gold works just fine as money... so long as you do not attempt to use it as actual money.  If I convert all of my dollars to gold, what happens when I attempt to buy things with that gold?  Will I not be liable for a huge amount of tax if gold has gained value relative to the dollar?

It seems that you agree that performing day-to-day transactions in gold is completely impractical under current laws.  Given that, isn't Craig completely correct that one does not have the option to conduct their financial business in gold?

I'm not sure what you're taking issue with here.  It's clear that if you can't actually use it without facing big penalties, gold's not on any sort of level playing field as a competing currency.

moda0306 wrote:Also, per Wikipedia...

"In January 1835, Jackson paid off the entire national debt, the only time in U.S. history that has been accomplished.[26][27] The accomplishment was short lived. A severe depression from 1837 to 1844 caused a tenfold increase in national debt within its first year."

Maybe austerity doesn't work after all?

I'm half kidding.

Reminds me of a great passage from Mosler's book:

Al Gore

Early in 2000, in a private home in Boca Raton, FL, I was seated next to then-Presidential Candidate Al Gore at a fundraiser/dinner to discuss the economy. The first thing he asked was how I thought the next president should spend the coming $5.6 trillion surplus that was forecasted for the next 10 years. I explained that there wasn't going to be a $5.6 trillion surplus, because that would mean a $5.6 trillion drop in non-government savings of financial assets, which was a ridiculous proposition. At the time, the private sector didn't even have that much in savings to be taxed away by the government, and the latest surplus of several hundred billion dollars had already removed more than enough private savings to turn the Clinton boom into the soon-to-come bust.

I pointed out to Candidate Gore that the last six periods of surplus in our more than two hundred-year history had been followed by the only six depressions in our history. Also, I mentioned that the coming bust would be due to allowing the budget to go into surplus and drain our savings, resulting in a recession that would not end until the deficit got high enough to add back our lost income and savings and deliver the aggregate demand needed to restore output and employment. I suggested that the $5.6 trillion surplus which was forecasted for the next decade would more likely be a $5.6 trillion deficit, as normal savings desires are likely to average 5% of GDP over that period of time.

That is pretty much what happened. The economy fell apart, and President Bush temporarily reversed it with his massive deficit spending in 2003. But after that, and before we had had enough deficit spending to replace the financial assets lost to the Clinton surplus years (a budget surplus takes away exactly that much savings from the rest of us), we let the deficit get too small again. And after the sub-prime debt-driven bubble burst, we again fell apart due to a deficit that was and remains far too small for the circumstances.

For the current level of government spending, we are being over-taxed and we don't have enough after-tax income to buy what's for sale in that big department store called the economy.

Anyway, Al was a good student, went over all the details, agreeing that it made sense and was indeed what might happen. However, he said he couldn't "go there." I told him that I understood the political realities, as he got up and gave his talk about how he was going to spend the coming surpluses.

Source: Seven Deadly Innocent Frauds of Economic Policy

LW,

I guess I'd agree with the statement that "Gold is completely impractical to use on a daily, or even monthly basis as money, and part of that is because of government taxation and legal tender laws."  That said, usually we're not concerned about the debasement over days, weeeks or months of a contract (after which it can be adjusted for new inflation expectations), but over years and decades of saving.  If we have even 12% inflation (1% per month), the various things you spend your money on every month where you have to hold cash for 5-15 days at a time is hardly the concern you probably have in terms of debasement.  It probably amounts to a few grand in the checking account held through out the year.  Inflation expectations are worked into our contracts, and even if expectations change, those 5-15 days of holding cash for purchases is hardly worth worrying about.  Your concern would be the money that you're savings for much later use will be debased.  That savings can pretty easily be gold instead of cash, and the tax, while somewhat high, will still be worth paying to ensure that you've, insured against the majority of the debasement.  Everyone else is paying taxes, too, on their interest, even if it doesnt' keep up with inflation.  It's just one of those things that bends, but does not break, our will to save and in what form.

I'd add that even if gold had a 0% tax to it, people STILL wouldn't use it in most transactions, because it's price is incredibly volatile even in terms of a typical basket of goods.  People would rather hold in their short-term checking account something that will hold its value relatively well with a typical basket of purchased goods.

-5% real return and -35% real return are totally different acceptable ranges of purchasing power for short-term reserves.

Is it fair to say that the tally stick system was a fiat currency system that lasted fine for centuries. The key characteristics were that once all the tally sticks were made, they then stopped making new ones, all the tally sticks were regularly collected back by taxation and no interest payments were involved. In fact usery was actually illegal at the time and considered to be "theft from God" (because it was charging for time that was supposidly a gift of God).

In the UK, sovereign coins are tax free gold. I've never heard of anyone using them as money (rather than as a saving instrument) in recent times.

stone wrote: Is it fair to say that the tally stick system was a fiat currency system that lasted fine for centuries. The key characteristics were that once all the tally sticks were made, they then stopped making new ones, all the tally sticks were regularly collected back by taxation and no interest payments were involved. In fact usery was actually illegal at the time and considered to be "theft from God" (because it was charging for time that was supposidly a gift of God).

In the UK, sovereign coins are tax free gold. I've never heard of anyone using them as money (rather than as a saving instrument) in recent times.

Here is a very interesting explanation, from L. Randall Wray, on the history of monetary metals and coinage from an MMT perspective — Kings, coins, debasement, Gresham's Law and all:

Commodity Money Coins? Metalism versus Nominalism, Part One
Commodity Money Coins? Metalism versus Nominalism, Part Two

A precious metal coin with the King's image stamped on it is a sovereign’s IOU — the nominal value was set by the King who demanded tax payment with those IOUs. The same coin would have less nominal value outside of the King's realm — though the metal itself did provide a floor below that nominal value.

moda0306 wrote: Dollars are much more stable than gold when compared to a basket of goods.  This is the MAIN consideration of intelligent savers when they choose to save more in dollars than in gold.

Ok I will explain it another way. Let's say in some future time gold was allowed to compete directly against dollars. You were free to choose to be paid in either but could not be forced to accept one over another. So if something is priced in gold you would not be forced to accept the paper dollar value stamped on the gold coin, etc.

Now you go to a Toyota dealer to buy a Corolla. The Corolla has two prices on it. We will assume that after some market gyrations initially, the markets decided to make gold worth $1,000 an ounce in this future time. The dealer invoice says:

Toyota Corolla with Basic Options:

$20,000 Federal Reserve Notes
20 1oz. Gold Pieces

Now you go back in five years to buy a new Corolla. In your view you are telling me that this is more likely to happen:

Toyota Corolla with Basic Options:

$20,000 Federal Reserve Notes
24 1oz. Gold Pieces (reflecting ~20% decrease in the value of the gold)

Is that really what you think would happen? Or do you think it would be more like this:

Toyota Corolla with Basic Options:

$24,000 Federal Reserve Notes (reflecting  ~20% decrease in the value of the paper notes)
20 1oz. Gold Pieces

If I were a betting man, I'd say the second option is what would happen and history would probably agree with me. Gold would have maintained a steady value to Toyota but it would be the dollar moving all over the place, not gold.

The "weakness" that haters of gold bring up (that it is just a yellow metal that sits there and does nothing) is its biggest asset as a money. It just sits there. It doesn't change.


Re: Big depressions always happened after the govt. had a surplus.

I disagree. Between all the numbers of an economist's spreadsheet real history is going on. There are world events that happen constantly that can trigger severe recessions with govt. spending or not. The tech bust of 2000-2002 and the mirage "surplus" (which was never a "surplus" because the government doesn't count their unfunded liabilities) was borne out of a small group of people creating the WWW to ride on the Internet and turning it into a huge idea. It had nothing to do with government monetary policies. Correlation does not equal causation.

I don't know much about MMT economics so far. But I see a series of articles forming in my head to refute a bunch of this stuff.

craigr wrote:If I were a betting man, I'd say the second option is what would happen and history would probably agree with me. Gold would have maintained a steady value to Toyota but it would be the dollar moving all over the place, not gold.

If the economy were to improve, and prosperity were to prevail, I suspect the car dealership wouldn't want the gold — since they couldn't get any interest from it. Of course, I don't believe the economy is going to be booming anytime soon.

Gumby wrote:

craigr wrote:If I were a betting man, I'd say the second option is what would happen and history would probably agree with me. Gold would have maintained a steady value to Toyota but it would be the dollar moving all over the place, not gold.

If the economy were to improve, and prosperity were to prevail, I suspect the car dealership wouldn't want the gold — since they couldn't get any interest from it. Of course, I don't believe the economy is going to be booming anytime soon.

But in our imaginary world gold and dollars are both separate lawful money. Since gold currencies are very stable over time it is not as necessary to seek out interest on it as it is with cash that is constantly on the inflation treadmill as soon as it hits your wallet. A business can invest it in riskier things if they desire, or simply sit on it and know it's not going to go anywhere. And often, that's exactly what a business wants to do with short-term operating capital.