62 replies to this topic

[mk]

El Guapo, on Wednesday, July 27th, 2011, 1:11 PM, said:

Hmmm. I would like to hear from MK on this, now I am actually not sure. But I know the Federal Reserve hold a huge amount of liquid capital for overnight loans to banks. The also use it to increase and decrease the money supply, but I have never heard that they can just all of the sudden type in "1,000,000,000,000" into a ledger and now they have that much more money.

Typically, this is correct, but the Fed does have its own balance sheet, of course, which they've obviously expanded a great deal in a response to the credit crisis, and how they've done this is actually fairly complicated and boring unless you're into wonky monetary policy stuff. Typically they buy or sell assets using reserve deposits which are like credits to accounts which banks hold with the Fed. Before all the shit went down, the Fed's portfolio was ~$800b in Treasury securities. When stuff went nuts and the entire system started to violently de-leverage, the Bernank sought to provide a large amount of short-term loans to financial institutions in order to prevent the whole thing from seizing up (which was imminent post-Lehman). Typically, he'd do this by creating new reserve deposits, but that would've ballooned the money supply rapidly, and he didn't want to do that. He essentially 'sterilized' the loans by selling off the Fed's treasury portfolio as they took on new short-term loans so the money supply didn't change but the amount of loans did. So that $800b obviously didn't go all that far which prompted them to implement the supplementary financing program through Treasury wherein Treasury auctions securities directly to the public and then leaves the proceeds in an account at the Fed, which has the net effect on the balance sheet as if the Fed had sold the securities themselves out of their portfolio, allowing the sterilization of a lot more in loans without ballooning the money supply. So now banks are just sitting on those reserves (not turning them into cash) and the Fed can and will reabsorb those reserves back in with sales of Treasuries. So the Fed has been very creative in finding ways to effectively type $1x into the ledger and in theory they could step in and delay a default with a number of methods, but they won't do that. There's no reason Congress can't do what they've done dozens of times before.

AmScray, on Thursday, July 28th, 2011, 6:08 PM, said:

Maybe I have you confused with someone else (To me, FCP is like 4 or 5 posters, with everyone else being categorized into a gray, non-descript mass) , but aren't you a bond trader?(If) So, you basically make your living (and presumably, a very nice living) in the fiat paper chase?

Nah, I'm just some dumb young kid who hangs out in Wrigleyville.Well, I mean, sure fiat currency has a great history obv but pegging to a gold standard or something similar would be instantly disastrous. Do we want to have that discussion?

[El Guapo]

OK that's pretty much what I figured.I would love to hear your thought on if we tried to re-implement the gold standard or something like it.I also want your thought on current gold prices, because I think they are absurd and that it's a fools market, which we have talked about before.

[ahosang]

mk, on Friday, July 29th, 2011, 3:06 PM, said:

Nah, I'm just some dumb young kid who hangs out in Wrigleyville.Well, I mean, sure fiat currency has a great history obv but pegging to a gold standard or something similar would be instantly disastrous. Do we want to have that discussion?

So as with other currency arrangements, there can be floating against a market gold price. The ECB already does this. It has not been the cause of disaster in the Euro area. Whatever disasters take place there are not due to this floating of monetary gold to the market price. That feature of the euro is what makes it attractive to outside interests. It is not a gold standard, yet is an official process that mark their gold reserves to market prices. A gold standard is clearly not desirable, nor would it be pragmatic for different reasons. The idea for the globalised world is for gold to play the referent role for fiat currencies.

[ajs510]

ahosang, on Friday, July 29th, 2011, 3:43 PM, said:

So as with other currency arrangements, there can be floating against a market gold price. The ECB already does this. It has not been the cause of disaster in the Euro area. Whatever disasters take place there are not due to this floating of monetary gold to the market price. That feature of the euro is what makes it attractive to outside interests. It is not a gold standard, yet is an official process that mark their gold reserves to market prices. A gold standard is clearly not desirable, nor would it be pragmatic for different reasons. The idea for the globalised world is for gold to play the referent role for fiat currencies.

Is it bad that I'm currently singing your username to the tune of Black Hole Sun in my head?

[hblask]

I will have trouble tracking down the exact numbers, but it went something like this:Total inflation for the 100 years or so we were on the gold standard: -5% or so ($1.00 was worth $1.05 100 years later)Total inflation for the years since fiat currency: 95% ($1.00 is worth about $0.05)That's pretty terrible. A small amount of predictable, regular inflation is harmless. What the Fed does is not harmless, and we would've been way better off on the gold standard.Going back to it probably won't happen, we're more likely to be on a de facto BitCoin standard (or something equivalent). If the Fed continues to intentionally devalue our money, people will bypass the system.

[FCP Bob]

hblask, on Friday, July 29th, 2011, 7:42 PM, said:

I will have trouble tracking down the exact numbers, but it went something like this:Total inflation for the 100 years or so we were on the gold standard: -5% or so ($1.00 was worth $1.05 100 years later)Total inflation for the years since fiat currency: 95% ($1.00 is worth about $0.05)That's pretty terrible. A small amount of predictable, regular inflation is harmless. What the Fed does is not harmless, and we would've been way better off on the gold standard.Going back to it probably won't happen, we're more likely to be on a de facto BitCoin standard (or something equivalent). If the Fed continues to intentionally devalue our money, people will bypass the system.

You really actually believe that going back to the gold standard would be a good thing.Holy CrapThe Gold Standard while keeping inflation low causes far worse problems. Moderate inflation is not a big deal. Here's a nice little article that I found that explains things pretty well.http://www.j-bradfor...ldstandard.html

[hblask]

FCP Bob, on Friday, July 29th, 2011, 5:58 PM, said:

You really actually believe that going back to the gold standard would be a good thing.Holy CrapThe Gold Standard while keeping inflation low causes far worse problems. Moderate inflation is not a big deal. Here's a nice little article that I found that explains things pretty well.http://www.j-bradfor...ldstandard.html

Much LOLs:

Quote

If the U.S. and a substantial number of other industrial economies adopted a gold standard, the U.S. would lose the ability to tune its economic policies to fit domestic conditions.

Ah yes, because the central planners have done so well for the last decade, and in the 70s. That was some fine economic tuning there.Seriously, that one was just a joke, right?If only we had omniscient central planners, and they were benevolent and immune to political pressure, fiat currency would work fine.It's happened for stretches, but the 1970s and the 2000's show the damage of what really happens.

[hblask]

FCP Bob, on Friday, July 29th, 2011, 5:58 PM, said:

You really actually believe that going back to the gold standard would be a good thing.Holy CrapThe Gold Standard while keeping inflation low causes far worse problems. Moderate inflation is not a big deal. Here's a nice little article that I found that explains things pretty well.http://www.j-bradfor...ldstandard.html

Oh, and I should say, I'm not necessarily saying to go back to the gold standard. I think a better solution is to allow competing private currencies, so you could use AmeriBucks or VisaDollars if the Fed kept making our money worthless with QE1....QE26 or whatever they think they will stop at now. The private currencies could be contractually tied to whatever store of value individuals wanted.So competing hard value currencies >> gold standard >> fiat currency.The problem is that the value of our money is intentionally devalued for political purposes, as will definitely happen in the coming years. Politicians will not have the nerve to balance the budget, so they will do it through inflating their way out of it. Fiat currency just allows political cowardice to harm the country's economic health.

[FCP Bob]

hblask, on Friday, July 29th, 2011, 8:14 PM, said:

Much LOLs:Ah yes, because the central planners have done so well for the last decade, and in the 70s. That was some fine economic tuning there.Seriously, that one was just a joke, right?If only we had omniscient central planners, and they were benevolent and immune to political pressure, fiat currency would work fine.It's happened for stretches, but the 1970s and the 2000's show the damage of what really happens.

http://www.econlib.o...ldStandard.htmlThis one is a little more technical but I think you can understand it.

Quote

Performance of the Gold Standard As mentioned, the great virtue of the gold standard was that it assured long-term price stability. Compare the aforementioned average annual inflation rate of 0.1 percent between 1880 and 1914 with the average of 4.1 percent between 1946 and 2003. (The reason for excluding the period from 1914 to 1946 is that it was neither a period of the classical gold standard nor a period during which governments understood how to manage monetary policy.)But because economies under the gold standard were so vulnerable to real and monetary shocks, prices were highly unstable in the short run. A measure of short-term price instability is the coefficient of variation—the ratio of the standard deviation of annual percentage changes in the price level to the average annual percentage change. The higher the coefficient of variation, the greater the short-term instability. For the United States between 1879 and 1913, the coefficient was 17.0, which is quite high. Between 1946 and 1990 it was only 0.88. In the most volatile decade of the gold standard, 1894-1904, the mean inflation rate was 0.36 and the standard deviation was 2.1, which gives a coefficient of variation of 5.8; in the most volatile decade of the more recent period, 1946-1956, the mean inflation rate was 4.0, the standard deviation was 5.7, and the coefficient of variation was 1.42.Moreover, because the gold standard gives government very little discretion to use monetary policy, economies on the gold standard are less able to avoid or offset either monetary or real shocks. Real output, therefore, is more variable under the gold standard. The coefficient of variation for real output was 3.5 between 1879 and 1913, and only 0.4 between 1946 and 2003. Not coincidentally, since the government could not have discretion over monetary policy, unemployment was higher during the gold standard years. It averaged 6.8 percent in the United States between 1879 and 1913, and 5.9 percent between 1946 and 2003.Finally, any consideration of the pros and cons of the gold standard must include a large negative: the resource cost of producing gold. Milton Friedman estimated the cost of maintaining a full gold coin standard for the United States in 1960 to be more than 2.5 percent of GNP. In 2005, this cost would have been about $300 billion.Conclusion Although the last vestiges of the gold standard disappeared in 1971, its appeal is still strong. Those who oppose giving discretionary powers to the central bank are attracted by the simplicity of its basic rule. Others view it as an effective anchor for the world price level. Still others look back longingly to the fixity of exchange rates. Despite its appeal, however, many of the conditions that made the gold standard so successful vanished in 1914. In particular, the importance that governments attach to full employment means that they are unlikely to make maintaining the gold standard link and its corollary, long-run price stability, the primary goal of economic policy.

[hblask]

Those make a little more sense, but.....

FCP Bob, on Friday, July 29th, 2011, 6:23 PM, said:

But because economies under the gold standard were so vulnerable to real and monetary shocks, prices were highly unstable in the short run.

Basically, they are saying that long term, predictable devaluation of our money is better than short term price instability but long-term stability. I don't see how. The people who are most affected by that particular short term risk are those who can most afford it and most understand it. Long term inflation harms everyone, especially those who can least afford it and are least able to protect themselves from it.Having said that, I believe even Milton Friedman said that predictable, low inflation rates of around 1% is better than occasional bouts of deflation. The problem with that is it requires omniscient central planners -- something the world seems to have a shortage of. Instead, we end up with occasional spikes of inflation and deflation, which is even worse.

Quote

Finally, any consideration of the pros and cons of the gold standard must include a large negative: the resource cost of producing gold. Milton Friedman estimated the cost of maintaining a full gold coin standard for the United States in 1960 to be more than 2.5 percent of GNP. In 2005, this cost would have been about $300 billion.

I don't think this is really a huge factor. If the money supply is managed properly, the net inflow and outflow should average zero over time, so no new production is necessary. You just need the small amounts necessary for short-term trading.But as I said, I'd rather see private companies produce currency tied to actual stores of value, and their efficiency at that would be a factor in the value of their currency and therefore people's likelihood of using that currency.

[Roll the Bones]

Okay, I have a question.Why are we talking about this here?

[BaseJester]

Roll the Bones, on Saturday, July 30th, 2011, 2:43 PM, said:

Okay, I have a question.Why are we talking about this here?

It's on-topic for the thread because not paying the debt (defaulting) and making dollars worthless and paying the debt with dollars are only nominally different. To the extent that the US taxes the possession of dollars through inflation, people will seek alternative methods of storing wealth that aren't taxed.Maybe I don't understand what you mean by "here". Do you mean off-topic->general by here?

[Roll the Bones]

BaseJester, on Saturday, July 30th, 2011, 3:31 PM, said:

It's on-topic for the thread because not paying the debt (defaulting) and making dollars worthless and paying the debt with dollars are only nominally different. To the extent that the US taxes the possession of dollars through inflation, people will seek alternative methods of storing wealth that aren't taxed.Maybe I don't understand what you mean by "here". Do you mean off-topic->general by here?

haha, yeah. I mean it's not like it isn't confusing enough already. Political talk is in Daniel's blog section. I mean GenPop has it's place and crowd. I have the religon forum to myself mostly. At work is up top, sickies like the bottom. And then someone goes and screws the whole ecosystem. It's like the guy who let rabbit's loose in Australia. He let a dozen bunnies go so he could hunt like the old days, and then next thing you know there's a hundred million of them and half the country's plants were eatin' like Ron Mexico on a Friday's free wing night.

[AmScray]

mk, on Friday, July 29th, 2011, 6:06 AM, said:

Nah, I'm just some dumb young kid who hangs out in Wrigleyville.Well, I mean, sure fiat currency has a great history obv but pegging to a gold standard or something similar would be instantly disastrous. Do we want to have that discussion?

Fiat currency does not have a 'great history'. It has a disastrous history. Here's a list of countries that have learned that lesson. The only significant example of straight asset currency inflation/deflation was the Spanish situation when they started shipping the loot from the new world, back into Spain. Unless there's an undiscovered, gold rich continent full of natives we can enslave to mine it (or unless someone strikes a deposit of gold in Africa of such magnitude, it fundamentally alters the world supply ((which is basically the same thing as finding an undiscovered continent and enslaving the natives to mine it)) ) that situation will never happen again. While extreme inflation is usually a failure of policy, those policy failures are always rooted in very credible macroeconomic situations that leave inflation as 'the only option'. A $1/$1 pegging of the dollar to gold wouldn't work in the year 2011, but infusing a floating commodity basis into a currency product adds a foundational element that isn't liable to political whim. Our current currency (and in turn, economy) is being manipulated by politicians and the Federal Reserve- a motley crew if there ever was one. Asset backing removes those fuckers from the equation.

[ahosang]

hblask, you probably prefer the gold standard because it represents a possibility of fixing of monetary supply which politicians(read: CENTRAL PLANNERS) seemingly cannot affect. The gold standard cannot be maintained at a fixed rate by a state such as the US, which sought to have the dollar as international reserve currency(see Triffin's Dillemma). But even for any other state, a gold standard is problematic. Set the rate too low, and gold leaves your country quickly until you're out. Set it too high, and outsiders gain purchasing power over domestic population. This is before you get into monetary issues of deflation, flow etc. The standard requires omniscience of central planners too, in terms of what rate to set the exchange at.This article touches on some of the points, and nearly reaches a sensible conclusion. Triffins' Paradox, currencies, and gold

Quote

Gold might be the correct answer to Triffin's dilemma. Their National Review article proposes that, at current price levels, a fixed-price gold reserve introduced at $1,000 per ounce (versus a market price of about $840 at this writing) should both avoid deflation and maintain enough international liquidity to enable trade to revive somewhat.

But really, guessing the rate and attempting to fix it is just pointless. Floating currency against gold is the way to go. The ECB does this as it marks its gold assets to market price and publishes this in quarterly statements.A 'freegold' architecture as proposed by blogger FOFOA is an elegant solution whereby gold is tradeable by the public both inside and outside of any country. In that way, a market price is discovered, even though the government may enter the market with public gold reserves. Internationally, this evolves into his freegold concept, where the limited supply of gold is available for saving by the public, therefore diminishing malinvestments caused by currency(base money) and credit inflation. Gold naturally enters trade-surplus areas and leaves trade-deficit areas. Essentially, true productivity is sparked, as the bidding for gold(savings/wealth) intensifies. Rather than having savings forced into fiat-denominated debt instruments or marginal speculations, gold holds wealth until worthy candidates tempt savers into liquidation of such wealth into investment/spending. Fiat may be controlled by countries in order to address some flow problems, but value is always determined by the market in its bid for gold through the currency.

[hblask]

ahosang, on Sunday, July 31st, 2011, 12:34 PM, said:

hblask, you probably prefer the gold standard because it represents a possibility of fixing of monetary supply which politicians(read: CENTRAL PLANNERS) seemingly cannot affect.

The fundamental problem is allowing the value of a currency to be determined by a small group that has no personal stake in the outcome and is influenced more heavily by political concerns than economic ones. There are probably dozens of potential solutions. The gold standard is probably the easiest to understand, but not without problems. Pretty much anything is better than pure fiat currency. I'm convinced a large part of our current debt crisis is this little voice in the back of politicians heads saying "we can always inflate our way out of this".

[ahosang]

AmScray, on Sunday, July 31st, 2011, 7:12 PM, said:

Fiat currency does not have a 'great history'. It has a disastrous history. Here's a list of countries that have learned that lesson. The only significant example of straight asset currency inflation/deflation was the Spanish situation when they started shipping the loot from the new world, back into Spain. Unless there's an undiscovered, gold rich continent full of natives we can enslave to mine it (or unless someone strikes a deposit of gold in Africa of such magnitude, it fundamentally alters the world supply ((which is basically the same thing as finding an undiscovered continent and enslaving the natives to mine it)) ) that situation will never happen again. While extreme inflation is usually a failure of policy, those policy failures are always rooted in very credible macroeconomic situations that leave inflation as 'the only option'. A $1/$1 pegging of the dollar to gold wouldn't work in the year 2011, but infusing a floating commodity basis into a currency product adds a foundational element that isn't liable to political whim. Our current currency (and in turn, economy) is being manipulated by politicians and the Federal Reserve- a motley crew if there ever was one. Asset backing removes those fuckers from the equation.

Gotta think he was being sarcastic on the 'fiat has a great history thing'. Surely he was...

[ahosang]

hblask, on Monday, August 1st, 2011, 1:31 AM, said:

The fundamental problem is allowing the value of a currency to be determined by a small group that has no personal stake in the outcome and is influenced more heavily by political concerns than economic ones. There are probably dozens of potential solutions. The gold standard is probably the easiest to understand, but not without problems. Pretty much anything is better than pure fiat currency. I'm convinced a large part of our current debt crisis is this little voice in the back of politicians heads saying "we can always inflate our way out of this".

Absolutely agree, yes, history suggests you are right. And in this day and age, so much easier for them to pursue those options!!

[hblask]

ahosang, on Sunday, July 31st, 2011, 7:05 PM, said:

Gotta think he was being sarcastic on the 'fiat has a great history thing'. Surely he was...

I would've thought so because Bob is very level-headed and obviously smart, and his opinion is always worth listening to, but he did write this:

FCP Bob, on Friday, July 29th, 2011, 5:58 PM, said:

You really actually believe that going back to the gold standard would be a good thing.Holy Crap

[mk]

ahosang, on Sunday, July 31st, 2011, 8:05 PM, said:

Gotta think he was being sarcastic on the 'fiat has a great history thing'. Surely he was...

ldo