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Old 08-18-2011, 01:09 PM   #41
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lol, I'll get my GF to troll you guys more tonight. Good luck arguing with her on this ****.
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Old 08-18-2011, 01:42 PM   #42
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First Some terminology:

Price inflation = prices generally rising

Money supply inflation = the money supply is increased, which dilutes the existing money supply and tends to reduce a currency's value. The world gold supply does inflate, but historically much slower than fiat currencies.

Fiat currency = a currency declared to be such, by gov't fiat (law)

Asset-backed currency = a currency, or paper money, with a 1:1 correspondence to an asset at a fixed exchange rate. For example, I may issue "miataturbo dollar" notes and say "backed by 6UL wheels", each mt dollar in circulation has a corresponding X amount of wheels in my warehouse. The notes are much more convenient for commerce than actual wheels. Or, I could issue debit cards instead of notes.

Monopoly currency = a currency that has monopoly status by legal tender laws (laws which say "this currency is money, and it's illegal for sellers to say 'I don't want your stinkin' Federal Reserve Notes"

Seignorage privilege = a central unbacked fiat currency issuing authority will profit from creation of money, just like a counterfeiter would. So does a gold miner. However, printing money is very cheap (near zero cost if the money created is digital), while extracting gold is very expensive (>$600/oz). So extracting gold is no different than say, extracting oil or coal, you have to organize and find spots where it's profitable to extract them.

Federal Reserve Notes = look inside your wallet. In an earlier age they said something like "exchangeable for gold at $35 per oz". Today they're just paper.

Federal Reserve - the US central bank, designed by 7 Wall St. Banksters in 1910 and passed into law by Congress in 1913. It is the 3rd attempt of the banks to cartelize, having previously been unsuccessful thanks to Pres. Andrew Jackson. These Banksters were competitors, but were steadily losing market share to tiny banks sprouting up everywhere. They needed a mechanism by which their cartel would be protected by law, from smaller competitors. The model of "modern" central banking was invented by the Rothschild cartel in the late 1700s with the creation of the Bank of England, IIRC.

Central banks - secretive, quasi-governmental institutions with enormous power and which are shielded even from nations' legislatures. They are the enforcement arm of the banking cartel. They do not profit directly from their operations, but allow the biggest financial institutions enormous profits through leverage; they protect said large corporations via implicit bailout guarantees whenever said leverage goes belly up. Central banks do not make money directly from the seignorage privilege as they do not create money that they directly spend; instead they make money from the interest payments. Legally they create money out of nothing in order to loan to gov't. When this money is repaid it disappears. For this reason they don't want the principal repaid, but earn the perpetual interest. At some in the 1920s (?) when this scam was pointed out, the FED started returning the interest earnings to the US Treasury, minus expenses. This system of debt-fiat currency, plus Fractional Reserve Banking, creates an inherently unstable economic system which then oscillates between boom and bust. (see my post to physicist's paper)

Unbacked non-fiat currency - very rare historically, as people generally don't trust unbacked paper money, for obvious reasons. The exception today is Bitcoin: https://bitcoin.it/wiki/FAQ By design it has no central issuing authority, its inflation rate is low, fixed, known, and tapers to zero over time, and cannot (by any known methods), be counterfeited. The recent hacking was about bitcoins getting stolen from users' digital wallets, not counterfeited.
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Old 08-18-2011, 01:51 PM   #43
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Now for Joe's concerns

Quote:
Originally Posted by Joe
1: Stability.
2: Standardization. (All bills / coins work in all vending machines, parking meters, etc.)
3: Efficiency and low overhead. (No need to memorize and constantly update twenty different exchange rates, have twenty different sets of drawers in point-of-sale registers, etc.)
4: Guaranteed exchangeability. (Without a central bank, businesses in Area A might choose not to accept a currency which is popular in Area B, etc.)

1. Stability. The purchasing power of the dollar was more stable prior to the creation of the Federal Reserve (1913). Prices tended to fall before then, because productivity increases tend to reduce cost (see LCD TV's). After the adoption of the Bretton-Woods pseudo-gold-standard (during which the Federal Reserve could start inflating in earnest), peacetime steady inflation began in earnest. It accelerated after Nixon ended the USD->gold price ratio peg in 1971 (which ended the remnants of the gold standard).

2. Standardization. The private sector, and voluntary associations are perfectly capable of generating standards. Just look at your PC. USB, HDMI, VGA, etc. If legal tender laws were repealed, the banks would probably break up into competing central banks, and new metallic coins could replace existing coins with the same dimensions, but with actual metallic content equal to their face value today.

3. Efficiency, low overhead. This is what's nice about metallic standards. Say gold, silver, copper. Only 3.

4. Guaranteed exchangability. Again, this is what's nice about metals. But then, it's no different than using VISA vs. Mastercard. You have a VISA card. They have an exchange rate in the major metals and currencies, say, Gold, Silver, Platinum, Copper, and "Texas dollars". You go on ebay to buy some Virtual Texas ****, and they only accept Texas Dollars, which is the Texas issued currency backed by oil. Ebay knows your profile and knows you use VISA. The ebay page automatically goes to the VISA site and does the conversion calculation. It shows you how many VISA BUX it will cost you (which btw is convertible to gold or silver).
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Old 08-18-2011, 01:59 PM   #44
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Quote:
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The currency would resemble the state of affairs in early America, where various territories all used different currencies, the collapse of specific currencies relative to others was not uncommon, and interstate commerce didn't really exist.
Only unbacked currencies, and currencies wherein the issuers issued more currency than they actually had gold in store, collapsed. i.e. a bank has 10,000 oz of gold, then issues notes for more than that. That is fraud (illegal of course), and when holders of notes hear of this and come and demand their gold, they collapse. They are no different than say, ebay scammers. You wouldn't accept currency from Bank of Podunk, just as you wouldn't buy an expensive turbo from some Nigerian guy on mt.net with one post.

Quote:
The economy would resemble that of pre-Eurozone Europe,
In the world of free markets in currency, countries wouldn't have monoplies, and currency issuers would have to compete. It's the competition that keeps them in line, and limits their profits. State-issued currencies OTOH, don't compete - any given citizen is forced to more or less only use that state currency.
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Old 08-18-2011, 02:05 PM   #45
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Having said all that, government issued currency could be a *service* the gov't offers, in the same way it runs the post office's overnight deliveries. (Ignoring the fact that they lose money and eat taxes while UPS and Fedex make money). However, there *must* be competition i.e. no legal tender laws. It is this competition that will prevent abuse. If the USD is continually being inflated then common folk would prefer not to use it. Said gov't issued currency doesn't need to be asset-backed; however, it should not be debt-based, but rather created debt-free at a fixed rate (i.e. a low, fixed inflation rate), and used to pay for some of government's expenses. This is colloquially called the "greenback" type of currency. IOW no Federal Reserve, the Treasury creates the money and gov't takes the seignorage profits. However again, without competition, (i.e. in the presence of legal tender laws), the temptation is there to inflate the currency, steal from the masses via inflation, for politicians to fund its pork, welfare, and warfare.

The USD *could* transition into this, however, it is politically impossible because the financial elite profit tremendously from the status quo.
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Old 08-18-2011, 02:09 PM   #46
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JasonC_SBB - I would be interested in your response to Joe's more pragmatic questions.

What would it look like if the US reverted to an asset-backed currency but the Eurozone kept the relatively floated euro and China kept the more directly controlled renminbi?
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Old 08-18-2011, 05:27 PM   #47
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A transition would probably be very rough. There will be massive bankruptcies in the financial industry. They would have to liquidate, but this is like the pain an alcoholic has to go through to get on the road to recovery. But these bankruptcies are part of the free market process - inefficient businesses go out of business. Right now the financial corporations are propped up by the system.

The USD would appreciate instead of depreciate while fiat currencies continue to be inflated. in the USA there would be slow and relatively steady price deflation instead of price inflation. Prices on most goods would go down instead of up. Wages would probably stay about constant or rise slowly. The US consumer and the middle class would prosper.

The financial industry would shrivel down to a size to where they actually generate wealth by providing a real service to their customers, instead of a big parasite. It would be easier to save for retirement, (no need to try and "beat inflation"), and booms and busts would be shorter and less severe.

Interest rates would be higher but then prices of goods which are traditionally financed would be lower - such as education, homes, and cars. Companies would in many cases find it cheaper to self-finance than to borrow. The gov't would not be able to run huge deficits nor run up huge debts. Consumer debt would also go down.

Due to smaller booms and busts, and the absence of "regime uncertainty" (e.g. "what's the FED gonna do now?"), companies would find it easier to forecast further into the future and would therefore find it easier to do long term planning and investment. These all improve productivity.

As US productivity increases, the goods and services made in the US will become cheaper to the general population; as productivity improves they will be cheaper for foreigners to buy as well. Things which are made more cheaply with cheap labor overseas will be imported and will be very cheap for US consumers.

China's central control over the exchange rate will continue to be a means for the gov't to reward its exporters to the detriment of the general population.

The Euro CB would continue to bail out its biggest banks, to the detriment of more prudent banks and the middle class.

Basically free markets tend towards economic efficiency. Central control mucks with that and ends up favoring politically connected groups over the majority, resulting in reduced overall economic efficiency. Economic efficiency comes partly from division of labor - whosoever is the most efficient producer of a good will gain the most market share. Consumers get to buy from the most efficient producer. The money they don't spend on less efficient producers, goes towards other, efficient producers. Gov't intervention in the form or tariffs and selective taxation, mucks with this process.

One possibility to move to a sound currency, is to simply abolish the Federal Reserve, and repealing legal tender laws, while keeping the existing USD in circulation, with no possible new-money creation. Because it is so widely accepted, the USD will continue to function as a currency. The market will then decide if it stays. The fly in the ointment here, is the oustanding US Gov't debt, which is denominated in USD, and which is UNPAYABLE.
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Old 08-18-2011, 05:55 PM   #48
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I'd still like to hear your input on the relatively straightforward thought-experiment which I posited in post #36 of this thread. In other words, rationalize the implementation of speculative academic ideals vs. the realities of modern-day international commerce.
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Old 08-18-2011, 08:35 PM   #49
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I already explained that a widespread currency, asset backed or not, will be stabilized by the general economy. At the time when gold was money, prices did not fluctuate in the same way that the gold price today does. Ergo day to day, it wouldn't be any different than using USD. The difference is in the long-term inflation.
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Old 08-18-2011, 08:51 PM   #50
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Your argument seems to presuppose the universal adoption of gold as currency by all nations. But when only one nation adopts a gold-based currency, while all other nations continue to treat gold as a commodity, this supposed stabilization will not occur.

You also state that a number of very nice things would occur (eg: "Prices on most goods would go down instead of up. Wages would probably stay about constant or rise slowly. The US consumer and the middle class would prosper.") without offering any explanation for why these events might occur.

I offer the contrary opinion that such a system would cause the value of "money" within the US to oscillate wildly relative to the values of foreign currencies, with the result that foreign trade (both import and export) would become extremely difficult.

Uncertainty about exchange rates would lead to the rise of an entirely new form of speculative "exchange hedging" very similar to the present system of crop futures, and since we all "know" that anything which benefits large-scale investors is detrimental to the economy (I'm paraphrasing your past arguments here), this would be inherently "bad."

Furthermore, the retail costs of all imported goods (cars, appliances, petroleum) would become far more variable than they are today (as the foreign purchasing power of one US "goldback" would change rapidly from day to day), leading to a decline in overall consumer confidence very similar to that which occurs during an inflationary period. With no way of knowing whether the price of gasoline is going to triple in a year's time, or the price of that new car will fall by 30% in a month's time, discretionary spending will fall and the velocity of money will decrease severely.
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Old 08-18-2011, 10:42 PM   #51
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No I did not presuppose adoption by all nations. I was talking about a state or the USA; any popular currency will not have rapid fluctuations because the general economy will smooth that out.

With a fixed money supply, the price of money (its value, and the inverse of the price of goods), will vary in relation to supply and demand of goods/services in the economy as a whole. There is a supply/demand curve for currency, just as there is for tires, or oil. As goods increase in relation to the currency, the demand for currency increases and its value increases (prices of goods denominated in the currency, drop).

Do you agree that with a fixed money supply and zero productivity growth, general prices would remain flat? If so, then you will agree that increased productivity would reduce the cost and thus price of goods. Increased human labor productivity would increase its value which would tend to increase wages.

A large demand for a currency due to its widespread use, will damp any fluctuations, as I keep saying. Where would "wild oscillations" come from? Today gold is not money and that is why its price has been changing more rapidly than the value of currency.

Futures markets are not a bad thing, in the absence of special privileges granted by gov't (which distorts the operation free market). I never said "anything which benefits large-scale investors are not detrimental". I said "gov't is in the protection racket of protecting big business" and that is bad.

Futures market speculation serve to reduce price fluctuations, because if a say, bad weather is foreseen, speculators will buy up wheat (which drives the price up now), but they will re-sell it when supply is low (which reduces the prices which would have otherwise even higher). They make a profit, but this profit is limited by competing speculators and by being able to forecast accurately.

I keep explaining that the "goldback" would not fluctuate in the same way gold today does, if it is adopted widely.

Last edited by JasonC SBB; 08-18-2011 at 11:52 PM.
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Old 08-19-2011, 10:55 AM   #52
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I am not trying to nit-pick here; I am genuinely interested in this dialogue. I tend to pay more attention to what is and what is likely to be, rather than what could be or what was - at least in terms of monetary policy.

Quote:
Originally Posted by JasonC SBB View Post
The USD would appreciate instead of depreciate while fiat currencies continue to be inflated.
What is your reasoning for this?

Quote:
Originally Posted by JasonC SBB View Post
in the USA there would be slow and relatively steady price deflation instead of price inflation. Prices on most goods would go down instead of up.
What would drive these price changes?

Quote:
Originally Posted by JasonC SBB View Post
Wages would probably stay about constant or rise slowly.
Why would wages act in this way?

Quote:
Originally Posted by JasonC SBB View Post
[...]and booms and busts would be shorter and less severe.
Why would this be?

Quote:
Originally Posted by JasonC SBB View Post
As US productivity increases, the goods and services made in the US will become cheaper to the general population; as productivity improves they will be cheaper for foreigners to buy as well.
Using the assumption that the US goldback appreciates in price and other nations using fiat currencies keep theirs artificially low in comparison, wouldn't this put US exporters at a significant disadvantage?

Quote:
Originally Posted by JasonC SBB View Post
Do you agree that with a fixed money supply and zero productivity growth, general prices would remain flat?
Under what circumstances are you pre-supposing that there is a fixed money supply? There may be a finite amount of gold in the world, but I don't think anyone has that exact number calculated. Are you assuming that the dollar is pegged to a specific portion of the current US gold holdings and that the gold holdings will never be increased or decreased via market operations (e.g. buying more gold either from foreign central banks or domestic miners or selling to the public or foreign investors)?

Quote:
Originally Posted by JasonC SBB View Post
I keep explaining that the "goldback" would not fluctuate in the same way gold today does, if it is adopted widely.
I think this is where I am getting hung up. What is your definition of "adopted widely?" I think Joe and I are assuming the US would be the only one adopting a gold standard in this situation.

Last edited by Scrappy Jack; 08-19-2011 at 11:02 AM. Reason: Cleaned up a redundant quote tag
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Old 08-19-2011, 02:13 PM   #53
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Scrappy,

I will type more later, but here's the free book that made the stuff about currency supply and demand, inflation and overall prices, clear in my mind:

http://mises.org/Books/mysteryofbanking.pdf

Chapters 1 & 2.
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