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Reinhart and Rogoff: 1933 US gold reprice was a debt default

<div style="text-align: justify;">In this IMF Working Paper by Reinhart and Rogoff <a href="http://www.imf.org/external/pubs/ft/wp/2013/wp13266.pdf">"Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten"</a> they state that</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>"... the United States had already defaulted on its sovereign debt in April 1933 to domestic and external creditors alike. The abrogation of the gold clause in conjunction with a subsequent 40 percent reduction in the gold content of the U.S. dollar (January 1934) also amounted to a debt haircut amounting to about 16 percent of GDP."</i></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Nice to see mainstream economists calling a spade a spade and a handy link to use next time someone says the US never defaulted on its debt (links from goldbug sites don't count, we are all biased you know).</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">The rest of the paper is a depressing read, with Reinhart and Rogoff concluding that a <i>"mix of austerity, forbearance and growth"</i> will not get advanced economies out of their debt overhangs and that they will have to <i>"resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression."</i></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">While this is all stuff gold followers are aware of, it is the continued appearance of this financial repression <a href="http://goldchat.blogspot.com.au/2013/07/gold-is-pure-epsilonnarrative-asset.html">narrative</a> and related bail in and other talk in mainstream circles that I think is more important. As it becomes accepted wisdom that this the path we are on, then we will see money move into gold. However, while the mainstream continue to believe that we don't have a big debt overhang and with a bit of taper here and there it will all end up peachy pie, we are going to see gold languish.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">PS, if my mum saw <a href="http://www.bloomberg.com/news/2014-01-02/perth-mint-gold-sales-surge-41-in-2013-on-worst-rout-since-1981.html" target="_blank">the reports</a> of Perth Mint sales up 41%, then no doubt you have as well. Just some caveats: the figures reported are just our minted coins and minted bar sales, and do not include volumes from our Depository business or cast bars (ie kilobars) sold into China etc. They thus represent less than 10% of the metal we refine and is more of an indicator of retail demand. Having said that, we are currently achieving solid premiums on kilobars ahead of the Chinese New Year.</div>

In this IMF Working Paper by Reinhart and Rogoff "Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten" ...

A metallic standard to save the economy and one central bankers will accept

Forget the gold standard people, central banks are never going to go for that. However a UK professor has unwittingly identified a metallic standard a central banker can live with - from this <a href="http://www.bbc.co.uk/news/magazine-25255957">BBC article</a> on why humans have always tended to choose gold as currency:<br /><br /><i>"Take iron. In theory it looks quite a good prospect for currency. It is attractive and polishes up to a lovely sheen. The problem is rust: unless you keep it completely dry it is liable to corrode away. 'A self-debasing currency is clearly not a good idea,' says [professor] Sella."</i><br /><br />Not a good idea? Hasn't he heard of inflation targets - debasement is the stated policy of central banks. So forget this talk of a Gold Standard, an Iron Standard is what we need.<br /><br />One great advantage of an Iron Standard is that everyone has some rusted piece of metal lying around, so it would be a form of QE/monetisation for the common people. Everyone will be instantly wealthy, that has got to get everyone's animal spirits going and turn the economy around. Every country also has iron, so it should get worldwide support. China's got a lot of it, just knock down those empty apartments.<br /><br />It will also market well with the public - iron is "strong" - and I'm sure Obama's political advisers will see the spin/MOPE benefits of the following announcement:<br /><br /><i>"An indispensable element in building a new prosperity is closely related to creating new jobs. We must protect the position of the American dollar as a pillar of monetary stability around the world.<br /><br />Accordingly, I have directed the Treasury Secretary to sell all of America's gold reserves, which is a soft, ductile and wimpy metal, and institute convertibility of the dollar into strong Iron, in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States.<br /><br />Now, what is this action — which is very technical — what does it mean for you?<br /><br />Let me say that this new Iron Standard will make all Americans, who buy American-made products in America, wealthier and your dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to strongize the dollar."</i><br /><br />To sex it up a bit, politicians might also want to consider Izabella Kaminska's <a href="http://ftalphaville.ft.com/2013/02/18/1383972/why-central-banks-should-take-charge-of-their-digital-currencies/">idea</a> of central banks issuing their own digital crypto currencies. Iron is heavy to carry around, so do away with physical coins and notes and issue BitIron instead. <br /><br />Finally, an Iron Standard will encourage a lot of recycling, which is a Good Thing. It will also probably result in people scrapping perfectly good goods to monetise the iron in them - economists will love that as it is similar to Keynes' idea of filling old bottles with banknotes, burying them, and having people digging them up.<br /><br />There is one potential problem with an Iron Standard, being that iron's debasement rate, or rustment rate, is constant and thus out of control of the central bankers. However I think an Iron Standard is a fair compromise between the hard money advocates and meddling central bankers who think they alone know what the one right interest/inflation rate is for a massively dynamic and complex economy. Come on guys, compromise. Central bankers - give up your omniscient delusions and omnipotency. Hard Money - give up your rigid money stock, a little rustment will discourage hoarding and encourage people to spend spend spend, and what could be wrong with that?

Forget the gold standard people, central banks are never going to go for that. However a UK professor has unwittingly identified a metallic ...

Central banker pop quiz on gold

<strong>Q1.</strong> If you say <a href="http://www.mineweb.com/mineweb/content/en//mineweb-gold-news?oid=218307&sn=Detail">that</a>  gold <i>"is an asset that people want to hold when they’re very fearful about potential financial market catastrophe or economic troubles"</i> or <a href="http://blogs.wsj.com/economics/2013/07/18/bernanke-nobody-really-understands-gold-prices/">that</a> gold is an <em>"asset that people hold as a sort of disaster insurance"</em> and someone points out that you hold around 70% of your reserves in gold, you should:<br /><br />A. say that you are not fearful at all <a href="http://www.federalreserve.gov/newsevents/testimony/yellen20131114a.htm">because</a> <em>"under the wise and skillful leadership of Chairman Bernanke, the Fed helped stabilize the financial system, arrest the steep fall in the economy, and restart growth."</em><br /><br />B. say "does 70% allocation to gold sound like I think everything is peachy pie, you moron?"<br /><br />C. just say <a href="http://www.gpo.gov/fdsys/pkg/CHRG-112hhrg67941/html/CHRG-112hhrg67941.htm">that</a> <em>"it is tradition, a long-term tradition"</em> to hold gold as <em>"a form of reserves"</em> and tell them to keep calm and carry on doing what you say and not what you do.<br /><br />D. Note the person's name and forward it to the NSA.<br /><br /><strong>Q2.</strong> If you say <a href="http://blogs.wsj.com/economics/2013/07/18/bernanke-nobody-really-understands-gold-prices/">that</a> <em>"nobody really understands gold prices and I don’t pretend to understand them either"</em> or <a href="http://www.mineweb.com/mineweb/content/en//mineweb-gold-news?oid=218307&sn=Detail">that</a> you <em>"don’t think anybody has a very good model of what makes gold prices go up or down"</em> and someone points out that it isn't very smart to invest 70% of your reserves in an asset you don't understand, you should:<br /><br />A. say that when you <a href="http://www.huffingtonpost.com/2009/09/07/priceless-how-the-federal_n_278805.html">have</a> <i>"a lock on the economics world"</i> and don't allow <i>"room for other views"</i>, you don't need to understand anything nor does it matter if you get it wrong.<br /><br />B. say "that was just to scare people off investing in gold, because do you really think we don't understand gold when we employ <a href="http://www.federalreserve.gov/econresdata/theeconomists.htm" target="_blank">over 300</a> Ph.D. economists and have written hundreds of papers on gold, you moron?"<br /><br />C. just say <a href="http://www.gpo.gov/fdsys/pkg/CHRG-112hhrg67941/html/CHRG-112hhrg67941.htm">that</a> <em>"it is tradition, a long-term tradition"</em> to hold gold as <em>"a form of reserves"</em> and tell them to keep calm and carry on doing what you say and not what you do.<br /><br />D. Note the person's name and forward it to the NSA.<br /><br />Answer key: anything exept B.<br /><br />

Q1. If you say that gold "is an asset that people want to hold when they’re very fearful about potential financial market catastroph...

My thoughts on Freegold

<div style="text-align: justify;">A reader, LS, asked for my thoughts on the following topics:<br /><br />1) freegold<br />2) the gold for oil trade<br />3) the current price is not a real physical price of gold because of happenings in COMEX/LBMA<br />4) do you believe the current world affairs will resolve itself towards freegold or something similar?<br /><br />Firstly, I haven't had the time to read <a href="www.fofoa.blogspot.com">FOFOA</a> in depth given the amount of material and thus give it justice. My comments here are therefore tentative thoughts.<br /><br />Freegold is very interesting and I can see the logic of the idea of leaving fiat to perform the medium of exchange role and gold the wealth store role. I have a feeling <a href="http://www.freebanking.org/">free banking (<a href="http://www.terry.uga.edu/~selgin/freebanking.html">see also</a>)</a> and a restriction on <a href="http://unqualified-reservations.blogspot.com/2008/10/misesian-explanation-of-bank-crisis.html">maturity transformation</a> would need to be involved for it to work. There is a hell of a lot of discussion condensed in that sentence, more than I have time for at the moment.<br /><br />I would also argue that Freegold needs to allow gold leasing but not gold lending. By "leasing" I mean as in leasing a car, ie physical asset rented (not borrowed and sold). Manufacturers of gold products like the Perth Mint could not operate without leasing because with Freegold's ban on lending of gold and other financialisations it would be difficult (impossible?) to hedge against gold price movements.<br /><br />This leads to my next point, which is that the gold price under Freegold would not be stable and still exhibit some volatility. This is because under Freegold people can save excess wealth either in gold or by investing in productive enterprises (ie true investment). Human nature being what it is we will still have overestimation of the success of productive enterprises, thus failures, thus business cycles, ths varying preferences to store wealth in gold versus investments.<br /><br />On the Oil/Gold idea, I don't have an option as this is not an area of FOFOA I've looked at much.<br /><br />The current price is a real physical price as physical buyers and sellers of size (giants) are willing to exchange at that price. When aversion to counterparty risk really hits market players (MF Global you'd think should have been enough), then we will see a divergence between paper and physical.<br /><br />As to the fourth question, well this is bound to my answer in the paragraph above, which is a necessary condition, but not sufficient, for Freegold to emerge. You would also need consensus that a gold standard is not the answer, and there are strong forces working towards that end. Possibly the biggest problem is getting people to understand the reason why financialisation of gold needs to be banned. How it will end is impossible to predict.<br /><br />Either way it is going to be exciting to see how it plays out.<br /></div>

A reader, LS, asked for my thoughts on the following topics: 1) freegold 2) the gold for oil trade 3) the current price is not a real physic...

US manipulating the gold price up

<div dir="rtl" style="text-align: right;" trbidi="on"><div style="text-align: justify;">Very funny to read this from Reuters where Iran claims that its <i>enemies were deliberately causing the price of gold and foreign exchange to rise in a bid to undermine the Islamic Republic's economy. "The enemies and ill-wishers want to make a fuss and present wrong information to provoke and deviate the market," Ahmadinejad told a crowd in a town in the western province of Hamadan, where he was on one of his frequent provincial visits. "In order to disturb the market they buy a lot of gold coins with their huge amount of money ...</i></div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Seriously, this should be read in context of Vietnam's issues with its citizens buying gold as an inflation hedge/savings, which I've blogged about in the past. We are seeing how politicians respond to high inflation. In Vietnam's case, try to ban/restrict gold or in Iran's case, blame outsiders. In neither case take responsibility. Don't expect it to be any different in Western countries.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">I also note DGC Magazine's pick up of expansion of reporting (in USA) of export/import of physical money to prepaid access/stored value card products. Of course all about preventing the "transfer of money obtained through illicit activity". I wonder how long before the movement of money between states within a country has to be reported. They may as well get it over and done with and tell us fuck your privacy and just ban all forms of physical money/value and tell us we have to have one government issued credit/debit card we have to use for any transaction.</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;">Finally, I recommend reading Unqualified Reservations blog post on maturity transformation, on which he has written about before. His argument is that borrowing short and lending long is at the heart of our banking problems and cause of the business cycle. Quote:</div><div style="text-align: justify;"><br /></div><div style="text-align: justify;"><i>The genius of Professor Krugman is that he goes so near the truth that he makes it obvious even to his commenters - who typically are both idiots and fools, but several of whom spontaneously exhibit the same insight themselves: Why can't we regulate or even ban the maturity mismatch? Savers would have to make the maturity choice themselves and it would be transparent. Currently, the savers don't understand the huge run risks that the banks have by funding with demand deposits and lending long. It's hiding the risk.</i></div></div>

Very funny to read this from Reuters where Iran claims that its enemies were deliberately causing the price of gold and foreign exchange to ...

A Fofoarain take on the swiss move

<div align="justify">The Swiss National Bank <a href="http://www.snb.ch/en/mmr/reference/pre_20110906/source/pre_20110906.en.pdf">press release</a>: <em>"<span style="font-size: small;">The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development."</span></em></div><div align="justify"><br /></div><div align="justify">The Fofoarian rephrase: "Too many people are trying to <em>store value</em> in our <strong>currency</strong>, which is distorting it's role as a <em>medium of exchange</em>. We'd rather you save your wealth in something whose price increase won't impact the economy because it has minimal industrial/productive use but which many people still think is valuable anyway. Hey, I know, how about gold?"</div><div align="justify"><br /></div><div align="justify">Don't know what I'm talking about? Have a look at <a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjNGJNnIyI-SBqHl7rGtFkuowzcrT3TAOlaU9e16qIawzwgZ2FUmxeMS2UezGVj2sdCt-XAPHZlOj0SlPtBcaD0wMYz_zocmzjwNPppoltlHbWu7foYuFWd6snsFgmC4whwS-rnw6XOUPTB/s1600-h/Freegold_Quadrangle.jpg">this picture</a> and then <a href="http://fofoa.blogspot.com/2011/05/return-to-honest-money.html">read this</a>.</div><div align="justify"></div>

The Swiss National Bank press release : " The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss econo...

The coming goldbug civil war and your PM exit strategy

<div dir="rtl" style="text-align: right;" trbidi="on"><div style="text-align: justify;">I recently received a question from a client regarding my three point staged approach to choosing a storage method, as per the Perth Mint website:<br /><br /><i>“1. While the world environment is benign, they hold unallocated. They do not incur ongoing storage costs and fabrication charges. <br />2. When the environment becomes uncertain and risky, they convert to allocated. <br />3. When the world is at a crisis point, they take delivery of their physical metal.”</i><br /><br />By the way, I wrote that webpage text many years ago, well before the gold bull market and when the world environment was benign.<br /><br />His question was <i>“At a crisis point why would investors opt to take delivery of their metal, rather than sell it? Isn't that the whole idea of holding precious metal?”</i><br /><br />I found it a very interesting question, because it indicated that the investor saw only one scenario developing, what I would call <b>“Repeat of 1980”</b>. This scenario sees the 1970s repeating with a bubble in metal prices driven by high inflation, recession and a “mild” financial crisis.<br /><br />This exit strategy assumes that just like the 1970s, the current economic environment is just a cyclical phase and we will return to “normal” at some point, in which case you can deploy your increased wealth into other (hopefully) cheap productive assets. Selling your metal for cash certainly could be profitable in such a scenario.<br /><br />However, my third point was addressing another scenario, one I call <b>“End of the Debt Bubble”</b>. This scenario in simple terms (and probably do the complex issues involved a disservice), is that we are at an “end of cycles” as the debt levels most Governments and individuals have accumulated will not be able to be paid back. The only acceptable political solution, it is argued, will be for Governments to inflate debts away, which given the scale of the problem, will lead to hyperinflation as people lose confidence in fiat currency’s ability to hold its value. Some consider this scenario will also involve confiscation. In the case of Australia I personally think this is unlikely and have covered it in detail in this post.<br /><br />This is a completely different sort of crisis, possibly also involving societal breakdown, in which case investors would be looking to take delivery (in coin form) with the purpose of using their gold and silver as money to buy goods and services or simply because they feel more secure having the physical metal in their possession in such a situation. Selling your metal for cash in such a scenario could be disastrous unless you quickly convert that cash into some other wealth preserving asset. <br /><br />This is the single most important issue precious metal investors must have a view on, because if you get it wrong it will potentially do significant damage to your wealth. You do not want to have held on to your metal if we will experience a <b>“Repeat of 1980”</b> as you will end up selling at a much reduced post-peak price. Alternatively you do not want to have sold your metal if we experience the <b>“End of the Debt Bubble”</b> as you will be left with worthless cash.<br /><br />Whichever scenario you favour, I suggest you read this post of mine on Deflation or Inflation .<br /><br />For those who believe in <b>“Repeat of 1980”</b>, this post summarises the key arguments why the US won’t be able to paper over its debt problems. For those believing in the <b>“End of the Debt Bubble”</b>, keep in mind that the text of the post was written 20 years ago. At the time the writer was sure that it was “the End” – how sure are you that it really is different this time?<br /><br />It is not something you have to work out right now as you can wait for more "data" as economic events unfold, but unlike my questioner, at least be aware that there are alternative "futures".<br /><br />As the gold price increases, you will also start to see a "civil war" developing in the gold internet community on this issue. All gold commentators you read have a view on this issue. It may seem that everyone is in the <b>“End of the Debt Bubble”</b> but a careful reading of many commentators tells me many hold a <b>“Repeat of 1980”</b> view. At the moment all gold advocates are united against conventional economists and investments advisers as they have been proven right with a 10 year bull market.<br /><br />But once the gold price starts to get really high, you will see commentators who believe in the <b>“Repeat of 1980”</b> scenario start to recommend selling your gold. This is likely to result in <b>“End of the Debt Bubble”</b> commentators calling them "traitors" or "incompetent" for recommending holding soon-to-be worthless cash. The passion of the current debates in our little gold internet community will be nothing compared to this.<br /><br />The key will be to keep your emotion out of it, weigh up the claims, and hopefully make the right decision.</div></div>

I recently received a question from a client regarding my three point staged approach to choosing a storage method, as per the Perth Mint we...

Debtors vs Creditors

<div align="justify">Those interested in this issue, which I have covered in <a href="http://goldchat.blogspot.com/2010/06/gold-and-clash-of-civilisations-by-andy.html">this</a> and <a href="http://goldchat.blogspot.com/2009/09/protecting-yourself-from-world-war-iii.html">this</a> post, will find FOFOA's <a href="http://fofoa.blogspot.com/2010/07/debtors-and-savers.html">latest post</a> useful.<br /><br />FOFOA agrees with Marx that "the history of all hitherto existing society is the history of class struggle" but says that he got the classes wrong:<br /><br /><em>The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. "The soft money camp" and "the hard money camp". History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.</em><br /><br />What is the relevance of this to gold? FOFOA argues that:<br /><br /><em>... when the soft money guys are in power the transfer of wealth happens slowly and gradually, and wealth flows from the Savers to the Debtors. But when "soft money" collapses - and it ALWAYS collapses - there is a very RAPID transfer of wealth in the other direction, from the Debtors back to the Savers.<br /><br />... By selling your debt-financed paper savings and buying physical gold today you are making the conscious CHOICE to join the camp of the true Savers.</em></div>

Those interested in this issue, which I have covered in this and this post, will find FOFOA's latest post useful. FOFOA agrees with M...

Mannkal Economic Education Foundation

<div align="justify">For those goldbugs of a libertrian/Austrian economics bent (most seem to be, funnily enough) <a href="http://www.mannkal.org/">this organisation</a> is likely to be of interest. Their mission:<br /><br /><em>We aim to strengthen the free market system in Western Australia and Australia, by promoting ideals of voluntary co-operation, choice, personal rights, limited government and responsible resourcefulness of individuals.</em><br /><br />The <a href="http://www.ldp.org.au">Liberal Democratic Party</a> may also be of interest. How can you argue with this <a href="http://www.wa-ldp.org.au/economics_101.shtml">Econ 101</a> on the WA branch's site:<br /><br /><em>9. Prices Rise When the Government Prints Too Much Money. When a government creates large quantities of the nation's money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services. <br /><br />10. Government Manipulation of Interest Rates and Money Quantity Causes Booms & Busts. Making money cheap (low interest rates) and abundant leads to excessive short term consumption which leads entrepreneurs to over invest in non-productive assets. Excessive demand for goods from consumers and entrepreneurs then raises the price of goods and money (higher interest rates) which results in the liquidation of non-profitable investments (mal-investments). The destroyed capital and associated production dislocation is the recession.</em></div>

For those goldbugs of a libertrian/Austrian economics bent (most seem to be, funnily enough) this organisation is likely to be of interest....

Gold and the Clash of Civilisations by Andy Smith

<div align="justify">Well, it’s not ‘the end of history’, as Francis Fukuyama originally forecast in 1989. As events, as much as Samuel Huntington’s 1993 counter-thesis ‘The Clash of Civilisations’, have shown. For Fukuyama, it was ‘the politics’ that mattered. And these ‘ended’ when the Berlin Wall fell and, soon after, victory in the Cold War was declared by liberal democracy, happily “free from such fundamental internal contradictions” that undermined alternative forms of government. For Huntington, it was all about ‘the religious’, ‘the ethnic’. Since history, like nature, abhors a vacuum, ‘politics’ would be replaced by something .... like 9/11, and the Iraq and Afghanistan wars.<br /><br />What if both are wrong? What if it’s ‘the economic’? And record gold prices (in all currencies) ‘prove’ it? In late 1993 Huntington challenged his critics to come up with an “alternative paradigm that accounts for the more crucial facts in equally simple or simpler terms.” A little late, here goes.<br /><br />The deepest and most enduring schism in and between societies is that dividing creditors and debtors, and surplus and deficit countries. In turn, these sides champion hard or soft money, deflationary or inflationary policies. In the ‘good old days’ this was an even fight. Indeed, the climax of the ‘Gilded Age’ of prosperity in America at the end of the nineteenth century was marked by three successive defeats for the soft-money candidate, William Jennings Bryan.<br /><br />The “plain people of this country” were Bryan’s army. And you’d “search the pages of history in vain to find a single instance in which the common people of any land ever declared themselves in favor of a gold standard”, ie hard money. For Bryan “the idle holders of idle capital” (with assets to defend) were pitted against “the struggling masses” (with debts to burn, they hoped). And “where, in law or morals” was the “authority for not protecting the debtors?” Or, as his more memorable rallying cry went: “you shall not press down upon the brow of labor this crown of thorns. You shall not crucify mankind upon a cross of gold.”<br /><br />This was probably the high water mark for the forces of hard money. Their ‘cross of gold’ discarded in the 1930s, now they have simply been outnumbered by debtors. And in democracies, power is a numbers game. In America today almost half the working population pays no Federal income tax, compared with only a fifth as recently as the late 1980s. What is this great subsidized majority going to vote for? Smaller government and fewer benefits - ‘hard choices’? A strong dollar that keeps inflation low and the real value of their debts up? Or personal profligacy funded by government excess?<br /><br />The dwindling minority of (‘idle’ but taxpaying) creditors has worked this one out. And it is investing accordingly, in an asset viewed beyond the grasp of the mob or its elected representatives:<br /><ul><li>in gold coin - American Eagle sales an 11 year high for May</li><li>in gold bars - the securitized version, gold ETFs; 5 million ounces of the largest of these were bought in the thirty days after the Greek crisis broke, 23 April when Athens officially requested a bail out, more than in the month after the fall of Lehman Brothers, 15 September 2008</li></ul>Similarly Europe’s largest creditor nation Germany finds itself ‘out-voted’ by debtor members of the euro. Albeit under duress, it has signed up to contribute over a quarter of the capital to the 440 billion euro ‘bail out’ fund – and the euro has reacted accordingly, falling to $1.19, no better than its launch on 1 January 1999. As the world’s biggest creditor, China, jumping from the frying pan of the dollar into the fire of the euro this past decade, will note, painfully. In fact, since the inception of the euro, all major currencies have fallen some 75% against gold. Bryan cannot have imagined that debtors would enjoy such ‘protection’.<br /><br />A few hard money guerillas survive, in what some might call the backwoods. Ten American states are considering bills to reintroduce ‘Constitutional Money’. Namely, proposals to break the Federal Reserve’s monopoly (of paper currency) and return to Article 1, Section 10 of the 1787 Constitution which forbade states from making “anything but gold and silver coin a tender in payment of debts.” Stranger than the fiction of Ayn Rand? (In whose 1957 novel ‘Atlas Shrugged’ society’s creditors, its movers & shakers, fled a rapacious government to a hidden valley where gold and silver were the basis of transactions and savings.) Or the golden nail in the coffin of Fukuyama’s thesis that democracy is not “prey to ... contradictions so serious that they will eventually undermine it as a political system”?</div>

Well, it’s not ‘the end of history’, as Francis Fukuyama originally forecast in 1989. As events, as much as Samuel Huntington’s 1993 counter...

Counter to Ben Bernanke's The World on a Cross of Gold

<div style="text-align: justify;">Extract from <a href="http://econjwatch.org/file_download/88/2005-08-timberlake-tyranny_statquo.pdf">Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy</a> by Richard Timberlake. The references to "Bernanke 1993" are to Ben Bernanke's 1993 article "The World on a Cross of Gold" in the Journal of Monetary Economics.<br /><br /><i>Ben Bernanke, in a laudatory review of Golden Fetters, agrees with its main thesis. “Eichengreen,” Bernanke states, “has made the case that the international gold standard, as reconstituted following World War I, played  a central role in the initiation and propagation of the worldwide slump” (Bernanke 1993, 252). “In this masterful new book,” he notes approvingly, “Barry Eichengreen has gone well beyond his previous work to marshal a powerful indictment of the interwar gold standard, and of the political leaders and economic policy-makers who allowed themselves to be bound by golden fetters while the world economy collapsed.” The United States, especially, absorbed and sterilized gold, “largely reflecting conscious Federal Reserve policy. . . . Monetary policy became tight in the U.S. in 1928. . . . High returns on both bonds and stocks attracted gold into the U.S., but the Fed, intent on its domestic policy goals, sterilized the inflows” (Bernanke 1993, 253-258).<br /><br />Bernanke’s words, much like Temin’s and Eichengreen’s, contradict his argument. If central banks could absorb and sterilize gold, “reflecting conscious Federal Reserve policy,” the central bank, not the gold standard, was running the show.<br /><br />...<br /><br />Bernanke finally poses a very apt question that he leaves unanswered. “Why was there such a sharp contrast between the stability of the gold standard regime of the classical, pre-World War I period and the extreme instability associated with the interwar gold standard?” (Bernanke 1993, 261).<br /><br />Here are two commentaries that may help answer his question. The first is from Lionel D. Edie, a prominent economist of the time. At a conference of economists in early 1932, he stated,<br /><blockquote>The Federal Reserve Act cut the tie which binds the gold reserve directly to the credit [money] volume, and by so doing automatically cut off the basic function of the gold standard . . . in an essential respect we abandoned [the automatic money supply function] some time ago. . . . We are not now on the gold standard . . . and we have not been for some time . . . it is time to recognize that the Federal Reserve mechanism does not constitute an automatic self-corrective device for perpetuating a gold standard. (Edie1932, 119-128)</blockquote><br />And Leland Yeager in 1966 described the “gold standard” of the 1920s in these words:<br /><blockquote>The gold standard of the late 1920s was hardly more than a façade. It involved extreme measures to economize on gold. . . . It involved the neutralization or offsetting of international influences on domestic money supplies, incomes, and prices. Gold standard methods of balance of payments equilibrium were largely destroyed and were not replaced by any alternative. . . . With both the price and income and the exchange-rate mechanisms of balance of payments adjustment out of operation, disequilibriums were accumulated or merely palliated, not continuously corrected. (Yeager 1966, 290)</blockquote><br />These commentaries provide the answer to Bernanke: “The” interwar gold standard was not a gold standard. It was an entirely different system than the pre-1914 gold standard that had existed for 100 years.</i><br /><br />Also quoted in the article is the following from Joseph Schumpeter's 1954 History of Economic Analysis:<br /><br /><i>An ‘automatic’ gold currency is part and parcel of a laissezfaire and free-trade economy. It links every nation’s money rates and price levels with the money-rates and price levels of all the other nations that are ‘on gold.’ It is extremely sensitive to government expenditure and even to attitudes or policies that do not involve expenditure directly, for example, to foreign policy, to certain policies of taxation, and, in general, to precisely all those policies that violate the principles of [classical] liberalism. This is the reason why gold is so unpopular now [1950] and also why it was so popular in a bourgeois era. It imposes restrictions upon governments or bureaucracies that are much more powerful than is parliamentary criticism. It is both the badge and the guarantee of bourgeois freedom—of freedom not simply of the bourgeois interest, but of freedom in the bourgeois sense. From this standpoint a man may quite rationally fight for it, even if fully convinced of the validity of all that has ever been urged against it on economic grounds. From the standpoint of etatisme and planning, a man may not less rationally condemn it, even if fully convinced of the validity of all that has ever been urged for it on economic grounds.</i></div>

Extract from Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy by Richard Timberlake. The references to "Bernanke 199...

Government incentives to inflate debt away

<div align="justify">Two interesting quotes caught my eye in a recent Andy Smith note:<br /><br /><em>"We cannot stop terrorism or defeat the ideologies of violent extremism when hundreds of millions of young people see a future with no jobs, no hope, and no way ever to catch up to the developed world"</em> <a href="http://www.state.gov/secretary/rm/2010/01/134838.htm">Hillary Clinton, Remarks to the Center for Global Development at the Peterson Institute for International Economics</a><br /><br />For a moment there I thought she was talking about the US - "when millions of young Americans see a future with no jobs, no hope, and no way ever to catch up to the Baby Boomers". Generational class warfare anyone?<br /><br /><em>"could seriously disrupt bond markets if it triggered concerns about creditworthiness or inflation because of concerns with government incentives to inflate debt away"</em> Bank for International Settlements in <a href="http://www.bloombergutv.com/stock-market/commodities-market/commentary/363760/economic-buzz--excessive-risk-taking-about-to-rear-its-ugly-head.html">invitation to top central bankers and financiers for a meeting in Basel</a><br /><br />This doesn't need any further comment for readers of this blog, suffice to say I find it interesting that the BIS acknowledges that inflating debt away is an option.<br /><br />PS - unfortunately Andy Smith's stuff is not publically released, because I rank him as the top precious metals analyst.<br /></div>

Two interesting quotes caught my eye in a recent Andy Smith note: "We cannot stop terrorism or defeat the ideologies of violent extremi...

Golden Avalanche

<div align="justify">Nick from <a href="http://www.blogger.com/www.sharelynx.com">www.sharelynx.com</a> shared some quotes with me that I'd like to pass on. They are from a book written in 1939 by Graham & Whittlesey called Golden Avalanche:<br /><br />“Before leaving the subject of gold supply it is interesting to relate present gold reserves to the monetary circulation of this country and the world. The gold reserves of the United States are almost two and a half times the total of all ordinary money now in circulation in this country. We could replace at its present value every piece of paper money with a gold coin and would still have enough left over to do the same for every country in Europe. There is enough gold in the monetary reserves of the world to replace all ordinary currency of the entire world 100 per cent with gold coins. Never until the present decade was such a situation as this even approached.” p.15<br /><br />"It has been estimated by a number of writers, on the basis of conditions prior to 1914, that the production of gold would have to rise by about 3 per cent a year in order to preserve approximately stable price levels. The best known of these calculations are those of the Swedish economist, Professor Cassel. This estimate tends to exaggerate the rate of expansion in the demand for basic reserve money. It is based on a period when population and production, and, therefore, the money-work to be done, were increasing at an exceptional rate, and when the non-monetary demand for gold was at its highest. During these years, moreover, the need for gold rose as rapidly as it did partly because of the extension of the international gold standard system to embrace a growing list of countries.<br /><br />Even if the gold standard system were again established as it was in 1913 the need for gold could not be expected to increase as it did in the half century before the World War, simply because there would not exist the same possibility of extending the use of gold over a steadily widening area.</div><div align="justify"><br />As was noted earlier, the monetary reserves of the world are today nearly three times as great as in 1929. If commodity prices were to return to the 1929 level, if business activity were to increase at an annual rate equal to that maintained in the sixty fat years prior to 1914, and if all the countries then on the gold standard should return to it, we should still have enough gold to meet all monetary requirements for many years to come, even though not one single ounce was produced during that time. If the gold standard is not restored on such a scale, then the world is long on gold to a corresponding degree. It is absolutely fair to say that, ignoring entirely the possibility of increasing the efficiency of our monetary and banking systems and making the most liberal assumptions as to growth in the monetary and non-monetary demand for gold, there is not the remotest prospect of the world’s needing to have another ounce of gold mined for several decades." p. 18-19</div>

Nick from www.sharelynx.com shared some quotes with me that I'd like to pass on. They are from a book written in 1939 by Graham & W...

Protecting yourself from World War III: Debtors vs Creditors

<div align="justify"><a href="http://en.wikipedia.org/wiki/Steve_Keen">Steve Keen</a> is an Australian <a href="http://en.wikipedia.org/wiki/Post-Keynesian_economics">Post-Keynesian</a> economist credited as having "seen it coming" in <a href="http://mpra.ub.uni-muenchen.de/15892/1/MPRA_paper_15892.pdf">this survey</a> of research by economists or financial market commentators. Keen was one of only eleven researchers who qualified, which included Schiff, Roubini, and Shiller.<br /><br />Steve Keen is a follower of <a href="http://www.debtdeflation.com/blogs/2008/03/10/time-to-read-some-minsky/">Hyman Minsky’s “Financial Instability Hypothesis”</a>, which he summarises as:<br /><br />1) Capitalist economies periodically experience financial crises;<br />2) These are caused by debt-financed speculation on asset prices leading to bubbles in asset prices;<br />3) These bubbles must eventually burst because they add nothing to productive capacity while increasing the debt-servicing burden;<br />4) When they burst, asset prices collapse but the debt remains;<br />5) The attempts by both borrowers and lenders to reduce leverage reduces demand and causes a recession;<br />6) If the economy survives such a crisis it goes through the same process again, with another boom driving debt up even higher, followed by yet another crash; but<br />7) This leads to a level of debt that is so great that another revival becomes impossible since no-one is willing to take on any more debt;<br />8) Then a Depression ensues.<br /><br />A plausible but dismal explanation. Consider <a href="http://www.debtdeflation.com/blogs/?p=2588#comment-14425">this comment</a> on Steve's latest blog post:<br /><br /><em>"This is one of the great questions for all of history, how to get out of this. For one thing, one persons debt is another persons asset or in many cases their money. ... It is clear that everyone that has something is going to take a haircut on it. Either by a systematic bankruptcy or by a natural one."</em><br /><br />As Steve Keen <a href="http://www.debtdeflation.com/blogs/?p=2588#comment-14424">says</a>:<br /><br /><em>Some form of price chaos has to be expected though, whatever is done. One side-effect of the bubble has been an enormous dislocation in prices, not just with overvalued financial assets, but also with drastically overinflated incomes for the financial class, and concomitant price distortions all the way through commodities.</em><br /><br />How do you protect yourself from this economic World War III? Simply swallow the <a href="http://en.wikipedia.org/wiki/The_Matrix">red pill</a> and step outside the Financial Matrix: bail out of your "has something"s into precious metals and sit by and watch the annihilation as everyone else takes "a haircut".</div>

Steve Keen is an Australian Post-Keynesian economist credited as having "seen it coming" in this survey of research by economis...

Crash Course in Sound Economics

Amusing read from Unqualified Reservations (UR) blog. Introduction comments: Here at UR, "economics" is not the study of how real...

Socialism

<div align="justify">Received the email "parable" below today. Interesting that I received it just after reading Chris Leithner's latest newsletter (yesterdays post) - synchronicity?<br /><br /><em>An economics professor at a local college made a statement that he had never failed a single student before but had once failed an entire class.<br /><br />That class had insisted that socialism worked and that no one would be poor and no one would be rich, a great equalizer.<br /><br />The professor then said, "OK, we will have an experiment in this class on socialism. All grades would be averaged and everyone would receive the same grade."<br /><br />After the first test, the grades were averaged and everyone got a B.<br /><br />The students who studied hard were upset and the students who studied little were happy.<br /><br />As the second test rolled around, the students who studied little had studied even less and the ones who studied hard decided they wanted a free ride too so they studied little.<br /><br />The second test average was a D! No one was happy.<br /><br />When the 3rd test rolled around, the average was an F.<br /><br />The scores never increased as bickering, blame and name-calling all resulted in hard feelings and no one would study for the benefit of anyone else.<br /><br />All failed, to their great surprise, and the professor told them that socialism would also ultimately fail because when the reward is great, the effort to succeed is great but when government takes all the reward away, no one will try or want to succeed.<br /><br />Could not be any simpler than that.</em></div>

Received the email "parable" below today. Interesting that I received it just after reading Chris Leithner's latest newsletter...

Is a deflationary gold standard bad?

<div align="justify">I've never really got why a gradual deflationary bias was a problem. Consumers know, for example, that just about any electronic good (computers, plasma screens etc) will get cheaper in the future, yet this does not seem to stop them from being made and bought. The fact that only those people who really really want the good will buy it and those are no so enthused will wait until it gets cheaper does not seem to stop business from making money.<br /><br />If it was conspicuous consumption fueled by debt (and an inflationary bias) that got us into this mess, then would not a system with a deflationary bias be the solution? It has a built in frugality: your money will have more purchasing power in the future, so only buy today what you actually need. People would also only want to take on debt if they were actually going to be productive/efficient rather than just trying to bubble up asset prices. Now maybe if we can convince Greenies that a <a href="http://www.goldstandardinstitute.com/">Gold Standard</a> would work against consumerism and thus be good for the planet, we've got a chance.<br /><br />The above thoughts were prompted by these comments left at this article <a href="http://www.citizeneconomists.com/blogs/2008/11/21/gold-standard-debunked-or-another-bubble/">Gold Standard ... Debunked or Another Bubble?</a>:<br /><br /><em>Dirk, on November 24, 2008 at 12:58 pm, said:</em><br /><br />I’m happy someone gets it- that constraining global economic activity based on a single metal that doesn’t really correlate to economic activity makes no sense.<br /><br />Clearly, the gold standard is deflationary in absence of either major gold finds, or major negative economic shocks. More goods and services chasing a fixed money pool will create massive downward pressure on prices. And downward pressure on prices and assets equals lower incentives for investment, more difficulty paying off debt, and a negative wealth effect that creates real economic stagnation.<br /><br />Inflation, on the other hand, creates pressure to invest money- not hoard it. As long as a currency promises a future redemptive power, it will keep its value. Perhaps fixing currency values to a “total energy” metric- the sum of all oil, coal, gas, solar, nuclear, etc. reserves- would allow for both economic growth and a guarantee of some future redemptive power for something really useful.<br /><br /><em>16 Stanley Pinchak, on November 25, 2008 at 2:03 pm, said:</em><br /><br />Wow so much muddled thinking in one place. It is amazing that my browser didn’t pop up a warning.<br /><br />1) Any stock of money sufficient to be accepted by the public as a money and selected as the medium of exchange is capable of serving as money. There is no need to grow the stock of money. Despite this false criticism, the gold stock does grow at a predictable (by mining engineers) and low rate between 1% and 3% per year.<br /><br />2) The purchasing power of a money is related to the stock of money and the demand for money. Its purchasing power is also related to the supply and demand for all other goods in society for which it is exchanged. Thus as productivity increases, the purchasing power of a stable or slowly increasing money will increase. This has the effect of making daily expenses of those with debts easier to bear.<br /><br />The only time a debt would become harder to pay off would be if the debtor was in a field of employment where his pay decreased in line with the increase in purchasing power of money. This might be a possibility, but at the same time that human actors today judge their debt burdens based on future expectations of income, those operating under a regime of increasing purchasing power of money would be capable of determining their expected future debt load capabilities. Those who guess wrong in such a situation are no different than those who bite off more debt than they can chew under our inflationary regime.<br /><br />The biggest improvement that increasing purchasing power has is for savers and those on fixed incomes. Savers would earn interest + the difference in purchasing power between when they started saving and when they start consuming. This is the opposite of today where the difference in purchasing power subtracts from the interest and reduces the incentive to save. This will have the effect of greatly encouraging saving and the stock of loanable funds, driving interest rates to natural and sustainable low levels. This will benefit the saver/consumer in the future as well as the entrepreneur and the durable good consumer in the present.<br /><br />Inflation on the other hand encourages debt based financing. It favors instant gratification, but since there are fewer savers since debt is the preferred method of financing, the purchases of today are not sustainable. The increase in consumption fueled by new money is not fully offset by the preferences of a ever shrinking class of savers who abstain from present consumption. This results in a business cycle like we see continuously under a system of bank credit expansion (ex nihlo). Inflation encourages capital consumption and not investment as Dirk claims. Empirical evidence of this is present in the dilapidated factories and rotting machinery of the American Rust Belt.<br /><br />3) All business cycles (as in repeated and not caused by something like war or famine) are the result of fractional reserve banking and its concomitant ex nihlo credit expansion. There can be no stable and sustained economic growth under a fractional reserve banking regime. There will always be over-expansion combined with malinvestment, and and then retrenchment as the bad investments are liquidated. Attempting to tie a money to a commodity standard while maintaining a fractional reserve banking system is unsustainable. There will inevitably be calls for the creation of a central bank and lender of last resort as the bust causes bank runs.<br /><br />The only viable solution is to realize that fractional reserve banking on demand deposit money is clearly a case of conflicting views of a contract and thus an untenable and invalid contract. How can a depositor demand a physical object which the banker (rightly?) assumes is lent to him for his purposes. A physical object must have a clear owner and can not be subject to control simultaneously by two parties of differing opinion under which direction to place the object. Thus demand deposits must be maintained in a warehouse fashion with 100% reserve maintained at all time. This eliminates the possibility of a bank run (in the historical sense and in the practical sense of potential damage to the depositor). Furthermore by limiting bank loans to funds deposited in time accounts (i.e. true saving) there will cease to be a business cycle.<br /><br />4) The idea of a world central bank is superfluous with a free monetary system and 100% reserve banking. The main purposes of the central bank are to ease governmental expansion and to act as a lender of last resort. A world central bank will only lead to world bureaucracy. If banking is on a firm economic and legal foundation, there is no need for a lender of last resort. A world central bank is only an excuse for the establishment of world government. It can not prevent world wide business cycles while maintaining a fractional reserve banking system. Furthermore, if it maintained a 100% reserve banking system, it would still be subject to political considerations in open market operation and would still cause misallocations of resources, though not of the intertemporal kind as explained by the business cycle theory. The misallocations would result in privileged borrowers being able to bid resources from those who obtain the increase in the money supply last.<br /><br />5) The myth that a gold standard would limit growth is preposterous. One of the greatest periods of economic (and population) expansion was obtained under a gold standard and under a period of increasing purchasing power of money (Cf. the 19th century). There is no theoretical nor physical restriction on the growth of economy based on a sound monetary system besides the subjective actions of individuals to save which allows for the implementation of longer and more productive production techniques.<br /><br />The claim that unemployment is higher under a gold standard is also ridiculous. All non voluntary unemployment is the result of artificial restrictions on the movement of labor or its price. One must be careful not to make the mistake of comparing the unemployment rates of a central bank and fractional reserve banking boom period to an average or bust phase unemployment rate under the fractional reserve banking system which has persisted in the United States prior to its inception. Under a free market, all labor wishing to be employed will be. All state intervention attempting to reduce the ranks of the unemployed can only be obtained by reducing the well being of other actors in the economy. As such interventionist attempts to reduce unemployment, though they may increase productivity (doubtful), will not be optimal as compared ex ante in terms of the satisfaction of wants of all economic actors. On utilitarian and natural rights grounds, state intervention in the labor market is counterproductive, misguided, and should be avoided.<br /><br />6) The idea that there is not enough gold to back all of the fiat currencies of the world is the most foolish statement of all. Logically one can take the stock of gold available and divide it by the weighted sum (by exchange rate) of the currencies of the world. This could provide backing for every single dollar, ruble, yen, etc. However, this is a bad policy, for the market should be left free to choose its own money, it should not be instituted from on high via state decree or central bank policy.<br /><br />All that needs to be done is to eliminate legal tender laws and taxes on market selected monies. Since we have several thousand years of history showing that Gold and Silver are typically selected as money, we should start by eliminating taxes on them. If there is a push for a different medium of exchange, it should be treated in the same fashion. At the same time, all fractional reserve demand deposit banking must be subjected to traditional legal principles regarding property rights.<br /><br />This means a reversion to 100% reserve banking. From these two changes, the market will perform the transition to a sound money with the minimum disruption and transfer cost. A state imposed system can only result in higher costs, as well as a retention of particular privileges for the state, most commonly in the form of a central bank, liable to interfere in the money supply through open market operations and subject to the political whims of demagogues.</div>

I've never really got why a gradual deflationary bias was a problem. Consumers know, for example, that just about any electronic good (c...

Credit Restriction

<div align="justify">From Prosperity and Depression: A Theoretical Analysis of Cyclical Movements, G Von Haberler, rev ed., 1939, published by League of Nations:<br /><br /><em>Prosperity comes to an end when credit expansion is discontinued. Since the process of expansion, after it has been allowed to gain a certain speed, can be stopped only by a jolt, theere is always the danger that expansion will be not merely stopped but reversed, and will be followed by a process of contraction which is itself cumulative.<br /><br />If the restriction of credit did not occur, the active phase of the trade cycle could be indefinitely prolonged, at the cost, no doubt, of an indefinite rise of prices and an abandonment of the gold standard.</em><br /><br />Well, we abandoned the gold standard, had unrestricted credit, so now we wait for an indefinite rise of prices?<br /><br /><em>Bookkeeping is more or less based on the assumption of a constant value of money. Periods of major inflations have shown that this tradition is very deeply rooted and that long and disagreeable experiences are necessary to change the habit. One of the consequences is that durable means of production - such as machines and factory buildings - figure in cost accounts at the actual cost of acquisition, and are written off on that basis. If prices rise, this procedure is illegitimate. The enhanced replacement cost should be substituted for the original cost of acquisition. This, however, is not done, or is done only to an insufficient extent and only after prices have risen considerably. The consequence is that too little is written off, paper profits appear, and the entrepreneur is temptted to increase his consumption. Capital in such case is treated as income.<br /><br />The paper profits are also likely to add to the cumulative force of the upswing, because they stimulate borrowers and lenders to borrow and lend more. The foster the optimistic spirit prevailing during the upswing, and so the credit expansion is likely to be accelerated. This phenomenon has its exact counterpart during the downswing of the cycle.</em><br /><br />Those interested in the above may also find Professor Fekete's paper <a href="http://www.professorfekete.com/articles/AEFIsOurAccountingSystemFlawed.pdf">Is Our Accounting System Flawed?</a> of interest.</div>

From Prosperity and Depression: A Theoretical Analysis of Cyclical Movements, G Von Haberler, rev ed., 1939, published by League of Nations:...

Free markets work

<div align="justify">Continuing the theme of my recent posts. This from Troy Schwensen at <a href="http://globalspeculator.com.au/documents/globalspeculator-Issue23.pdf#PAGE=1">The Global Speculator</a>:<br /><br /><em>Australia’s Prime Minister, Kevin Rudd, has recently delivered an address to the nation providing details on his second stimulus package. Within this briefing, there was a number of sniping remarks about the so called “failure of free markets”. This apparent failure has forced the government to step in and clean up the mess. ... It seems free markets cannot be trusted to spend money wisely, so it is up to the government to spend our money for us. I want to make a couple of points.<br /><br />Firstly, free markets work fine. The global problems we have experienced in the credit markets were caused by easy monetary policy. Many argue the cause was a lack of financial sector regulation. The more pertinent question to ask is why does the financial sector need so much regulation in the first place? Why is it that free markets work well in other industries but fail so dismally when it comes to the financial sector? The answer is quite simple. The financial markets are anything but free! We have a government entity called a central bank that essentially sets the price of money. It decides the level of interest rates under the flawed belief that the market is incapable of performing this function on its own. ...<br /><br />The second point I want to make is governments are incapable of investing money smarter than individuals and companies. By deficit spending, they are drawing funds away from the capital markets and effectively competing with businesses for money. Over the longer term, this will put upward pressure on interest rates exacerbating our economic problems. What Australians should be doing right now is saving and paying down debt. At some point this will inevitably have to happen anyway. By lowering interest rates to historically low levels, the message central banks are sending is don’t save, borrow and spend. Governments are releasing stimulus packages encouraging us to spend and “save the economy”. You cannot save an economy via consumption. All you are doing is prolonging the agony. Individuals and organizations need to clean up their balance sheets and save.</em></div>

Continuing the theme of my recent posts. This from Troy Schwensen at The Global Speculator : Australia’s Prime Minister, Kevin Rudd, has rec...

Falling prices are a good thing

<div align="justify">Could not agree more with Mike Shedlock in his latest <a href="http://globaleconomicanalysis.blogspot.com/2009/02/stimulus-spending-over-time.html">post</a>:<br /><br /><em>The idea of a deflationary trap is in and of itself complete nonsense. Deflation is actually a natural state of affairs. As productivity increases, standard of living rises and prices fall. Absent government intervention, productivity would actually increase the amount of goods produced, causing prices to drop. Falling prices are a good thing not a bad one.<br /><br />Fed and government policies rob taxpayers by promoting policies of inflation. Look at what accompanies rising prices: rising property taxes, rising sales taxes, and rising income taxes. Is that a good thing? The answer is no, especially when wages fail to keep up, which is exactly what happened.<br /><br />Who benefits from inflation? The answer is government, banks, and already wealthy because they are first in line to receive money. Everyone else is screwed. Inflation is theft from the middle and lower classes for the benefit of government and the wealthy.<br /><br />Over time, the government and the Fed so distort the economic picture, that a mentality sets depicted in the often heard phrase for a few years' back "Better get that house now, before it's too late".<br /><br />The problem is not falling prices, the problem was the excess of debt that led to massive speculation and ever escalating prices.</em></div>

Could not agree more with Mike Shedlock in his latest post : The idea of a deflationary trap is in and of itself complete nonsense. Deflatio...