The rationale behind a hard money policy and how Ron Paul is making it relevant again

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Quote of the Day:

"Find out just what the people will submit to and you have found out the exact amount of injustice and wrong which will be imposed upon them; and these will continue until they are resisted with either words or blows, or with both. The limits of tyrants are prescribed by the endurance of those whom they oppress."
- Frederick Douglass

Subject: Deflating the deflation myth

We are amazed. Ron Paul has set records for fundraising. His poll numbers are also good, despite being rigged to hide the true level of his support. He has attracted followers from all corners -- conservatives, liberals, libertarians, and centrists. But most of all, we are amazed by the fact that so many people are attracted to . . .

Ron Paul's position on Honest Money.

We had thought this issue was dead. The subject is abstract and often clouded by academic jargon and obscure technical details. This is one reason why there has been no significant public discussion of it since at least the early 1980s. And yet, we see consistent testimony that Ron's position on money is one of the main pillars of his popular support.

Another way you can know a position is gaining traction is when people take the trouble to attack it. For instance, the neo-conservative David Frum has written that Ron Paul's call for a revived gold standard would cause painful economic downturns. Frum maintains that we need the Fed's monetary inflation to counter such slumps.

Of course, the exact opposite is true. Painful economic downturns are caused by monetary inflation, not cured by it.

I don't know about you, but I can't imagine anything more painful than the Great Depression, which was the first inflationary bust caused by the Federal Reserve System. And the inflationary recessions of the 1970s were pretty bad too. Of course . . .

David Frum is really attacking a straw man of his own creation. Ron Paul doesn't want the old gold standard that was managed by the government. Instead, he simply wants free market money. He wants the free market to determine what we will be use for money, and he naturally assumes that the market would gravitate toward gold, just as it has throughout recorded history.

This would be a free market gold standard, which is very different from the old gold standard under which the government pegged the dollar to gold at $20 an ounce. You can readily see how such a fixed rate of exchange would cause problems.

When the Fed increased the number of dollars under the old gold standard the price of gold should have risen to account for this monetary inflation, but it couldn't. The price was legally stuck at $20 an ounce. This caused people to want to trade their dollars for gold, creating an economic loss for banks and the government.

I know, it sounds like a stupid system, and it was, but isn't that exactly how government operates most of the time?

Strangely, Frum praises the system of floating exchange rates between dollars and, for instance, Euros, but pointedly ignores that this is exactly what Ron wants to happen for gold (and other commodities) when they are used as money. Ron Paul doesn't want a gold standard in the sense of having a standard government price for gold. Ron specifically opposes monopoly government price fixing, such as the old $20 fixed price for gold. That's the whole point.

Ron wants the price of gold in terms of dollars to rise and fall freely, depending on supply and demand. Thus, if the Fed inflated the supply of FRNs (Federal Reserve Notes, aka dollars) the price of gold would rise and people would fly from dollars to the safety of gold. This would force the Fed to stop inflating the supply of FRNs.

This is the heart of Ron Paul's simple but powerful plan for curing inflation, and the recessions that result from it.

But Ron's critics make another point. They claim that using gold for money is inherently deflationary, and that monetary deflation is even worse than monetary inflation. They claim deflation is the true cause of recessions and depressions. Are they right?

We have already shown, in previous messages, how inflation causes recessions and depressions. But does deflation do the same thing, and is gold inherently deflationary? To answer this question we need to be precise in our use of words . . .

If inflation is an expansion of the money supply, it follows that deflation must be a contraction of the money supply. Gold could only be deflationary if a significant part of the world's gold supply suddenly disappeared. But this just doesn't happen. Remember . . .

Gold has been used as money throughout history for two very important reasons. 1) It is very hard to find, which severely limits inflation, and 2) It's durable, which limits deflation. Gold doesn't just simply disappear, so gold can't be deflationary in this sense.

What the critics of gold are talking about isn't monetary deflation, but price deflation -- a drop in prices. As an economy grows, and an increased supply of goods and services are offered for sale, prices will fall if the money supply remains static, as would be the case if gold was the dominant form of money. Gold critics claim that falling prices cause recessions and depressions. Are they right?

Consider two examples . . .

Computers have constantly improved in performance, while constantly falling in price. Computers, and consumer electronics in general, have experienced tremendous productivity gains and severe price deflation. Are the computer and consumer electronics industries in recession as a result? Of course not. They form the backbone of our economy.

Lasik eye surgery has also constantly improved in quality and fallen in price. Are Lasik eye surgeons experiencing recession as a result? Of course not. Instead, this one free market corner of the highly government controlled health care industry is a part of our health care economy that is really thriving.

The reason for this is simple. Productivity gains pay for themselves, allowing producers to charge less.

Using gold for money allows the benefits of increased productivity to be widely shared by everyone, through the mechanism of steadily falling prices. This is a benefit of a stable money supply, not a flaw.

The exact opposite is true of an inflationary money supply, where the benefits are enjoyed by those who get the new money first, and the price for their gain is paid by everyone else.

The gold critics are right that a stable money supply enables prices to fall, but they are wrong that this causes recessions. Instead, it makes everyone wealthier, not just the political elites that have privileged access to the Fed's stream of inflated funny money.

If you're ready to gain the benefits of honest money, by repealing the Fed's legal tender monopoly, then please ask Congress to pass Ron Paul's "Honest Money Act."

Thank you for being a part of the growing Downsize DC Army.

Jim Babka & Perry Willis
President & Communications Director
DownsizeDC.org, Inc.
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Just to go a little bit further,

if Inflation is an erosion of the purchasing power of the currency you hold, then deflation is an increase in the purchasing power of the currency you hold.

Crazy idea, hunh? That your savings might buy more in the future, rather than less? I mean, it sounds logical, doesn't it?

 

ReadyToGo, Bogart, EarlPearl, any comments?

 

Please give them some more time so they can stitch up a spin story for ya.

 

Nah, I'm not hostile with those guys. It's not a me vs. them thing. They seem to be the most interested in financially oriented posts, and I would like to engage them to debate and learn as we talk about this topic.

Not everything in this forum has to be confrontational. Rational discourse has its place too.

 

I hope this takes place, these are the types of debates/discussions I like to simply read and not trully get involved in

 

Good luck with that. Their nonsense will eventually drive you mad. If you have the patience more power to you M8.

 

My $0.02. The article is rhetoric and theory.

So few people in the world are capable of seriously discussing and making sense of these highly complex issues. I'm certainly not one of them.

What I get from the sum total of what I've read from the RP line of thinking on changing the financial system is that it is geared toward limiting credit in some sort of systemic way and that limiting credit would fundamentally lesson the impact of recessions. Essentially the US economy would operate with less tendency to boom and subsequent to that there would be less negative impact from recessions.

The risk associated with this thinking is that a change with restrictive credit could lead right to a recession. The other thing that is so disconnected from all this theory is that the relative size of the US economy versus the rest of the world economy shrinks every day. Regardless of what the US does internally, there are so many potentially huge impacts from the rest of the world that regardless of actions made in a fundamental way or by tinkering with what currently exists....the domestic economy is subject to what is happening in the rest of the world economy to an ever larger extent.

Who knows? Even the most sophisticated economists from both sides will argue this information with data (hopefully) supporting one point or another.

As far as that organization's write up--> more rhetoric.

and there you got my $0.02

 

Earl, how do you feel about deflation vs. inflation?

For sure, but Ron Paul is advocating closing the Federal Reserve immediately. He wants to remove the tax on money, capital gains and sales taxes on gold and silver.

Of course, recessions are natural economic conditions. Whenever credit gets too loose, and malinvestment occurs, a recession is the natural process to contract credit, until the malinvestment (which needs credit to continue) is purged.

Ok, but that sounds neither like a strong argument for the status quo, or for change.

Personally, I don't like to take the position that "this is for smart people, we can't understand it, the world is too complex".

Read the history of money by Murray Rothbard, and give me your thoughts.

 

Inflation erodes purchasing power because the price of good increase while in theory holding income constant, but what about wage inflation which out paces price inflation (Over long term historic trends). You just can't look at the price of goods going up and yell fire without looking at the other side and seeing people wages go up also.

Also in a deflationary period when your able to by more with your dollar, the business that produced that good gets less money so in turn they fire/layoff people or produce less goods, banks don't lend as much or at all if their going to get less money back in the future. What deflation creates are depressions or server recessions something that we experienced in the 1930s and what Japan went through in the 90s.

 

Source?

Please re-read the first post.

http://tampub.uta.fi/econet/wp44-2005.pdf

Please provide one valid example of deflation causing a depression or severe recession.

 

I'll get you the sources shortly, Its basically a common sense question. If your ran a business that produced widget x what's your incentive to produce widget x for $1.00 if you'll only get $.97 for it next month?

 

That the $0.97 I receive has equal purchasing power than the $1 I received before. That my lower price (in monetary units) allows me to sell more (supply/demand) relative to the amount of currency in circulation.

 

They both suck. I like boom times

Frankly I'd go for a greater dose of govt regulation. I'm a business person but I don't go for this "theory" that business is good and govt is bad.

I saw on a micro basis but several times with several instituions the actual what you call "malinvestment" take place during the 1980's. It was actually cr@ppy decisions by business people fueled by easy bucks without seriously looking at what they were doing. Greater regulation, reporting, review internally or through some sort of oversight might have nipped it in the national bud before it went bad nationally but it didn't occur. The wierd thing was that Texas suffered the fate of the rest of the country about 3-4 years before the problem (the S&L debacle) became a nationwide debt inspired crisis that led to a recession. But nothing was done.

By the late 1990's the telecom industry boom had run its productive length. Nobody, no institutions were overseeing what was happening. The big shots at big businesses started bullsh1tting everyone else and the industry tanked at a serious level. Its tanking was massively greater than that of the first dot.com bust. It led to recession in the early 2000's.

Nobody was overseeing the massive development of what are now called "sub-prime" mortgages. Today I look back and think of an instance when I met the then girl friend of a friend at that time. She and everyone in that office were making tons and tons of money. Although I don't remember the term "sub-prime" that was the business they were in. No normal real estate/mortgage business has life that great unless there are "crazy" unnatural circumstances at the time. I know I didn't think about it but was amazed at how much money so many people with so little experience were making doing something that was partly foreign to me but was also partly familiar to me. The money was TOO easy. That should have been a give away.

Frankly, I'd like to see some level of greater financial oversight.

Business people and the markets aren't moral gods definitively superior to govts and always capable of better decisions. It just doesn't work that way. Business in fact always responds to the greater greed opportunity.

If there was more of that it would have a similar effect of dampening run away boom times...and then when the boom ran its course the down time wouldn't be as severe.

That is another simple prescription for the goal of the RP monetary theorists who fear inflation from too much credit.

 

Jim Rogers endorses Ron Paul : youtube radio interview

 

Whose theory is that? Not mine.

Ok, but regulation and oversight are hidden costs, and barriers to entry.

Actually, John McCain was involved in S&L. A good example of government sleeping with business, for personal gain. It's a toxic relationship when you give the power of taxation, subsidy and law to a group, and then let them control the economy.

Right, but you're talking about the symptoms, not the cause.

Right, but the unnatural circumstances were the result of artificially low interest rates (FED), regulation that mandated lending to people who might be credit risks (based on a desire for equality in lending practices), and direct injection into the housing industry, in the form of new credit in the system, to houses, which artificially raised the price of houses.

People will always follow bad money, when it is easily available.

But who do you trust to do this?

Can you provide an example of when the government makes better decisions than the market?

Yes, business always responds to the greater greed, but with a governmental safety net, that is exacerbated. Business in a free market will chase greed, but is kept somewhat in check, or held accountable by the possibility of loss.

People say that when things like Enron happen, that is proof we need more regulation. On the contrary, Enron was a good example of the market cleaning out malinvestment. The people who lost money on Enron, were not the "smart money players". It's impossible to protect speculators and casual investors from themselves. Not without creating a cost to someone else, which unbalances the market.

The severity of the down and the explosiveness of the up are driven by the amount of credit in the system. If the amount of credit is greater than the true value in the economy (artificially, say by printing money out of thin air), then you're going to see bigger ups and bigger downs. The impact is increased by all of that excess credit, one that fuels the up, and two that must be extracted from the system in the down.

I mean, essentially, we're arguing for similar things, but you believe that the supply of money has absolutely nothing to do with booms and busts, and I believe that the regulation and oversight you desire will have little to no effect on booms or busts with unchecked credit. One big difference is, regulations are bad for business growth. It's the amount of taxation and regulation that we have, that forces business to go begging elsewhere. Not that Americans make investment mistakes, or our businesses are not as capable as businesses elsewhere.

I can't believe you are arguing against simple prescriptions, as though the sophistication (not validity) of the answer determines it's worth.

And inflation is caused by too much credit. Even Friedman will agree with Hayek, Mises and Rothbard on that. Two Nobel Prize winning economists, they just might know what they are talking about.

 

I can use some deflation

I think the issue of basing money only on Gold and Silver is that it is finite. Gold and Silver are good for bullion and back paper money with grain, oil, tin, aluminium etc

 

Well the scarcity of the hard good is a key component. But it also has to be durable, unlike say corn.

Aluminum and oil are interesting.

 

Grain is good in that we consume last years harvest and store this years.

What you would need to do is base paper on a basket of commodities including grain and oil so that at least there is some value. Of course issue gold and silver coins. $1000 for an once is about right.

 

Earl, this is a government agent, the Sec. of the Treasury discussing the mortgage crisis with the LA Times Editorial board.

From reading it, (3 pages), it doesn't sound like they are buying what he is selling.

http://www.latimes.com/news/opinion...0,7810419.story?page=1&coll=la-opinion-center

I like how he starts to talk to them like they are dumb, and (sic) ideologues.

Maybe they are educated in Austrian Economics.

Sec. Paulson, that's called a market correction, not a distortion. Corrections reverse distortions. Amazing doublespeak.

Read the whole thing. Fascinating.