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

Sorry, it took me a while to find this thread.
I didn't read the entire article. I stopped after this sentence: "we have already shown, in previous messages, how inflation causes recessions and depressions."

First of all, the Great Depression was not an "inflationary bust." The Depression itself was primarily caused by the Fed's recessionary monetary policy, not an inflationary policy as the article suggests. This is the reason why Great Britain went off the gold standard. Since the Fed wasn't taking action, the other economic policy, fiscal policy, had to stimulate the economy. This is where John Maynard Keynes comes in. With the introduction of countercyclical fiscal policy, the government used fiscal stimulus to boost the economy. This is what Roosevelt's New Deal was about. WWII is another example of an inflationary fiscal activity. As a result, the economy made a recovery. In conclusion, the Great Depression was caused by a recessionary economic policy and cured by an inflationary economic policy, not the other way around.
Now let's talk about recessions in general. If you want to subscribe to the argument that inflation causes recessions, you need to look at what causes inflation. Inflation is the increase in the general price level of goods. There are two types of inflation: cost push and demand pull.
Cost push inflation is triggered when the aggregate supply of an economy decreases due to higher costs of production. The law of supply confirms this. The most conspicuous example of cost push inflation that you'll find in any econ book is the oil crisis caused by OPEC starting in 1973. Cost push inflation is the primary cause of stagflation.
Demand push is the opposite of cost push in that it is triggered when the aggregate demand of an economy increases. Let's focus on one factor here that's germane to the subject: increase in the money supply. Law of demand states that prices and quantity demanded are inversely related. Therefore, an increase in the money supply increases the aggregate demand of an economy, leading to demand push inflation. So the important question is, who increases the supply of money? The market does. Much of the money created in our system is created by people taking out loans. Therefore, the higher the employment level, the more money that is created. This is why inflation is inversely related with unemployment. The Phillips Curve demonstrates this relationship. When too much money is being created by commercial banks, the Federal Reserve can intervene. They will raise the interest rate to make borrowing more expensive, thereby slowing down the economy. The Fed's job, however, is not to prevent recessions from occurring; their job is to make sure that the economy doesn't contract by more than 3%.

Ok, I'm pretty much done for now.

 

I disagree with this. The recessionary monetary policy exacerbated the depression, it did not cause the recession.

A big problem with Keynesian monetary policy is that all of the stimulus is artificial. It's not driven by the marketplace, it's driven by inflationary government spending. The government doesn't actually have the revenue, but it continues to spend either through debt or deficit finance or the creation of new money in the system. And we've both argued several times about the creation of new money via credit.

Cost and price are two sides of the same coin. If you're selling it's cost, if I am buying it's price.

1. The availability of credit is facilitated by the FED. Banks want to make loans with this "free credit" to generate income from interest. The individual banks themselves do not create the money in the system. Not without colluding with the FED.

2. The FED facilitate's the entire banking system. From the discount window, to low overnight rates, to fractional reserve banking. Just think for a minute, how the banks are afforded the privilege of making a deposit with the FED of $100k, and receive $1 million in new credit. Wouldn't each and every one of us as individuals also like to participate in the inflation scheme such as this?

3.And 3% is absolute nonsense. Basically the FED is supposed to maintain constant growth, with little or no contraction. It's an artificial imbalance, totally unrelated to savings, wealth, productivity etc. Right now, we have a growing debt, a negative savings rate, and yet the official propaganda says that growth is up. But if you talk to middle and lower class people, they are not feeling a growth in their wealth. It's because it is being diluted, to maintain positive growth for how long now?

And the dilution comes from the cost of servicing those debts, to keep up with spiraling monetary inflation. Servicing debt is also considered growth if interest is one of my revenue streams (not 100% on this, please refute as necessary).

Really, a lot of this is just common sense.

Cost Push, demand pull, wage-price, fancy names constructed to hide the real causes of inflation. If you study our history, the government has many times been behind inflation, and yet now, people have been taught that it's always the market or consumer, even with greater governmental controls or interference than there ever has been at another time in the past.

To revisit an earlier point, Cost Push. If I make toys, and the cost of plastic goes up, then my sale price also goes up. This isn't inflation. It's a relation between supply and demand.

Demand Pull. If there is an increased demand for my goods, and I cannot achieve a consistent supply level (due to a myriad of factors), then my goods become scarcer, and the price may increase. This is not inflation.

Aggregate prices do not have to rise or fall because there are shortages or excesses because a lack of capital or supply in one industry would be reflected in lower prices in another industry with lots of capital and excess of supply. In fact, while I don't buy the Core CPI numbers, one could make an argument (in an economy without monetary inflation) that we see examples of this where the price of electronic goods are falling, even as the cost of food and energy is rising. Of course, we know that innovation and capital have flowed to these tech industries, and that influx combined with economies of scale have helped keep the aggregate in line.

But when you inflate the monetary supply (which usually occurs in times of low credit rates), you destroy savings. The dollar I saved 10 years ago, hardly buys what it did 10 years ago today. For a good like say a dozen eggs.

The question then becomes, how do I keep my dollars saved over a lifetime of work from losing value on basic commodities like food? Well some would say I should put my money into the bank and earn interest. But interest rates have been artificially lowered, and if you disregard core CPI and use the old measure, my savings are becoming worth less over time.

Inflation is countered by deflation, and then the aggregate over a period of time is a constant.

http://en.wikipedia.org/wiki/Image:US_Historical_Inflation_Ancient.svg

Notice how under a gold standard (even with some historical deviations, such as the civil war inflationary financing), the aggregate kept prices fairly constant? This is how you accumulate wealth, by saving and deferring consumption for a later date. But you cannot do it, if your savings are under constant assault of inflation. The only hope you have, is to acquire assets which (theoretically) will also inflate in value, and the way people do this today, because small ticket items like cars and stereos lose value immediately on purchase, is to take on debt for larger ticket items like homes and property.

Which is all well and good as the debt functions as the inverse of the savings loss through inflation. But the debt really isn't cheaper than saving, when you factor in the costs of servicing that debt, and the unpredictability of asset appreciation. Instead of hiding dollars under your mattress, you're now speculating for a return that should offset your losses.

Any way, I'm done on this sidebar.

I really thought you would find a discussion on a hard money system engaging. I was hoping to get your insight on the meat of the first post, not something early in the email that stuck in your craw.

 

The Fed doesn't give commercial banks the ability to practice fractional reserve banking. If you think that the act of making a deposit with the Fed gives banks the ability to create money, you have absolutely no idea how banking works. Your arguments are almost always based on false premises.

 

Excuse me?

You know exactly what I am talking about, and now you are playing semantic games, I can only guess because I absolutely owned you in my last post.

Look who is talking. You actually think cost push and demand pull cause inflation.

 

You think you did (which is quite arrogant of you).
Fractional reserve banking has been practiced before the Fed. Commercial banks don't make a deposit with the Fed and get new credit in return. In fact, the opposite occurs; the amount that the banks deposit is frozen so that new money cannot be created. Is this too confusing for you?

They cause inflation? That makes no sense. Cost push and demand pull are types of inflation and not causes. Have you even passed ECON101?

 

Let's break this down, shall we?

Never disputed that.

So during an open market operation, the banks do not buy up securities and create more credit in the system? Securities that the banks sell to the FED?

I agree with you on 1/2 of this post. They are not causes. They are also not types. Re-read what I wrote about aggregate pricing, and then we can continue the discussion.

 

Lets not forget about silver. Silver is also an excellent hard money that could be used to great effect. Because of the high price of gold, it works best when used for major purchases. Gold is like a savings account, and silver is the checking account, silver can be used to purchase every day goods, like food, clothes, etc, while Gold can be used to purchase cars, expensive gadgets, etc. You know, using precious metals as a currency should be common sense, I don't know why anyone would be against it(other than the people who benefit from the Fed system, of course.).

Paper vs silver and gold? Hmmm, that shouldn't be too hard to choose. I agree with Ron Paul that we should just let people choose, let silver and gold compete against the FRNs, see which one wins, I already know that silver and gold will destroy the FRNs on any given day.

And yes Guerilla, the idea of my savings being able to purchase more in the future is dazzling, to say the least.

 

Let's talk about one subject at a time, shall we? Where did open market operation come from? Your issue was about banks depositing money with the Fed and somehow ending up with new credit because of it. Do you remember your example of $100K deposit turning into $1 million of new credit? That is done through open market operations? Please explain.

You're defining inflation as an increase in the money supply which is only accepted within certain schools of economic thought such as the Austrian School. In economics, increase in the money supply is known as monetary inflation. Monetary inflation is a factor affecting inflation. To continue with the discussion, we have to settle on the definition of inflation. Is it a problem for you to refer to an increase in the money supply as monetary inflation and increase in the prices of goods as inflation?

 

Tesla, it is truly sad that we are on our 4th or 5th generation that believes that savings will not keep up with inflation, so deferred saving of earned production loses value over time.

I mean really. Think about how ludicrous that is.

I save enough for 4 cans of Coca Cola in my piggy bank. 20 years from now, that same amount of money now buys 1 can of Coca Cola.

And the madness is that there are people (who shall remain unnamed) that this is how money is supposed to work. That if you don't spend it immediately or invest it (at a risk of loss), it will lose value.

 

I was going out for dinner, and mistyped. Hence why I called it a semantic game. You and I have debated enough times to know exactly what I was talking about. The deposit (or sale) of securities to the FED, and the creation of new money in the system by a factor of 10 (sometimes more).

We'll get to the Austrian school later in this discussion. I'm curious to know where you find fault in it's theories.

Yes, it is a problem for me. Show me how the price of goods constantly "inflates" without a commensurate deflation to keep aggregate consumer pricing at or near par. When we get to a common understanding, I think our discourse will take off.

 

No, I didn't know exactly what you were talking about. I read what you typed. Don't expect people to be able read you mind.

I'm not finding fault in Austrian School. I'm trying to expand the discussion beyond the realm of Austrian School.

Monetary inflation and price inflation are directly related, but combining the terms is confusing. For example, supply shock inflation, which is a form of cost-push inflation, is not caused by monetary inflation so it is more appropriate to refer to it as price inflation. More importantly, increase in the money supply does not immediately lead to price inflation, and we cannot determine exactly how much price inflation it will result to (even though the RRR of 10% is a given). We don't know how significant a 5% increase in the money supply is until we look at price inflation.

 

If you can't read my mind, then perhaps we should end this discussion.

Well, if you don't find fault with the Austrian school, why are you arguing against it? You're also arguing against the Chicago school. Btw, I am trying to expand the discussion as well. Hopefully at one point, we'll get back to the OP, because you had indicated earlier that it was an interesting topic to discuss, hence why I posted it. Most specifically, to discuss it with you!

Supply shock, cost push, demand pull, wage spiral are all just layers of jargon built up and they don't withstand the scrutiny of my simple statement on aggregate pricing.

We know that my model for aggregate pricing is sound, and therefore, all of those terms are superfluous to the discussion. Unless you are willing to argue that inflation can exceed the size of the economy.

 

I don't subscribe to one particular economic thought; I find advantages and disadvantages in each economic thought and try to analyze them objectively.

Is it realistic to assume that we'll be able to enjoy a great increase in productivity in every industry? Is it realistic to assume that we'll be able to enjoy deflation on goods that have a low price elasticity of demand, i.e. an inelastic demand?
The most important point to discern is that if people were encouraged to save and not spend, the economy will lose its productivity anyway. The purpose of inflation is to impose a tax on idle money.

 

Ok, I will yield on this point. I just find it hard to argue for a position, unless my counterpart is willing to argue against my position.

I'm going to answer, but you haven't been answering my questions and at one point, I would like to gain some ground, at least with regards to clarifying what is and what is not common ground.

Increase in every industry? No. I don't think that is realistic.

Re: low price elasticity of demand, no I don't think that is realistic.

Elasticity has little to do with my argument for the aggregate of prices. If prices rise with little elasticity, then spending is taken from other goods and services, which suppresses their prices. Unless the argument is that all demand is inelastic, which I am sure you would agree is not realistic.

That's part of why I love Murray Rothbard. He doesn't talk about decisions by the consumer in the marketplace as statistical probabilities but rather as ordinal choices.

This is entirely untrue IMO. Savings provide the basis for capital formation. It's the expansion of credit that leads to boom / bust cycles. Credit has no value, except the promise to repay. It is entirely artificial. Savings represent accumulated stored productive gains, and deferred consumption available for spending at a later time, either through consumption or investment.

Remember, savings at one time were the base of the extension of credit by banks for investment. Without savings, the banks could not make loans. Until this Ponzi Scheme of fractional reserve banking and a fiat currency came along where the system provided artificial credit, and the only way to keep the economy from collapsing on artificial (read: non-existent wealth) was to continue to inject more and more into the system.

 

The reason people think this is because they are stuck in the "financial matrix." Their perceptions have been altered by the powerful banking interests who control the U.S. government. I always laugh when I've seen television specials where financial experts debated about "whether or not you can retire on a million dollars."

The debate is ridiculous, unless you understand the insidious nature of the discussion............the debate on TV about whether or not you can retire on a million dollars is called in the military a Psychological Operation, a means with which to distort the reality of your enemy.

The experts on these shows known damn well that the average American has no were near $1 million, and yet, they debate about "whether or not you can retire on it." The goal of this Psychological operation is to:

1. Give the people who watch it a sense of hopelessness. Since the average person watching the show has no were near $1 million, these lose all hope of ever getting wealthy, OR, they are compelled to follow the financial advice of the "experts" which is designed to make the viewers invest the money they do have into a system that either makes them lose more money, or puts them further into debt, making them slaves of the financial control grid.

Then, to add fuel to the fire, the corrupt financial system them constantly feels the minds of the average American with "how much this costs, how much that costs, how much Britney Spears paid for this, how much Angelina Jolie paid for that, How much Tom Cruise and Katie Holmes house cost."

The average American who sees these things is brainwashed to think that spending money equals true wealth, and in an attempt to emulate the celebrities who they are obsessed with, who live in a different reality than them, they go in debt trying to live a status lifestyle, but only end up becoming economic slaves to the banking interest who control our society.

The celebrities themselves are the "peoples champions," poster childs who are used at tools by the TRUE elite to make the dumbed down masses believe these poster childs have true power. However, the real power always lies in the shadows, letting the celebrities(or people's champions), unwittingly or wittingly, brainwash the masses into being bankrupt, poor, and in debt.

 

For those of you here who don't get my previous post, I will do some research and find an article I read a month ago about Britney Spears. The article was on the front page of Yahoo, and the article essentially stated that Britney makes $700,000 per month, and that she didn't set aside hardly any of it for retirement. The article then implies that other people in Britney's age group(Britney Spears is 25 years old), should not bother worrying about retirement, and that two thirds of 25 year olds today have put nothing aside for retirement.

The article is basically saying, "if Britney can do it, so can you." Again, a wise man sees this article as a Psychological Operation used to brainwash fools who can't see it for what it is.

 

Here is the link to the Britney article I referred to in my previous post:http://biz.yahoo.com/hmoney/071106/110607_revell_moneymag.html?.v=5&.pf=retirement

Now, the article is entitled "What Britney can teach you about retirement." Now, I will dissect this article bit by bit like a biologist with a frog, explaining to everyone here why the person who wrote this article is a part of the financial establishment, and there article is designed to brain wash and control the masses.

Lets start with the title of the article "What Britney can teach you about retirement." Now, with this title, the author of this article is immediately conveying a message that Britney Spears is an excellent financial role model for us 25 year olds. The author implies that a woman who doesn't put aside any of her money for retirement "can teach you something about retirement."

This is a paradox. If retirement money is defined as the money you put aside while you're young until you reach the age that you're ready to retire, how can a woman who puts aside none of her money for retirement be a good role model? Now, lets talk about why the author chose Britney Spears.

I mean, she could have chose anyone. She could have picked Warren Buffet, or Michael Lee Chen. Why Britney? Because the mass American public knows more about celebrities than anything else. Writing an article about Britney would immediately catch the attention of most people. Unfortunately, she is a bad example, and someone like Warren Buffet is much better. But again, the goal of this article is not to help you make an educated financial decision, it is designed to brain wash you.

Then the author goes on to state that, despite the fact that Britney is not putting away any of the $700,000+ she brings in per month, she could have a lot by the time she reaches 65 if she only put away 8% of it. Now, while the mathematics of this article are indeed correct, the article is mixed with deception as well.

First, if Britney put away 8% of her monthly earnings, she WOULD NOT have $300 million by 65. The reason why this is not true is because, eventually her album sales could fail, there were plenty of big name celebrities 10 years ago who have fallen out of the limelight, and are not as popular as today. Pop music is competitive, a year or two from now, some new hot blonde singer can hit the scene and steal Britney's shine. Not only that, the author forgets that Britney uses sex appeal to sell records, and as she gets older, well, that sex appeal will dissipate, and her album sells, more than likely, will not continue to bring in the money they generate today.

The author assumes that Britney will continue to make $700,000 each month until she is 65, a stupid and irresponsible assumption, and you know the old saying about assumptions. In addition to this, a person who saves an average of 8% of their own money each month won't built the type of wealth that the author hypothetically says Britney could save.

The author also doesn't understand that inflation, which experts show is about 13% will eat up any savings that Britney or anyone else puts away if that money IS NOT BACKED BY GOLD AND SILVER. Notice in the article that the author doesn't mention how to beat inflation, or why gold and silver should be purchased. The author also doesn't state that the hypothetical $300 million that Ms Spears would have if she put away 8% of her earning until 65 would have been greatly eroded, and that $300 million would only purchase a fraction of what the same amount can purchase today.

The author finally concludes the article by suggesting you should put your money into a 401K, and anyone who has read Robert Kiyosaki's work knows that he is totally against 401ks, because first off, they are subject to huge taxes once the money is finally taken for retirement. Here is what Wikipedia says about Kiyosaki's belief in 401ks, which many mutual fund managers agree with:

"Kiyosaki's claim is given some credence by the founder of mutual fund powerhouse Vanguard, John C. Bogle. In a Frontline episode titled 401(k)s: The New Retirement Plan, For Better or Worse, Bogle, too, claims that management fees and trading costs gobble up approximately 2.5% of an investor's annual returns and approximately 80% of an investor's long term gains. He says management costs reduce the value of a $1,000 investment over 65 years from approximately $140,000 at 8% compounded annually to a mere $30,000 at 5.5% compounded annually. Bogle's solution is to utilize index funds to substantially reduce or eliminate management fees."

So, may final verdict of the Britney Spears Article? It is a Psychological Operation use to brainwash young people in their twenties into thinking they can spend like Britney, only put away 8% in a 401K, and manage to be wealthy by retirement. In other words, the article is a load of hogwash, and is typical of the financial garbage that is spoon fed to the masses today.

It is articles like this which make me understand why so many Americans are broke.

 

Go to college.
Any college will do.
You will be asked (forced?) to take an economics class where you will be introduced to the idea of reserve banking and interest on your (most probably) student loans.
You will instantly be introduced to the idea that you are being screwed.
That interest will rise every year.
That you will pay somewhere close to 2x what you are being loaned even with non-subsidized loans (Stafford). You will realize that you will work at least 2x the amount of time you are in school at an optimal paying job in your field to pay off what it costs you to get that degree.
Welcome to the real world.
It is not fun.
"Any man who is under 30, and is not a liberal, has no heart; and any man who is over 30, and is not a conservative, has no brains."
Attributed to Winston Churchill and written on many a college bathroom wall.

Edit: let me not forget the little caveat, you are most probably involved in the field of Web Design, or Information Management and Design, in which case your job (if you are an American Citizen) is being subsidized to any number of foreign countries at a rate which your student loans will not allow you to compete. HAVE FUN!