An objection to theories of hyperinflation

[Tigermoose]

It seems to me that the modern fiat monetary system is based on relative values -- not absolute. It seems that many critics of fiat currency are uncomfortable with a currency being valued relative to other currencies rather than tied to an absolute commodity in the physical world. Where is the justification in condemning fait currency as unsustainable just because one has a "gut" negative reaction to relative valuation rather than "absolute" valuation? I agree that resource and environmental limitations will restrain exponential growth in the future, but I don't see a crash but rather a plateau that extends until consumption is reduced and alternative energy supplies are sufficiently in place to lower the price of energy enough so that sustainable growth can take place (see my critique of peak oil in the peak oil crash course discussion forum).



The crash of 2008 occurred because banks and corporations did not have enough reserves to cover their exposures to more-than-expected defaults. As you know from studying inflationary banking, when defaults occur money is eliminated in this system. The crash of 2008 resulted in a massive crater in the U. S. money supply. If the government did not step in to provide reserves to the banks and corporations, these defaults would cascade through the system and lead to a total collapse. Yet, from many on the internet I hear that this government intervention is going to cause hyperinflation? Did these people not notice the huge drop in the money supply? This creation via government debt was a stop-gap to replace the devastation of money in the bank-credit monetary supply. And if inflation begins to accelerate due to velocity of this stop-gap money, then all the better! Understandably, banks are correctly holding onto these reserves because they just got burned by not having enough reserves! Once they feel sufficiently stable, they will increase lending. Then the fed can raise interest rates and balance out the money supply at a low growth rate. I just don't see the problem with this. It's almost as if the hyperinflation theorists ignore the huge destruction of our money supply in the crash of 2008. Right now, I think we are at the point where the banks and corporations are beginning to feel comfortable again, and the fed will begin raising rates if inflation begins to get out of hand.

[Dr. Righteous]

1. It's not a "gut" negative reaction

Every fiat currency in the history of the world has always hyperinflated itself out of existence. It's unsustainable because the people who control the supply of money always create too much of it. It cannot be avoided because the levers of such power are too tempting. Also, the price of oil is not going up - it's the value of the dollar that's going down.

Your problem when describing the crash of 2008 is that you're starting in the middle of the story rather than from the begining. You have to look at it as the BOOM being the BEGINNING of the cycle which causes the BUST at the END of the cycle. The reason the crash happened was becuase the Federal Reserve pushed interest rates artifically low (lower than what the free market would have naturally set) and caused way too many people to take loans out that they couldn't afford. Eventually the loans were defaulted on, and the FED stepped in and created much more money and even lower interest rates. Yes, the money supply does decrease during contraction, but the Federal Reserve has created much more money than was lost in the economy in order to combat the deflation. This is what ALWAYS happens. This will create another boom phase that will be much larger than the last one, and ultimately the bust will be worse than this last one, too.

Inflation does not equal economic growth. It only leads to higher prices and destruction of savings. The Fed does not raise rates if things start getting out of hand. It did not do this the last time around, so why would you expect them to do it again?

[Tigermoose]

10. The bust was caused by insufficient reserves in banks and corporations

The banks and corporations deleveraged themselves too much because of an inaccurate assessment of their risk. When the defaults came and they did not have enough reserves to cover the defaults, a cascading chain reaction of monetary destruction in the Shadow Banking System resulted. The Fed is able to control its own monetary creation and deflation, but the shadow banking system was a new largely unregulated beast that got out of hand.

In our system, inflation is vital to encouraging the reinvestment of capital into production. Without inflation, people could sit on their money and it would not circulate. Greenspan and the Fed are at fault for trusting that the shadow banking system could regulate itself. Bernanke and the current Fed have handled the collapse and remonetization brilliantly thus far. I have to admit, though, that I am not up to speed on what regulations and checks have been placed to correct the shadow banking system problems.

[abelenkpe]

14. You say:

"...caused way too many people to take loans out that they couldn't afford."

People took out loans because credit was easy and cheap. They spent beyond their means because wages have been stagnant since the 70s but cheap and easy credit offered (and encouraged) by banks drove the price of necessities like homes, health care, energy and education up up up to the point where it was no longer affordable for most and certainly not in line with wages.

But you're right, the FED is not going to raise rates. They are still pushing easy credit but the only ones with access to it are banks and financial institutions that take that money and speculate on necessities like energy and food driving the cost of those things up up up. Meanwhile wages are still suppressed, people are out of work or working fewer hours because of forced furlough days, and many have seen their wages and benefits cut. For this reason more people are dependent of food stamps, unemployment, and other forms of assistance. Homes are going into foreclosure and tax revenues have dropped sharply forcing government to cut social programs just when they are needed the most.

The working class needs to see its wages rise so that they can once again afford necessities, pay taxes and not require social programs or we need to raise taxes on the very rich and cut our defense budget significantly so as to not leave the majority of citizens out of luck just when they need help the most.

Shrinking government and cutting social programs during this crisis is particularly heartless.

So yeah we have another boom, for financial companies and banks and those on wall street. But it's not one fueled by spending from the working class. When the next bust happens...and it could be very soon...there will be no blaming it on immigrants, Muslims, gay people, abortionists, poor people, or foolish yuppies buying more than they could afford. Because no one has access to cheap easy money but the banks, financial institutes and wall street. This is their boom and bust. The last one was theirs as well, but they won't be able to shift the blame so easily next time.

At least one can hope....

[Taitertots]

16. The gold standard was abandoned because it was a pathetic failure

If you have access to JStor, I can link you to the former head of economics at MIT explaining how it exacerbated the great depression, and why it was a great idea to abandon it.

"Every fiat currency in the history of the world has always hyperinflated itself out of existence."
Except every single currency on earth right now.

If you have Jstor I can also link you to Ben Bernanke explaining with data why those interest rates were chosen. The problems extend beyond the control of the federal reserve, Mortgage securitization, CDOs, CDO squared, and the ratings agencies.

[roamer65]

18. The gold standard did not cause the Great Depression.

The cause of the Great Depression was due to the dollar-pound currency rate manipulations by Benjamin Strong (NY Fed Chief) and Montagu Norman (Chief of the Bank of England). Strong and Norman colluded to artifically depreciate the dollar against the pound in the late 1920's. The "hot money" from this manipulation ran straight into the stock market resulting in a stock market bubble. That bubble popped in 1929. Normally, the Fed would cut its funds rate immediately after a stock market burst...but since Strong died in 1928 and defined leadership was lacking at the Fed and the funds rate simply did not drop fast enough. This was the cause of the Great Depression.

Remember that 1933 was not the end of the gold standard, we simply devalued against gold to $35/oz and remained on a gold exchange standard. Nixon truly ended the gold standard in 1971 with the closing of the gold exchange "window".

[Taitertots]

21. It was not the sole cause, but it exacerbated the Great Depression

Don't take my word. Here is the former head of economics at MIT explaining it to you. http://www.jstor.org/stable/2138201

[roamer65]

24. There were four types of currency in the USA leading up to the GD.

(Note: My debate would now be with the MIT dude.)

1. United States notes - fiat money, backed by the "full faith and credit" of the US gov't - Not redeemable in gold or silver.
2. Silver certificates - backed by billions of ounces silver in the US Treasury.
3. Gold certificates - backed by gold coin in the US Treasury
4. Federal Reserve notes - at that time, only fractionally backed by gold reserves.

The only notes truly and fully redeemable in gold were gold certificates. Many times in US history (esp Civil War and World War I) our paper money has traded well below the value of our gold coin.

During the low point of the Civil War for the North, federal paper money traded at an exchange rate of $2.59 to $1 in gold.

Why didn't Herbert Hoover start printing United States notes and begin the easy money policy? We had the power to do so well before FDR. It was because of the advice of Andrew Mellon, then Secretary of Treasury...who was quoted as saying these things:

"“Give tax breaks to large corporations, so that money can trickle down to the general public, in the form of extra jobs.”

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.”

Given the past non-adherence to a gold standard in the US (well before the 1920's), the fault for the GD lies squarely upon the monetary and fiscal policy makers of the 1920's. They created the problem and exacerbated it with their poor supply-side decisions. A gold standard is simply a tool. It does not make policy. People make policy.

It would be fun to debate all of this it with the MIT guy. This would be my first question...

Fiat money already existed before the gold standard, so why was it not used to its fullest extent?

[Taitertots]

28. Hoover's excessively tight monetary policy was certainly an exacerbating factor

Expansionary monetary policy was a leading factor causing the Great Depression to end. In fact, the States in Fed districts that adopted more expansionary policy were the States that recovered the fastest.

"Given the past non-adherence to a gold standard in the US (well before the 1920's), the fault for the GD lies squarely upon the monetary and fiscal policy makers of the 1920's. They created the problem and exacerbated it with their poor supply-side decisions. A gold standard is simply a tool. It does not make policy. People make policy."
Did you read the article? He clearly shows that the gold standard made the correct policy choices impossible. You can't have a commodity currency and independent monetary policy. Your monetary policy becomes dependant on balance of trade deficits. When this happens, the monetary policy contracts during recessions and expands during booms. This negative feedback system causes booms and busts.
Of course the supply side efforts didn't help.

"Fiat money already existed before the gold standard, so why was it not used to its fullest extent?"
Because monetary policy back then was based on principals and models that have since been proven wrong.

[roamer65]

37. Yes. you can have literally two separate currencies and monetary policies.

We had it during the Civil War. Federal paper money and federal gold were not traded at par. Trading at par ended in 1861 and did not resume until 1878. However, officially we were on the gold standard. We used this bimodal system to fund the Civil War.

[econoclast]

2. What massive crater in the money supply?

Please refer to the graph at the St Loius Fed website

?bgcolor=%23FFFFFF&line_color=%230066cc&lw=1&txtcolor=%23222222&width=417&height=250&id=M2&range=max&transformation=lin

Sorry but I can't paste the image itself

Please be so kind as to point out the crater. What it shows is a substantial increase in M2 beginning in 1995 and continuing unabated to date. At first blush I want to argue that the increase in M2 beginning in about 1995 produced 2 hyperinflations and busts in 2 asset types - first, the dot com bubble and bust followed immediately by the housing bubble and bust. Call me crazy, but with the continued growth of M2 today, which asset classes are currently hyperinflating? Gold/silver/commodities? US Treasuries? Oil? Food?

And what happens when the inevitable bust comes?

[bemildred]

3. Don't forget health care and education, plenty of inflation going on there. nt

[Tigermoose]

8. That inflation is a result of government providing access to healthcare and education

As the government provides loans and money to provide access to patients and students, the demand will continue to increase and thus the price will increase as well.

Look, I too think that the government has a role in making sure all its citizens have access to healthcare and education, but basic economics tells us that if demand increases without a corresponding increase in supply, then the price will increase as well.

[Tigermoose]

7. The Shadow Banking System imploded

You are right about the traditional money supply. I admit I wasn't being very precise. But what happened was that the economy was rapidly growing due to the rise of the shadow banking system which is not measured with M2. This system collapsed and caused the balance sheets of the banks and many corporations to collapse with them.



You can see a chart of the collapse of the shadow banking system here at Wikipedia's entry for the Shadow Banking System: Securitization Market Activity

So in effect what we had happen is that we increased the M2 to compensate for the implosion in the shadow banking system. The shadow banking system was real and it did lead to increased lending and "money supply" to people looking for credit. The implosion of the shadow banking system is the crater that I was referring to.

[abelenkpe]

15. The crater is in credit not money supply.

[Po_d Mainiac]

4. The housing boom/collapse was created by a glut of cheap money

:grr:

[Tigermoose]

9. Yes, Cheap money was created by too much leverage

The banks and corporations did not sufficiently account for the real risk involved, and thus deleveraged themselves to the point where they could not cover the defaults.

[roamer65]

19. A glut of cheap money also caused the 1929 stock market crash.

[Taitertots]

22. Monetary Policy and the Housing Bubble by Ben Bernanke

http://www.federalreserve.gov/newsevents/speech/bernanke20100103a.htm

[econoclast]

5. graph

Notice the distinct increaseing change around 1995

[bemildred]

6. So what happened in 1995?

Gingrich's "revolution" that's what. You will see another jump around 1980 if you extend it back another 20 years.

[SoulSearcher]

11. Recall the Weimar Republic lesson

If people don't believe in their currency, the Fed is
not going to help. False security if you trust that too much.
The Fed is only capable of so much - but once credibility
is gone, so is the Fed.

Worse yet - what can you do? Most of your wealth is
dependent on USD - Commodities (of some type) are
the only real option. That is why Gold broke 1500.
Other currencies are just different fiat plays.

[Taitertots]

17. America is several orders of magnitude away from the Wiemar Republic

The comparison doesn't begin to make sense.

Don't jump out of bed because someone died jumping out of an airplane.

[SoulSearcher]

12. StLouis Fed Graph showing Non-Borrowed Reserves

The graph show the quick version

http://research.stlouisfed.org/fred2/series/BOGNONBR

But check the text data (link below) for the critical timepoints
Data starts in 1975, you will have to pull down and reference
the correct column - but it's very dramatic - and interesting -
when you consider what was in the news at the that time...

http://www.federalreserve.gov/releases/H3/hist/h3hist4.txt

[westerebus]

13. There was no destruction of the money supply.

The crash was caused by the shadow banking system being on the wrong side of the trade. The financial corporations and their affiliated banks took down the market by shorting the weaker banks and had insured themselves by placing their people in positions inside the US Administration. The problem with the large financial institutions came when the market player's couldn't cover their margins and sold into a market were there were few buyers. Prices collapsed.

The banks found themselves with toxic MBS and CDO's that were no longer trade-able amongst themselves. Credit collapsed as none wanted to be the last guy holding the junk they helped to create. The asset collapse was caused by fraud committed by the banks using the shadow banking system as their proxy.

The banks and the financial institutions should have been forced to restructure. They were insolvent. It had little to do with the money supply.

The banks are not lending, creating debt by expending credit, because few are interested on adding to the debt they already have. What we are in is a deflationary depression. Assets are deflating, the same time income is not increasing for the majority of Americans, while the value of the dollar continues to deflate as the FED increases the money supply. The FED put a huge amount of toxic debt on to their balance sheet and created reserves that are not being lent to give the appearance the banks are solvent.

The FED has pumped billions into the stock market to fund pensions and mutual funds, again to give the appearance all is well.
What the hyper inflationists see is the value of the dollar going to zero as the FED continues to expand the money supply.

You first have to stop deflation before you can inflate the economy. We're not there yet. The powers that be keep kicking that can down the road. It's not in their interests to give up what they control as they can continue to manipulate the markets and keep control of the government.

At some point this will end. There are many ways this can happen.

We can't default as we are a sovereign country. We pay in dollars. Other countries may not want our dollars. That's their problem and they knew that from the start. The problem here is that this leads to trade wars. They keep occurring as resources contract and internal markets expand in the developing nations. Proxy wars. Current version now available.

We can restructure. Fundamentally change how the business of the Nation is done. From taxing to educating to health care to war fare. The New Deal under FDR was exactly that.

We can convert the FED dollar into a new currency. No one can stop us from doing that either. Nixon did it.

We can go Egyptian. Still in progress.

Sooner or later, we will have to pick one.

[eridani]

20. Gold is a fiat currency, because ANY currency is by definition a fiat currency

I'd change my mind if there were any way to tie currency to energy supplies.

[orangeapple]

23. gold is a commodity

it requires work to produce an oz of gold.
It requires no more work to create a $1 federal reserve note than it does to create a $100 federal reserve note.

Gold is market based money, federal reserve notes are money because the government passed a law requiring their acceptance for debts. In fact, the government had to forbid contracts in gold to force their paper money on the populace. Fiat currency is used in circulation by government decree, not because the people want it.

"A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies." - Benjamin Bernanke, 2002
http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

See what has happened to the value of gold (or oil or any number of non-leveraged goods) relative to the dollar since this guy was put in charge of printing dollars...

[eridani]

26. If you use it as currency, it's fiat currency

Like any other currency, it depends on popular superstition to function as an exchange medium.

[orangeapple]

29. there is a distinction you're missing

Wiki has a succinct definition:

"Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used."

Without government government passing laws to compel somethings use as the medium of exchange it is not 'fiat currency', but simply currency.
The 'fiat' adjective refers to the government decree.

Gold has been used for millennium as money without government decree because of it's ideal properties as a medium of exchange. Scarcity, homogeneity, divisibility, durability, and portability.

Ben Bernanke is not an alchemist, but he has a printing press, and can use it to rob the common person by inflating the supply of dollars thus transferring purchasing power from everyone to those who receive his newly printed dollars. It was in a series of steps, not one fell swoop, that the government deprived the public of the market derived store of value and medium of exchange free from risk of their perversion. First by the issuance of gold certificates redeemable for gold on demand:



Then the government outlawed the holding of gold and altered the alleged corresponding value between dollars and the gold still held by the Federal Reserve. Finally Nixon defaulted on redeemable to foreign holders of U.S. dollars (undoing the Bretton Woods agreement that stabilized the relationship of international currencies). Inflation has been rampant since.

[Taitertots]

30. The ability to print more money makes fiat currencies ideal

Would you rather have moderate inflation and moderate unemployment or painful disinflation and high unemployment. Remember what happened with Reagan/Volcker?

[orangeapple]

32. what is ideal about letting

Ben Bernanke to counterfeit value in the economy and pass it out to Wall Street?

Every dollar he prints (and he has printed trillions since becoming Chairman) reduces the value of any dollars every honest person has in savings, or earns in their paycheck.

"Would you rather have moderate inflation and moderate unemployment or painful disinflation and high unemployment. Remember what happened with Reagan/Volcker?"

Did you know the answer to that before you asked it?

In 1980, Carter's last year of the presidency, the 'Misery Index', a combination of the unemployment rate and inflation rate, stood over 20. Under the policies of 'Reagan/Volcker' that number fell in half:

1980 20.76 Carter
1981 17.97 Reagan
1982 15.87
1983 12.82
1984 11.81
1985 10.74
1986 8.91
1987 9.84
1988 9.57

Volcker understood that the low rates under Burns' Fed was destroying the value of the dollar and distorting economic calculation. He had to raise rates to painful levels to curtail the monetary creation (inflation), but it worked, and restored flagging faith in the U.S. dollar. Appointing Volcker was the best thing Carter did as president.
Bernanke has no such understanding. His doctrines have been tried in Zimbabwe, and while the printing press has brought 'higher spending' (especially at the gas pump), are you convinced that he is actually creating wealth, and not merely transferring it to Wall Street?

[Taitertots]

33. "Misery Index" is meaningless and does nothing to measure the satisfaction of the populace

Does 1% inflation equal almost 1,000,000 people out of work?

Unemployment:
1979- 5.6
1982- 9.7
http://www.bls.gov/cps/prev_yrs.htm


Comparing Bernanke to Mugabe is laughable. We could do Quantitative easing #1 everyday indefinitely and never reach Zimbabwe level inflation. If anything he is doing the exactly what worked for the Japanese in the 1990's. Doing what you advocate is what caused the Japanese to have problems in the first place.

[orangeapple]

34. that's your petard you find yourself hoisted on.

If unemployment and inflation are 'meaningless', why did you bring them up?

"Would you rather have moderate inflation and moderate unemployment or painful disinflation and high unemployment. Remember what happened with Reagan/Volcker?"

I showed you the facts. Volcker slayed the galloping inflation of the '70s. Nothing is 'painful' about unjustified price increases slowing down, as these are hardest borne by the poor and those on fixed incomes.

Furthermore, you're cherry picking. Unemployment was already sloping up under Carter, combined with inflation, something the Keynesians thought impossible because it didn't fit their monetary theory.

1979 5.85
1980 7.18
1981 7.62
1982 9.71
1983 9.60
1984 7.51
1985 7.19
1986 7.00
1987 6.18
1988 5.49

Unemployment at the end of Reagan's term was lower than at any point under Carter. Those are just the facts.

Here's what happened to inflation (ramping up under Carter, until Volcker raised interest rates substantially):

1977 6.50
1978 7.62
1979 11.22
1980 13.58
1981 10.35
1982 6.16
1983 3.22
1984 4.30
1985 3.55
1986 1.91
1987 3.66
1988 4.08

Carter raised the 'misery index' (adding the two numbers together) in his run against Ford:

"Jimmy Carter became associated with the Misery Index by his own doing. In 1976, as the former Georgia Governor was campaigning for the presidency against incumbent President Gerald Ford, Carter began complaining publicly about the Misery Index which, by the summer of that year, had reached a high of 13.57.

Carter claimed that no man responsible for producing a Misery Index that high had the right to even ask to be President, let alone remain the President. Carter successfully used this rhetoric to engender resentment towards President Ford among the American electorate, which was part of what cost Ford the election in that year and ushered Carter into the White House in January of 1977.

But unfortunately for President Carter, Gerald Ford’s problem became an even bigger problem for himself as the Misery Index skyrocketed during his tenure at the White House. While the index dropped slightly from 12.66 at the time of Ford’s departure down to 12.60 in Carter’s second year as President, the index reached an all-time high of 21.98 just five months before Carter faced Ronald Reagan in the November 1980 presidential election. Thus, the economic indicator that Carter used to his favor to win the White House ended up being a statistic that helped make the case for his dismissal – and left Carter branded as the “Misery President” among many Americans."

If the government still calculated inflation the way it did in 1980 (prior to the substitution gimmicks being used now) it would be hovering at 10% (which anyone buying food or gas could easily see).

[Taitertots]

35. The "Misery index" is meaningless. Unemployment and inflation are important

Adding them together gives you a number that provides no useful information. It presumes that the misery from 1% inflation equals the misery associated with roughly one million people losing their jobs.


". Nothing is 'painful' about unjustified price increases slowing down, as these are hardest borne by the poor and those on fixed incomes"
The poor have nothing saved to lose, only debt that could be repaid easier. Volcker disinflation is painful because it creates millions of new poor people and saddles the poor with higher interest burden. The price increases were never at a rate that was sufficient to cause suffering equal to the results of Reaganomics.

So in summary it causes unemployment, saddles the poor with higher interest rates, and makes them pay more for their debts.

[orangeapple]

36. sorry, you can't have it both ways

both are important. Observing both of them together isn't meaningless, it just shows how bad the picture is in sum.


"The poor have nothing saved to lose"

Poverty measures as constructed by the U.S. government relate to income, not savings. My parents, with three vehicles, a two story 2100 ft 3br/2.5ba home with a pool, two car garage and backyard automotive shop on half an acre are in 'federal poverty', because their income is below a certain figure.
Where inflation kicks their ass is in reducing the value of the money they have saved, and reducing the purchasing power of the retirement income they have.


"Volcker disinflation is painful because it creates millions of new poor people"

Reducing the rate of inflation doesn't 'create millions of new poor people'.
Again, Keynesian monetary theory is WRONG (in fact, dangerously backwards as the inflation inescapably makes people poorer).
Inflation soared and so did unemployment, we called it stagflation. Volcker raised rates, curtailed the monetary creation, and unemployment subsequently decreased. Raising interest rates encourages savings, reduces borrowing for consumption, which raises investment, which raises productivity, which raises standards of living.


"The price increases were never at a rate that was sufficient to cause suffering equal to the results of Reaganomics."

Just 10% inflation leads to a doubling of prices every 7 years. Do you think people's wages were doubling every 7 years?!

[Taitertots]

53. There is no "having it both ways"

Adding them is meaningless because it conflates the suffering associated with millions or people losing their livelihoods with the mild inconvenience of a 1% price change. Do you believe that the suffering from 1% inflation is equal to the suffering caused by forcing millions of people out of work.


The only people that inflation "makes poorer" are people who are holding a lot of cash i.e. the wealthy. While the poor have copious amounts of debt and almost no cash holdings, which means inflation benefits them. Only the wealthy are hoarding enough for inflation to hurt them.

[eridani]

38. Gold has been used as a medium of exchange because people are superstitious idiots

In order for it to work, just as with paper currency, people have to believe that they can use it. Am old superstition is no less of a superstition just because it's old.

[roamer65]

40. ...but it is a beautiful superstition.

That yellow metal just mesmerizes us monkeys.

[Art_from_Ark]

41. Superstition has NOTHING to do with it

Gold has been accepted as a monetary medium for millennia around the world because it best suits the requirements for a monetary medium, that is:

It is scarce, but not excessively rare.
It can be, or has been, found in a natural state in most countries of the world.
It cannot be produced in unlimited quantities.
It is fungible-- that is, one ounce of .999 gold is the same whether it is in the United States, Japan, Germany, India, or wherever.
It represents considerable value in small quantities.
It can be easily formed into coins that will last for practically forever, since it does not decompose or corrode.

And for the umpteenth time, gold is, by definition, NOT a FIAT CURRENCY. Fiat currencies are currencies that are NOT backed by precious metals. Countries don't arbitrarily assign a value to gold coins that are issued *for circulation* like they do with paper money or base metal coinage. If a country stamped "$100" on gold coin that contained $50 worth of gold, and pronounced it legal tender, and the coin actually circulated as money, then the argument could be made that it would be a fiat currency IN THAT COUNTRY, since its face value would exceed its intrinsic value. But that is not the case in any country today.

[golfguru]

42. Gold has no intrinsic value except that it is a rare material

Silver & Platinum at least have a lot of industrial applications, while gold's biggest users are jewelry. Even dentists do not use gold any more.

Gold being rare, it imposes an artificial barrier to economic expansion if currency expansion is directly tied to gold. And a stagnant economy is never good.

[Art_from_Ark]

43. Gold has all sorts of uses

Please inform yourself before making such a misinformed statement:

http://geology.com/minerals/gold/uses-of-gold.shtml

[golfguru]

44. "Jewelry: The Primary Use of Gold"

from your article. Like I said use of gold in dentistry is close to zero. No one likes shiny teeth as a status symbol anymore. Electronic contact points is the only real industrial use but it is a very small percentage in terms of total weight of gold used. Recent spike in gold prices has a lot to do with China & India population buying gold jewelry with their increasing prosperity. And that will continue for a few more years.

Look at this way...gold would have to sell over $3000 /oz
to break even with its 1978-79 high adjusted for inflation.

[Art_from_Ark]

45. Did you bother reading the rest of the article?

And do you actually believe that gold use in dentistry is decreasing because "no one likes shiny teeth as a status symbol anymore"?

Perhaps you should read this:

"Did you know gold has been valued for its use in dentistry since the time of the Ancient Egyptians? Safe, durable, and pliable; no other material can offer all the outstanding qualities that gold combines. Internationally, it is the undisputed material of choice for long-term quality dental repairs."

http://www.dental--health.com/golddentalcrowns.html

[golfguru]

46. 40 years ago gold crowns were very popular

I know because my wife required several crowns and
gold backing with porcelain cladding was the best crown
money could buy. For whatever reasons, cost being one of them, gold crowns have gone out of vogue. Just ask your friendly dentist.

Like I said, if gold was so important why is it selling at less than HALF of its previous high during Carter admin. adjusted for inflation?

[Art_from_Ark]

47. The last time I visited my "friendly dentist"

gold crowns were still very much in vogue. They were cheap "Irish gold" (9K) though, which isn't as good as the high-quality 18K crown.

As regards the price of gold, do you realize that the $850 price that was recorded in January 1980 was just a blip on a screen? Someone raised that price up the flagpole but no one saluted it. The real high price where transactions were actually made was closer to $775.

But why the fixation on the spike price of gold in a bubble adjusted for inflation? Would it make you happier if there was a repeat performance and the price spiked momentarily to $2200 (which is closer to its inflation-adjusted 1980 spike price http://www.westegg.com/inflation/infl.cgi) and came back down almost immediately to $1500, which is what the AVERAGE inflation-adjusted price of gold for 1980 would be close to?

[golfguru]

50. Your points are well taken

My only point is gold is not a good very long term
investment. Whenever gold goes parabolic, it is usually
the worst time to buy. Best gains are made when gold is out of favor and going sideways.

[orangeapple]

51. Just watch the Fed Funds rate.

When they finally throw in the towel and start raising, that's the time to sell. Until then they can run the printing presses faster than the miners can dig ore.

With BRICs looking for alternatives to the USD, the Japanese mired in their own disaster and failed run at Bernanke's strategy, in addition to the EU trying to keep the lid on their own debt problems, I can't say we're close to the apogee yet. As you noted, we still haven't hit the inflation adjusted highs yet, and the U.S. fiscal situation is way worse than it was in the late 70's when you factor the debt to GDP and demographics facing our entitlement systems.

Nobody is going to hurt themselves by putting some of their savings in gold until Bernanke makes it pay (anyone except the banks who have access to his discount window) to keep your savings in USD.

[Art_from_Ark]

52. I don't know if you could call this parabolic

I would say the silver chart is much more parabolic



If you had bought gold in 2000, at say $310, when gold was out of favor, you would have had to wait about 2 years to break even (which incidentally, just about coincided with the full introduction of the Euro and full-scale implementation of European central bank agreements to limit the amount of their annual gold sales, and to announce sales).

You can't really go by graphs when it comes to gold-- you have to look at who the main players are on both sides, and try to figure out what their motives are and who is going to flinch first. Right now China and India both have huge wads of cash, and they are both very interested in gold.

[orangeapple]

48. give us a few more years of trillion dollar deficits

Volcker restored the faith in the dollar and broke the back of inflation with his interest rate increases. Gold will climb relative to the dollar until Bernanke's successor is forced to do the same. Bernanke thinks he can destroy the dollar yet save the economy. He's wrong, and anyone earning or saving dollars will pay the 'price' of his error. The uncertainty his policy of running the printing presses creates will have calamitous effects on economic calculation the world over, and may yet result in the abandonment of the USD as ultimate reserve currency.

[golfguru]

49. Agreed! n/t

[roamer65]

25. Gold cannot be created "out of thin air", therefore it is not fiat money.

Fiat money nowadays does not even require printing presses. It is simply created by entries into the Federal Reserve computers. QE money is simply computer entries.

[eridani]

27. Certifcates of gold ownership are created out of thin air all the time n/t

[orangeapple]

31. are they redeemable in specie

if so, they merely represent a warehouse receipt. The gold itself was not created from 'thin air', but paper can be used to demonstrate title to a particular weight of gold.

[eridani]

39. The gold that people imagine exists is ceated out of thin air

There are gold certificates extant supposedly worth more than humanity in total has ever mined.