Price Stability?


30 thoughts on “Price Stability?

  1. I am surprised the green line is not a straight flat line even though its trend is a straight line. when you look at the price of gold in dollars the blue line will translate into the green in a one to one relationship. It is not important if we call the oil currency a dollar or a dinar or Yakaka (I made this up) the correlation will be the same. Even if we make Gold the price of oil, there will not be enough physical gold to be used to trade with and we will have to resort to creating a derivative of some sort (fake gold) to pay for oil. Even in the case of having enough physical gold we will still have to pay with promissory notes and not the actual gold itself.

    • I hear this argument a lot – that there is not enough physical gold to facilitate trade as the population is too big now.. but I still don’t really get this. Surely the whole point of price discovery (in an unrigged market!) is that the commodity will be automatically revalued by the market to take account of demand from the population for trade and actual existant physical amount? So each person may have physically less of the commodity, but the commodity will be worth more per unit of mass/volume, thus ensuring that there can never be too little to represent the total ‘wealth’ that you need it to.

      Perhaps you are saying that there is not enough to mint pure coins with so that people can carry them? But then surely the gold can be alloyed with say copper so that coins can be made..? Hell, today we could probably even make notes that have say a gram of physical gold interwoven in the paper. With modern measuring technology and manufacturing tolerances we could probably take it down to the milli or micro gram and thus ensure that everyone has access to gold for trade…

      just thinking out loud really…

      • I hear this argument a lot – that there is not enough physical gold to facilitate trade as the population is too big now.

        I hear it so often that sometimes I see it in places where it isn’t.

        The bottom line is that in order to back all the financial assets created in this fiat bubble, gold would have to be upvalued to $36,000 an ounce.

        The thing is, as I’ve explained before, gold alone is not a cure, because gold can be securitised and fractionally multiplied, and bubbles can still form as they did prior to 1929. Possible cures we might look at are an equity-only debt system, or a much lower (or full) reserve requirement. The first (much is quite similar to Islamic finance) is most interesting by far.

        • The amount of physical gold does not matter. The fact that it is relatively fixed is what is important. This means inflation would be virtually zero. When productivity increased there would be deflation. The normal would be deflation, not inflation.

          This is a important distinction, deflation favors consumers, inflation favors producers. Capital users prefer inflation for two main reasons;

          1. They borrow millions and prefer to pay back loans in “soft” deflated dollars.

          2. The wealth distribution shifts in their favor because they can raise prices at will whereas the average worker gets a raise once a year. See gas prices.

          The argument that there is not enough physical is ludicrous. Since when did the amount of money produce real wealth?

          Real wealth is enhanced by sound money. Fiat creates misallocation of resources and theft by those with access to new money. Legal theft.

          The way to end “bubbles” is to have 100% fractional reserve banking.

          And if you want more flexibility, which I think is a good idea, use silver for reserves also. There is your limited supply of money with flexibility.

        • Deflation helps consumers and savers. We need deflation. We need savings and the liquidation of malinvestments. Deflation is good, it means the markets are correcting, and if that means some businesses go under, that’s the price we pay for inflating the money supply.

      • The CPI is a bogus fabrication and arbitrary. It is used to justify printing money, nothing more. In a normal economy when full employment is reached and productivity increases there should be deflation. This is normal for thousands of years. The Fed uses this deflation as a bogeyman and a excuse to print, providing stolen counterfeit money to the usual thiefs, Wall Street bankers and the federal government.

        I do not take seriously “economists” that do not understand the fundamentals of sound money and banking. If you do not understand what happens when counterfeit “new liquidity” money is injected into the economy how in the hell can you call yourself a economist?

        Money, Sound and Unsound by Joseph Salerno is a must read. Murray Rothbard, von Mises.

        • Salerno’s taxonomy of deflation is useful work, but he misses the fact that each kind of deflation (he identifies four) has precisely the same effect in a modern fractional banking system: debt-deflation, making debt harder to repay, and so raising the prospect of a deflationary spiral.

          The Minneapolis Fed did a piece on deflation in 2004
          — concluding that in fact the only time this had ever happened was in the 1930s (and more debatably in Japan during the 90s and 00s). But since the 1930s monetary policy around the world has been explicitly and implicitly engineered to inflate endlessly to avoid deflationary spirals.

          The Keynesian approach is actually quite reactionary: its logic is that deflation causes a downward spiral, so deflation must be avoided.

          My approach is quite different: deflation causes a downward spiral when the economy is based around an interlocking web of debt.

          The problem isn’t the deflation. It’s that debt is the basis of the economy. We need to transition to an equity-based economy.

        • Asking the Fed to do research on deflation is stupid. You know what they are going to say. Chapter 26, Money, Sound and Unsound, deflation facts.

          From 1820 65 of 73 deflation episodes involved no depression, and 21 of 29 depression episodes were not associated with deflation. In other words 90% of the deflation episodes did not result in depression. Many, 1875-79, resulted in economic growth.

          The bottom line is you have been feed a bunch of propaganda in college that you need to get rid of if you are to be a serious economist. I know the propaganda, I teach it. Its pure bull shit to make you think highly of the Fed and federal government. Pure 100% bull shit.

          The Great Depression was caused by the Feds increase (61% as per Rothbard, 55% other sources) in the money supply. When the crash happened they further inflated the money supply. the private sector contracted the money supply, not the Fed.

        • I never studied economics in college. All my work is self-taught.

          The bottom line is that in the era we are talking about there was no shadow banking system, no interconnected superstructure of derivatives and no possibility that the failure of one or two banks would lead to a global credit freeze. The point is that the 1920s was the first phase of the new era where widespread deflation can lead to systemic meltdown. Today it is much, much more severe.

          Yes, all of this junk is malinvestment and needs to be cleared. Yes, none of it could reasonably stand on its own without government intervention. And yes, it would be better for it to be cleared sooner rather than later.

          My point is that an episode of deflation would clear it. It would be a huge and painful liquidation, but ultimately it would be a good thing. The problem is that such crashes — while economically useful — will clear out a load of businesses which are not inherently bad. Systemic clear-outs are painful and messy. We need a better system.

          The whole point that I am arguing for is actually what we do afterwards. I know for a fact — based on the events leading up to 1929 — that merely adopting the gold standard cannot prevent future bubbles.

          I recommend two things:

          1/ A system of lending based on equity and not debt. This is much, much less fragile than what we presently see, and would allow for large defaults without systemic collapse.

          2/ A monetary system that does not lead to continuous credit expansion beyond the productive capacity of the economy. This could include sound money (based around a basket of commodities, which is much less manipulable than gold), or full-reserve banking.

          While I am not in complete agreement with Austrian economists like Salerno, I think they would probably agree that my recommendations are significantly better than the status quo.

        • I see your nuanced opinion in many articles (here too) that any “crackdown” on debt will cause chain reaction if we try to allow the natural tendency to deflate.
          I totally agree with you that this is possible and probable even with best intention, that any such event could cause chain reaction of defaults.
          But you will also have to agree that the more we wait the more probable it become that the Market will force this deflationary solution on governments and banks and society as a whole.
          That’s why I think that !deflation! & austerity has to have happen yesterday, already, even if it causes problems and even if it causes chain reaction.
          I think there is sill option to stop the flood of defaults with some “stair-cased”, levy approach or other approaches as “equity transformation”…etc.
          The question is not should we have austerity the question is when ? And do we face it OR it happens to us.

          What gov are doing is transferring the risk of financial destruction from the banks to the citizens of the world and the economy as a whole, so when it happens it devastates everybody, not just a minority of the society.

        • The only real “crackdown” on debt that will work is one of the following:

          1/ Mass Strategic Default (extremely messy)
          2/ Hyperinflation (even messier)
          3/ Systemic Deflationary Collapse (messiest)
          4/ Debt-to-equity transformation (controversial, but probably the least messy)

          Most “austerity” options come under the third option. There is very little hope of a “cut spending, and slowly pay back debt” option, because cutting spending at this juncture (i.e. in a depression) will lead to lower tax revenues, which will turn into larger deficits even in spite of spending cuts. This is mainly because of the deleterious effects of the huge existent debt burden, and the compounding interest.

          Now, I actually agree that a systemic deflationary collapse via mass austerity that finally breaks this broken system (so we can institute something else) may have good effects in the long run (i.e. liquidation). But it’s going to be very painful in the short run.

  2. Indeed. Such a high degree of stability is hardly a coincidence. Some say, and I find myself starting to believe them, that this oil-gold relationship is in fact the foundation of our whole monetary system. When the gold standard was abolished, instead there supposedly was a secret deal made between the ME oil producers and the US, that the former would keep selling oil in only dollars, but in return the US would ensure that cheap gold could be had for those dollars – because gold was the only thing for which the oil sheikhs would agree to part with the one great asset of their nations.

  3. In response to both Price Stability and Austerity & Taxation…

    The United States has embraced counter-cyclical spending for the last eighty years. It’s just that right now, fiscal stimulus is unacceptable to most politicians because it would support the President’s policies. So that leaves Bernanke alone to fix the economy with expansionary monetary policy. He’s pumped it full of cheap money, liquidity, in order to inflate a stock market bubble. Hopefully, the wealth effect will boost consumer spending and ease the debt-overhang.

    The only problem is that some of this liquidity finds its way into speculating on rising commodity prices. Anything non-perishable that can sit in a container ship in the middle of the ocean. Aggressive talk about Iran provides a good cover story. And the Fed is willing to tolerate some inflation. It is collateral damage. Yesterday, St. Louis Federal Reserve Bank President Bullard said that $4 a gallon for gas would not hurt the economy, but $5 is too much.

    • The United States has embraced counter-cyclical spending for the last eighty years.

      Debatably not since Carter, and certainly not since Clinton. Greenspan (the so-called “libertarian”) told Bush the surplus was harmful, and Bush had no compunction spending to high heaven.

      Hopefully, the wealth effect will boost consumer spending and ease the debt-overhang.

      Even if it did it would just be another unsustainable boom. America needs sustainable energy independence, and a financial system based on something other than continuous credit expansion.

    • I think the higher oil prices…++$5 is written on the wall.
      The question is how fast…if it happens slow over more stretched period it could be beneficial in the long run, because it would allow non oil energy to get more attention and investments.
      And anyway oil is not unlimited, so as hard as it is there is no other way.
      Sharp spikes help speculators make money, slow gradual increase could help (we will get higher price anyway).
      The problem is that the Fed induced inflation as you said, predisposes the worst of both worlds.
      Providing more currency provides more leverage to the speculators to push the commodities up.
      (I don’t use “speculators” in its bad connotation /as in government-speak 😉 /, but more as the market makers pursuing profits)

  4. @Börjesson
    something did happen didn’t it…instead of inflating after the ‘Nixon shock’ the dollar stabilized against all reason. How could a currency that was ‘as good as gold’ that then abandoned its redeemability continue to be held at a constant value? A secret deal with the Saudis is certainly one possibility. If dollars could continue to buy oil at a low price of course they would continue to be useful. In fact I have yet to hear another explanation for why the dollar did not continue to inflate after 1971…of course it did for a while but by 1981 all seemed stable.This is one of the freegold tenets as explored by FOFOA and until I find a better explanation for the dollars behavior I will continue to follow the freegold argument.

    • The thing about freegold that puzzles me is that — so long as one believes gold is the ultimate extinguisher of debt — it is more or less the system we already have. The difference is that gold’s role would be officialised. That might have benefits (less credit bubbles, hopefully). But — to me as a market participant — that isn’t really any different to today. If a central bank wishes to extinguish its position in gold, it can simply take payment in fiat and convert into gold. Today’s system is — if anything — more flexible, because it stipulates that the extinguishment of debt can take place in whatever unit of account central banks or market participants see fit, because all fiat currencies are convertible into gold. All I have to do is to remember to hold gold whenever there is a the prospect of a fiat currency crisis.

      • Freegold is actually NOT like the system we have. In Freegold the market is physical only and thus not influenced by the (almost) infinite supply of ‘gold’ that can be supplied by the paper gold market. In freegold there would be no lending or creation of proxy gold. All dealings would be physical. This would be demanded if the current paper market crashes (perhaps with the dollar). At present the desire to own gold is satisfied by the paper markets. GLG (the ETF) for instance allows one to bet on the price of gold but unless you are an Authorized Participant you will never get an ounce, you will be settled out in currency. This is just one aspect of freegold but the entire system makes sense if you realize that it comes after failure of the current system in which bullion banks can create product to dampen the desire for gold by the use of proxys. Once this occurs the investing / saving public will see the advantages of using physical gold as a savings vehicle. It will also dictate a higher price of gold as there is far less gold than there is paper gold.
        I hope this is helpful.

        • The entire system makes sense if you realize that it comes after failure of the current system in which bullion banks can create product to dampen the desire for gold by the use of proxys. Once this occurs the investing / saving public will see the advantages of using physical gold as a savings vehicle.

          We are a way away from this scenario, so I don’t think it’s really possible to accurately forecast the psychology of the market. The collapse can happen in a myriad of ways, and the fallout may be spun. CNBC & Warren Buffett would try to turn a paper gold collapse into a “gold is awful” meme. Whatever happens, I think everything physical (metals, commodities, real estate, resources, etc) will — at least from my perspective — emerge looking stronger than everything abstract (bonds, stocks, paper commodities, funds, etc), but I guess I agree with the central tenet of Austrian economics: humans are unpredictable.

          Ultimately, market participants have to learn for themselves the various virtues and vices of all currencies and investment vehicles, including gold — physical, or paper. Acquiring physical gold is achievable. Other such derivatives are just for the lazy and the hubristic, but that is their choice.

        • Thanks.

          I read the piece. The obvious questions are 1/ Who would implement such a system? and 2/ What safeguards would need to be put in place to avoid its corruption? If the various forms of fiat are the medium of exchange, what’s to stop demand for gold drastically falling in response to much higher rates of (fiat-denominated) return being available in other investments? How can FOFOA be so sure he has accurately measured the flow of human sentiment in a post-dollar world? Over the past 100 years gold has been a much better store of value than fiat, but a much worse one than Treasuries or shares in the DJIA.

          My conception of gold today is that its main function is that of a hedge against counterparty (systemic) risk. It has “moneyness” (store of value, unit of account, and underlying medium of exchange) but so do a lot of other things.

  5. A gold based currency will not happen for many reasons (non of which i like since I would preffer a gold back currency to what we have now). First off, those in power and their proxies, like any internal revenue service, want to have ultimate control and ultimate knowledge as to all economic transactions in an economy. This was never feasable before because people used cash, but now with smartphones and credit cards and online banking, it is possible for a government to have omniscient knowledge when it comes to economic transactions. This I think they will never let go. And by they I mean those in control of the current fiat system and the governments of the world.

    In fact, anyone advocating freegold and other gold backed plans would probably be labeled as a terrorist in a few years – and they are already putting barriers to using non-traceable forms of payments (fees, etc). Let’s face it, technology is here and technology will change our monetary system – we simply can’t go back to a gold standard (I wish we could!!).

    The question is how can we have a monetary system wich makes it impossible for those in power (elected or not) to change the money supply. Gold worked for the longest time but technology will do to money as paper did to money back in the medieval days. It won’t be the same from this point.

    my 2 cents.

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