The budget battles

[blackshoe]

Heh. Reminds me of Heinlein's short story "Let There Be Light", in which he postulates the troubles two scientists have getting their new invention, the Martin-Douglas Sunpower Screen, to market over the, um, objections of The Power Syndicate, a group of energy companies dedicated to maintaining their place in the energy market. In the story, Heinlein mentions "the museum of suppressed inventions", which contains such things as the razor blade that never dulls, the light bulb that never goes out, the (nylon - this was written in the 1940s) stockings that never run, the 50 mpg carburetor, and others.

[awm]

I wasn't thinking of the past decade, more like the past century and more.

 

If Rothbard is right, then the establishment of Central Banks, which started with the Bank of England in the early 19th century, has got to be one of the biggest scams in history.

 

What makes you think the past century or more has been a mess?

 

It seems to me that real wages and standard of living for all Americans (and Europeans, for that matter) have improved immensely since the 19th century. Medical care and lifespans have increased dramatically too. We have had very many years of amazing economic growth no matter how you measure it. At the same time, standards in products and in advertising and environmental laws have improved, making us all safer. We have more political freedoms now: lots more people can vote, women and racial minorities have equal rights, non-christian religions (and atheists) have more protections, people of different races (and even people of the same gender in some places) can marry, etc. There are plenty of cases where people from modest backgrounds have had a great idea and become wealthy beyond the imaginations of the 19th century (take Bill Gates or Sergey Brin for example). But at the same time, our working class can make a living wage (okay, could until this recent bout with high unemployment). Would you really want to trade in your modern lifestyle for the 19th century?

 

Yes, there are some countries that are total disasters (take Somalia for example) where things might arguably have been better in the 19th century, but it's hard to blame economists for what goes on over there.

[PassedOut]

What makes you think the past century or more has been a mess?

 

It seems to me that real wages and standard of living for all Americans (and Europeans, for that matter) have improved immensely since the 19th century. Medical care and lifespans have increased dramatically too. We have had very many years of amazing economic growth no matter how you measure it. At the same time, standards in products and in advertising and environmental laws have improved, making us all safer. We have more political freedoms now: lots more people can vote, women and racial minorities have equal rights, non-christian religions (and atheists) have more protections, people of different races (and even people of the same gender in some places) can marry, etc. There are plenty of cases where people from modest backgrounds have had a great idea and become wealthy beyond the imaginations of the 19th century (take Bill Gates or Sergey Brin for example). But at the same time, our working class can make a living wage (okay, could until this recent bout with high unemployment). Would you really want to trade in your modern lifestyle for the 19th century?

 

Yes, there are some countries that are total disasters (take Somalia for example) where things might arguably have been better in the 19th century, but it's hard to blame economists for what goes on over there.

I'm interested in the answer to this too, as I'm genuinely puzzled about what Blackshoe is getting at. There have been terrible wars for sure, but I don't see a connection between wars and mainstream economists.

[Winstonm]

Before the fantasy that the bailout was profitable becomes ingrained as more urban legend, I wanted to post this response to the currently reported analysis: http://www.ritholtz.com/blog/2011/07/bad-math-and-bad-analysis/

[hrothgar]

I'm interested in the answer to this too, as I'm genuinely puzzled about what Blackshoe is getting at.

 

You might want to look at the source materials Blackshoe is reading...

 

Rothbard was an anarcho-capitalist

(Not a warm fuzzy liberatarian minarchist... An outright anarchist)

 

These people are firmly detached from reality. I firmly recommend that folks read the following as a basic introduction to the species

 

http://examinedlife.typepad.com/johnbelle/2004/03/if_wishes_were_.html

[Aberlour10]

China seems to be not amused at all about what actually happens in Washington. They hold over the trillion dollars in US bonds, if they get too nervous and stop to buy all these new Treasuries, who want and will buy it else?

[blackshoe]

What caused the Great Depression? "Mainstream" economists would have us believe it was "a failure of capitalism". Others (not just the Austrians) think it was the Fed's manipulation of the money supply.

 

My understanding is that there are still international treaties whereby nations can demand repayment of another nation's debt in gold. If so, what happens when China says "you owe us $1Trillion, give us the gold."? I think we still have it, but who knows? And what if all our other creditors follow suit? I don't think the US going bankrupt can be good for anybody.

 

I dunno, maybe the mainstreamers are right, and there's nothing wrong with the way things are. Or maybe Rothbard is right, and the whole thing was a scam from the beginning. One thing I'm sure of: statements that "if we had kept a 100% gold standard, we would be in worse trouble now" or, for that matter "if we had kept a 100% gold standard, we would be in better shape now" are of no value, since there's no way to know which one is right.

[Foxx]

My understanding is that there are still international treaties whereby nations can demand repayment of another nation's debt in gold. If so, what happens when China says "you owe us $1Trillion, give us the gold."? I think we still have it, but who knows?

 

Rumor has it that there are hundreds of tons of gold buried away in an abandoned mine in North Dakota. No expedition, American or otherwise, has dared to venture there for decades, because of the hobgoblins, orcs, rattlesnakes, zombies, quaggas, ur-viles, and jabberwockies. Even the native Sioux Indian tribes didn't go in there.

 

Anyone ever heard of "Mean Mama"? If we could find him (yes, it's a "him"), he could haul out that coin in no time. He could single-handedly rescue our economy. Heck, I have enough experience to trek up there and lend a helping hand myself.

[hrothgar]

 

My understanding is that there are still international treaties whereby nations can demand repayment of another nation's debt in gold. If so, what happens when China says "you owe us $1Trillion, give us the gold."? I think we still have it, but who knows? And what if all our other creditors follow suit? I don't think the US going bankrupt can be good for anybody.

 

 

Nations live in the state of nature

They are welcome to demand whatever they want from one another...

And they are equally welcome to say "Bite me" to one another.

It would certainly hurt our credibility, our future ability to borrow, and probably cause world wide economic panic.

However, if we really wanted to, we could go tell the Chinese "We are going to pay you a dime. Bugger off".

I don't think the Chinese would be able to come over here and seize all our gold.

 

With this said and done, my understanding is that US debt is dollar denominated which means that we need to pay it back in dollars.

This is quite advantageous (For example, Greek debt is Euro denominated)

 

I'd certainly welcome seeing any treaty that is still in effect that suggests that US debt is denominated in gold.

(And, if so, what the exchange rate might be...)

[PassedOut]

You might want to look at the source materials Blackshoe is reading...

 

Rothbard was an anarcho-capitalist

(Not a warm fuzzy liberatarian minarchist... An outright anarchist)

 

These people are firmly detached from reality. I firmly recommend that folks read the following as a basic introduction to the species

 

http://examinedlife.typepad.com/johnbelle/2004/03/if_wishes_were_.html

Well it's certainly the case that the link gives examples of positions that are "detached from reality." So much so, in fact, that I doubt that Blackshoe personally holds those positions, regardless of what reading he happens to find interesting these days.

[hrothgar]

Ridiculing one's opposition is a common tactic — one usually employed by those who have no other recourse.

 

There is very little point in doing anything else when dealing with Austrians, Libertarians, Gold Bugs, and the like...

None of these disciplines are reality based...

 

• There are no representative examples of societies organized arround Liberatarian principles. The closest examples that we have are failed states like Somalia. As such, discourse with Libertarians always involves comparing reality (warts and all) with some kind of idealized theoretical construct
  
• In a similar vein, I'm not aware of any significant economies that currently maintain a gold standard. A lot of them tried very hard to do so. However, one by one they were forced off this standard because it doesn't work. Here, once again, trying to debate these topics involve comparing reality to some kind of a bizarre counter factual.
  

 

As a practical example, consider your own (recent) contribution to this thread:

 

One thing I'm sure of: statements that "if we had kept a 100% gold standard, we would be in worse trouble now" or, for that matter "if we had kept a 100% gold standard, we would be in better shape now" are of no value, since there's no way to know which one is right.

 

It's pointless to involve these individuals in any kind of serious policy discussions and the suggestion that their opinions should be accorded much respect is down right silly.

[kenberg]

I have a friend, call him Phil since that's his name, who thinks the creation of the Federal Reserve in 1913 was the beginning of our downfall. Well, that was some downfall.

 

We have our discussions but I have largely regarded them as intellectual exercises since it seemed unlikely that we would be abolishing the Fed, or going back to the gold standard, or any of these things. With the rise of the Tea Party, I guess all such bets are off.

 

About gold: This has always seemed to me to be the classic example of something being worth a lot because someone is willing to pay a lot for it. What's the current price? $1600 an ounce or some such? Why? Because people are willing to pay it on the assumption that people will be willing to pay that much or more in the future. Sort of like a painting by Warhohl, or by Picasso for a less nutty example. Or the housing market. Gold will work as a standard only as long as people believe in it. In any practical terms it cannot possibly be worth $1600 an ounce, and if the world comes to decide they have better uses for $1600 than to buy an ounce of gold, the price will collapse.

 

Until recently, people pretty much believed in the dollar, more or less. Perhaps a Picasso was a safer asset, but dollars were considered good. Eric Cantor and friends are doing their best to put a stop to this and there is a fair chance that they will succeed. They have already done plenty of damage, check with Moody's.

[blackshoe]

Gold has two uses: as a money, and as a, hm, "trade good", I guess. It's useful for things like jewelry, fillings (although we have cheaper and, I think, better materials for that now), electrical connectors, and probably other things. As a money, it's worth what it is. IOW, an ounce of gold is an ounce of gold. As a trade good, it's worth whatever the market will bear.

 

A "dollar" (the word has an interesting etymology) was, at one time, arbitrarily set to some fraction of the value of an ounce of gold. Now it's set to... I dunno, nothing. It's "fiat money", worth whatever people believe, and the government says, it's worth, I suppose.

 

In discussing a return to a gold standard (and I agree it's not likely to happen any time soon, if ever), Rothbard suggests one approach (that he did not particularly like) is to set the value of a dollar arbitrarily to $35 a gold ounce, as it was just before 1933. This would cause deflation, of course, but he seemed to think that's not necessarily a bad thing. Me, I don't know. The other approach he suggested was to figure out how many dollars there are, and divide that by the number of ounces of gold available to back it. He said back in the 60s that doing this would raise the value of gold (in dollars) by at least a couple of orders of magnitude (he was not, that I have found so far, specific). There wouldn't be deflation then, but I suppose there might be other problems. Anyway, if his estimate is accurate, or even close, $1600 an ounce is not absurd; it may even be too low. A third possibility, says Rothbard, is some combination of these two extremes. He didn't give a specific combination, he suggested it needed study (a point with which I agree). However, given he suggested that in 1962, and no one has done such a study yet (AFAIK), we're back to "ain't gonna happen".

 

One of the problems we (humans) have always had with money is that we do things like mint a coin, call it a "dollar" or a "quarter" or whatever, and then when the coin wears down, losing some of its metal, we want to "revalue the dollar". Or do what governments used to do, and by fiat rule that a "quarter" was worth whatever, no matter how much silver was actually in it. Wrong way to do it. Instead, label it as what it is by weight and accept that as the weight changes, so does the value. A one ounce silver coin will buy whatever one ounce of silver will buy. A 0.9 ounce silver coin, whatever it's labelled, will buy 0.9 what a one ounce coin will buy. I dunno, makes sense to me. All this stuff with the bankers arbitrarily telling us what a "dollar" is worth, and setting of interest rates, and telling the Treasury to print another billion dollars or whatever, strikes me as smoke and mirrors.

[hrothgar]

 

In discussing a return to a gold standard (and I agree it's not likely to happen any time soon, if ever), Rothbard suggests one approach (that he did not particularly like) is to set the value of a dollar arbitrarily to $35 a gold ounce, as it was just before 1933. This would cause deflation, of course, but he seemed to think that's not necessarily a bad thing. Me, I don't know. The other approach he suggested was to figure out how many dollars there are, and divide that by the number of ounces of gold available to back it. He said back in the 60s that doing this would raise the value of gold (in dollars) by at least a couple of orders of magnitude (he was not, that I have found so far, specific). There wouldn't be deflation then, but I suppose there might be other problems. Anyway, if his estimate is accurate, or even close, $1600 an ounce is not absurd; it may even be too low. A third possibility, says Rothbard, is some combination of these two extremes. He didn't give a specific combination, he suggested it needed study (a point with which I agree). However, given he suggested that in 1962, and no one has done such a study yet (AFAIK), we're back to "ain't gonna happen".

 

One of the problems we (humans) have always had with money is that we do things like mint a coin, call it a "dollar" or a "quarter" or whatever, and then when the coin wears down, losing some of its metal, we want to "revalue the dollar". Or do what governments used to do, and by fiat rule that a "quarter" was worth whatever, no matter how much silver was actually in it. Wrong way to do it. Instead, label it as what it is by weight and accept that as the weight changes, so does the value. A one ounce silver coin will buy whatever one ounce of silver will buy. A 0.9 ounce silver coin, whatever it's labelled, will buy 0.9 what a one ounce coin will buy. I dunno, makes sense to me. All this stuff with the bankers arbitrarily telling us what a "dollar" is worth, and setting of interest rates, and telling the Treasury to print another billion dollars or whatever, strikes me as smoke and mirrors.

 

Just to be clear:

 

The gold standard describes the situation in which a group of "bankers" specifies the value of a dollar (in this case, pegging it to an ounce of gold)

 

In our current situation, the value of the dollar is completely unpegged, meaning dollar is pretty much set by the market. (In this case, but whatever someone is willing to trade you for a dollar). Admittedly, governments often intervene to affect the value of a dollar in the market. However, this pales in comparison with the amount of machinations which were necessary trying to maintain an appropriate gold reserve.

 

Moreover, its not like governments don't involve themselves with precisely the same set of actions with respect to the gold supply, even to the extent of removing enormous amounts of gold from the world market.

[kenberg]

I have vague and probably not totally reliable memories from my youth of gold being pegged at thirty some dollars an ounce. Maybe thirty-five. I think the main reason for abandoning this was that it was untenable. It's always a problem for bankers or governments or anyone to set a price and enforce it. As Richard notes, there were various maneuvers most of which I was only vaguely aware of. The bottom line was that gold resisted being pegged.

 

I have had various friends with various positions. When I was in grad school a friend ran for governor on, I believe, the Socialist Workers Party ticket. Minnesota was not a Socialist State will not become one. Neither will they, or we, adopt the Libertarian agenda. Much more to the point, our national leaders either will or will not address the looming default crisis responsibly. It's looking more and more like "will not" will be the way we go. Charles Krauthammer this morning has some idiotic column about how Republicans are being "set up" to take the blame for this. Set up my eye, they have eagerly sought it. Michele Bachmann says all this talk about how bad it will be is just scare tactics by our evil President. And of course by Moody's. And the Business Roundtable. And by a wide range of economists.

[PassedOut]

Charles Krauthammer this morning has some idiotic column about how Republicans are being "set up" to take the blame for this. Set up my eye, they have eagerly sought it. Michele Bachmann says all this talk about how bad it will be is just scare tactics by our evil President. And of course by Moody's. And the Business Roundtable. And by a wide range of economists.

And by anyone else who has a clue about the risks of default.

[blackshoe]

I have vague and probably not totally reliable memories from my youth of gold being pegged at thirty some dollars an ounce. Maybe thirty-five. I think the main reason for abandoning this was that it was untenable. It's always a problem for bankers or governments or anyone to set a price and enforce it. As Richard notes, there were various maneuvers most of which I was only vaguely aware of. The bottom line was that gold resisted being pegged.

 

The problem with this view is that it's backwards. It's not the "dollar" that's important under a commodity standard, it's the standard itself. When you set the "price" of gold at $35 an ounce, you're not saying that an ounce of gold is worth $35, you're saying that a dollar is worth (actually, represents, it's called "representative money," 1/35th of an ounce of gold.

 

Gold only "resisted being pegged" because people wanted to be able to change the money supply, arguing that the money supply needs to fluctuate. Under a free market commodity standard, it doesn't. Or so I've read (remember, I'm still learning).

 

Krauthammer produces a lot of idiocy. As for Congress, well… "Suppose I were a Congressman. And suppose I were an idiot. But I repeat myself." - Mark Twain

 

Any particular state (or all of them) is/are unlikely to "go Libertarian" (or any third party - that's why they're called third parties, isn't it?) any time soon. But there is a growing libertarian (note the difference in capitalization) sentiment in this country.

 

It occurs to me that I'm going to have to devote as much study to other schools of economics ("mainstream", at least) as to the Austrian. Then (and only then) can I make up my own mind as to which one is "right". I'm disinclined to accept the pronouncement of some authority on that just because he is an authority.

[hrothgar]

Gold only "resisted being pegged" because people wanted to be able to change the money supply, arguing that the money supply needs to fluctuate. Under a free market commodity standard, it doesn't. Or so I've read (remember, I'm still learning).

 

You're only looking at one side of the coin... the other reason the gold resists being pegged is that the gold supplyis subject to ridiculous amounts of variation over time.

 

Historically, the most significant cause of variance has been trade imbalances. (This is what ultimately forced most countires off the gold standard. They didn't have the financial where-withall to kept their currencies pegged at a fixed rate)

 

There have been a number of well documented cases in which discoveries of significant new supplies of gold have caused equivilent problems. (The large influx of "new world" into the Spanish empire and the subsequent inflationary ripples around the Mediterranean is the best known example. If the Russian gold reserves ever hit the open market we'll see something equivalent)

 

Then, of course, there are always commodity bubbles like the one we're experiencing now...

 

Simply put, there is no reason why one should expect gold's value to remain stable over time...

More important, if you're maintaining a gold standard you need to ensure that the ratio of gold reserves to GNP remains stable.

This is an even more silly assumption

[luke warm]

I'm disinclined to accept the pronouncement of some authority on that just because he is an authority.

i guess that means you're even less inclined to accept those of non-authorities then, eh? :)

 

More important, if you're maintaining a gold standard you need to ensure that the ratio of gold reserves to GNP remains stable.

why is such a thing mandatory, exactly?

[hrothgar]

why is such a thing mandatory, exactly?

 

The point of a gold standard is to (try to) avoid long term inflation/deflation.

 

You lose your ability to conduct monetary policy

You dramatically increase the variance in prices

However, you hope that you can control long term inflation / deflation

 

If you don't maintain a constant ratio between your bullion supplies and GNP, you're one decent benfit gets tossed out the window.

Because statements that you are on the gold standard don't mean jack ***** unless you have bullion to back things up...

 

And maintianing those cash rserves is a royal pain in the ass... I recommend looking at British attempts to avoid withdrawl from the Exchange Rate Mechanism, culminating in Black Wednesday. (admittedly, the ERM used currency bands rather than pegging currencies directly, but the basic concept remains the same). Alternatively, look at the collapse of Bretton Woods.

[hrothgar]

i guess that means you're even less inclined to accept those of non-authorities then, eh? :)

 

In the land of the blind, the one eyed man is King...

 

I don't claim to be an authority on monetary policy. My graduate work focused on game theory and inventory control models.

 

With this said and done, in undergrad I majored in government, economics, and history.

I took a lot of economic history in one of the top universities in the country.

(Wesleyan is usually ranked in the top five liberal arts colleges in the country)

While I was there, I received the departmental award for the top major in two of those departments and had the best GPA in the third. I got a full ride scholarship for grad study at University of Chicago before I finished my junior year of undergrad. I was in the top handful in my class at MIT.

 

Still, I probably don't count as an authority on monetary policy, however, compared to you yahoos, I'm mother fraking Solomon...

[PassedOut]

The problem with this view is that it's backwards. ... When you set the "price" of gold at $35 an ounce, you're not saying that an ounce of gold is worth $35, you're saying that a dollar is worth ... 1/35th of an ounce of gold.

Isn't saying that gold is worth $35 per ounce exactly the same as saying that $1 is worth 1/35 of an ounce of gold?

[luke warm]

Still, I probably don't count as an authority on monetary policy, however, compared to you yahoos, I'm mother fraking Solomon...

no argument from me, your majesty

[blackshoe]

Isn't saying that gold is worth $35 per ounce exactly the same as saying that $1 is worth 1/35 of an ounce of gold?

 

I don't think so. It's not a case of different systems of measurement, like comparing inches and centimeters. If gold (or silver, or for that matter some other commodity) is the medium of exchange, then it is the standard against which other things, including representative money (e.g. dollars) are measured. You may not remember it, but when I was young, you could take a dollar bill (or any currency bill) to any bank, and redeem it for the equivalent value of silver (or in some cases gold). It said so, right on the bill. Somewhere along the line (1971 I think), you couldn't do that any more. So back when you could do that, a "dollar" bill was redeemable for a "silver dollar" coin which (in theory at least) would contain exactly however much silver a "dollar" was worth. Nowadays, you can't "redeem" a dollar bill (or a dollar coin, which these days is "base metal") for anything. Mainstream economists (among others) claim that it doesn't matter — their fiat money is backed by "the full faith and credit of the Federal government". As to that, I refer you to current news reports about Moody's and Standard and Poor's' reviews of the US's credit rating. B-)

[PassedOut]

Isn't saying that gold is worth $35 per ounce exactly the same as saying that $1 is worth 1/35 of an ounce of gold?

I don't think so. It's not a case of different systems of measurement, like comparing inches and centimeters. If gold (or silver, or for that matter some other commodity) is the medium of exchange, then it is the standard against which other things, including representative money (e.g. dollars) are measured. You may not remember it, but when I was young, you could take a dollar bill (or any currency bill) to any bank, and redeem it for the equivalent value of silver (or in some cases gold). It said so, right on the bill.

But that 35:1 is just an exchange rate, as we have today between currencies. Don't you think that gold is subject to the same fluctuations as any other medium of exchange, relying upon the confidence that the demand for gold remains stable?