Something economists thought was impossible is happening in Europe

[pmaitra]

Yes. In current EU conditions it is useful.

How is it useful? Is it useful in creating wealth? Help me remove the vagueness, because I am trying to see your side of the argument?

 

[Sakal Gharelu Ustad]

But without fiat currency, can the govt still run a budget deficit which will cause the debt crisis?

It wont run into debt crisis but something else. But don't forget govt owns the military so even if its currency is backed by gold, it can always decide to not pay its creditors unless the creditors have a bigger amry!!

 

[Mad Indian]

Ignore the post above. I got your answer.



So, you are claiming printing money has a causative effect on wealth creation (positively or negatively).

I am not, I am just stating the position of the believers in Fiat currency. Frankly, I dont have a position on it since I dont know about any other alternatives to the Fiat currency. But anyway, yes, Fiat currency "must" have an effect on wealth creation, positively or negatively, logically speaking.

 

[Mad Indian]

It wont run into debt crisis but something else. But don't forget govt owns the military so even if its currency is backed by gold, it can always decide to not pay its creditors unless the creditors have a bigger amry!!

Hmm, makes sense.

 

[Sakal Gharelu Ustad]

How is it useful? Is it useful in creating wealth? Help me remove the vagueness, because I am trying to see your side of the argument?

Quick reply. Just an example for showing you causation:

1) Low credit demand by both households and firms
2) Low investment and low spending
3) Vicious cycle further deteriorating the aggregate conditions leading to more firms closing shop due to lack of demand

Now, provide QE:

1) Cheap credit
2) Some households/firms will use it
3) Revival of aggregate demand and investment
4) Virtuous cycle follows and economy comes out of mess
5) Due to new investment, real wealth and jobs would be created

It is a tool and use it like one. They is no inflationary pressure in Europe right now, so it makes complete sense.

 

[pmaitra]

Let me ask some counter questions.

1) Do you think if you tie the hands of central banks from printing money the world would be much better place?
2) Is pegging money printing to random value of gold dug from earth any better?

You can ignore the above two if you want.
3) How does fiat money explain negative interest rate phenomenon- the topic of debate on this thread?



Hyper-inflation is well documented phenomenon. But is it due to fiat currency or not using the monetary policy well? Just because fiat currency allows you to print money, does not mean you will get high and print money. It is a tool and outcome depends on how you use it.

Do you think if you tie the hands of central banks from printing money the world would be much better place?

If by "tying the hands," you mean bringing in regulations, certainly.

A free market economy does not mean we are free to do whatever we want. A currency is a unit of measure of value. A unit of measure should always be fixed, and for all practical purposes, it should be pegged to something that is least likely to change its value. Alternatively, look at it this way. The currency should be free from manipulation.

If you want to measure the length of your suitcase, you have to use a ruler that remains of a fixed length. The definition of one metre is the length of the path travelled by light in a vacuum in 1/299,792,458 of a second (17th CGPM). You cannot have this one metre change every day, or every month, or every year.

Is pegging money printing to random value of gold dug from earth any better?

I disagree with the premise of your question "random," but I will touch that later.

I have already presented these things multiple times, but I don't mind doing it again. Let us compare the production of gold with production of dollars, here, what you should focus on is the dollar denominated debt, referred to as "Total USD Credit." Which one is more stable?

Now, I disagree with your term "random," because, we can always do curve fitting to represent the gold production and do another curve fitting to represent dollar production. We will end up with a linear function with the former, and an exponential function with the latter. Just use "Occam's Razor" when choosing the simplest curve that best fits the real curve. Alternatively, answer the simple question: Which one, dollar production or gold production is more stable?

How does fiat money explain negative interest rate phenomenon – the topic of debate on this thread?

First let us see what we are used to.

When we deposit money into a bank, the bank pays us interest. In other words, effectively, the banks keep our money, and as long as it so does, it pays us interest. Here, the depositor is the creditor, and the bank is the borrower. Similarly, when we take money from a bank as a loan, as long as we keep it, we pay an interest.​

Now, let us split the two actors.

• When we deposit money into the bank, we have to pay money to the bank for keeping our money in their bank. In other words, the banks pays us "negative interest," which translates into us paying money to the bank.
• When we borrow money, I assume, we would not be entitled to this same privilege. We would still have to pay a positive interest.

​

Hence, the topic of this thread is misleading.

This is what I have understood so far. I will comment further on this phenomenon.

 

[Khagesh]

Use of duress (military/multilateral trade cartels/differential voting rights in political bodies aka UNO) to avoid the straight and and narrow path of value recognition, communication and exchange, is a reality.

The use of coercive power is the current reality and has been reality for a fairly long time now. Gold is not the formal base, of this so called wealth generation today. Promises are.

The above situation is not a 'what if' or something that 'could happen'. Though what is, could truly happen tomorrow but that does not mean that what could happen or continue happening, tomorrow is not already happening of has not happened in the past.

And yet gold is what everybody wants. Gold passes through all fancy.

 

[Sakal Gharelu Ustad]

Do you think if you tie the hands of central banks from printing money the world would be much better place?

If by "tying the hands," you mean bringing in regulations, certainly.

A free market economy does not mean we are free to do whatever we want. A currency is a unit of measure of value. A unit of measure should always be fixed, and for all practical purposes, it should be pegged to something that is least likely to change its value. Alternatively, look at it this way. The currency should be free from manipulation.

If you want to measure the length of your suitcase, you have to use a ruler that remains of a fixed length. The definition of one metre is the length of the path travelled by light in a vacuum in 1/299,792,458 of a second (17th CGPM). You cannot have this one metre change every day, or every month, or every year.

Is pegging money printing to random value of gold dug from earth any better?

I disagree with the premise of your question "random," but I will touch that later.

I have already presented these things multiple times, but I don't mind doing it again. Let us compare the production of gold with production of dollars, here, what you should focus on is the dollar denominated debt, referred to as "Total USD Credit." Which one is more stable?

Now, I disagree with your term "random," because, we can always do curve fitting to represent the gold production and do another curve fitting to represent dollar production. We will end up with a linear function with the former, and an exponential function with the latter. Just use "Occam's Razor" when choosing the simplest curve that best fits the real curve. Alternatively, answer the simple question: Which one, dollar production or gold production is more stable?

How does fiat money explain negative interest rate phenomenon – the topic of debate on this thread?

First let us see what we are used to.

When we deposit money into a bank, the bank pays us interest. In other words, effectively, the banks keep our money, and as long as it so does, it pays us interest. Here, the depositor is the creditor, and the bank is the borrower. Similarly, when we take money from a bank as a loan, as long as we keep it, we pay an interest.​

Now, let us split the two actors.

• When we deposit money into the bank, we have to pay money to the bank for keeping our money in their bank. In other words, the banks pays us "negative interest," which translates into us paying money to the bank.
• When we borrow money, I assume, we would not be entitled to this same privilege. We would still have to pay a positive interest.

​

Hence, the topic of this thread is misleading.

This is what I have understood so far. I will comment further on this phenomenon.

I think this is the worst defense you have ever given that is full of words but no economics.

1) Monetary policy is a tool to be used in case of economic distress. There can be rules so that its excessive use does not lead to hyper-inflation. What has it got to do with fixed length of a metre?

2) Yes, gold is stable, but how does that make it better? It rather implies no freedom in monetary policy. So, no way you can fight recession. Some counter-intuitive results for you: The gold standard and the Great Depression | Econbrowser . It shows how sticking to gold standard prolonged great depression.

3) I will wait for your comments.

 

[pmaitra]

I think this is the worst defense you have ever given that is full of words but no economics.

Economics should be left to mathematicians and not con artists, and I am not talking about you, but those that come up with postulates that fail, and have repeatedly failed.

1) Monetary policy is a tool to be used in case of economic distress. There can be rules so that its excessive use does not lead to hyper-inflation. What has it got to do with fixed length of a metre?

Again, fixing the damage instead of addressing the root cause.

Let me rephrase that:

"You have a small leak in your radiator. You consistently refuse to acknowledge that you have a leak in your radiator. Instead, you keep topping up the coolant in your radiator every week, but never really fix the leak."
​

Your so called monetary policy is equivalent to this topping up of the coolant.

2) Yes, gold is stable, but how does that make it better? It rather implies no freedom in monetary policy. So, no way you can fight recession. Some counter-intuitive results for you: The gold standard and the Great Depression | Econbrowser . It shows how sticking to gold standard prolonged great depression.

Gold is relatively more stable, that is the reason why it is better.

Excerpt:

Under a pure gold standard, the government would stand ready to trade dollars for gold at a fixed rate. Under such a monetary rule, it seems the dollar is "as good as gold."

Except that it really isn't– the dollar is only as good as the government's credibility to stick with the standard. If a government can go on a gold standard, it can go off, and historically countries have done exactly that all the time. The fact that speculators know this means that any currency adhering to a gold standard (or, in more modern times, a fixed exchange rate) may be subject to a speculative attack.

I am used to such inane arguments. Doesn't surprise me. Let me rephrase that.

"In winter, a person should wear warm clothes. Under such a rule, it seems that wearing warm clothes is as good as not catching pneumonia. Except that it isn't–warm clothes is only as good as the person's willingness to stick to that rule. If a person can wear warm clothes, he can also take his warm clothes off , and catch pneumonia."
​

Here is another one:

"It seems that exercise is good for health. Except that it isn't–exercise is only as good as a person't willingness to exercise, because, he can stop exercising anytime he wants."
​

I guess there is no cure for the mental pneumonia of people who write such rubbish articles.

BTW, I am saying again, the currency should be free from manipulation. Also, I am saying, yet again, a currency should be free from manipulation. So, the question of taking it off the gold standard does not arise. Ok, one more time, the currency should be free from manipulation. Let me know if you want me to repeat this again. Because, apparently, you don't pay attention to what you respond to:

A free market economy does not mean we are free to do whatever we want. A currency is a unit of measure of value. A unit of measure should always be fixed, and for all practical purposes, it should be pegged to something that is least likely to change its value. Alternatively, look at it this way. The currency should be free from manipulation.

3) I will wait for your comments.

Thank you for waiting.

 

[Peter]

@Peter Check this video out

Great video. Thanks for sharing.

 

[Peter]

Scenario: At time 't' ECB said it would start quantitative easing some time in the future. At 't' swiss franc is pegged to euro, so does not make a difference how you buy Swiss bond. 1 bond for 1 franc = 0.8 euro

Time 't': You buy a swiss bond with 100 francs but negative rate , say 1%. So you get 99 francs next period. Right now 1franc =0.8 euro, so effectively you invest 80 euros and ideally would get <80 euros next period.
Time 't+1': peg is removed now swiss franc is 1franc =1euro. On the above investment you still get 99francs, but now they are worth 99euros.

Effectively you make 19 euros as an investor. Hope that is clear now!
Since markets are competitive so you would not expect such huge arbitrage opportunities. And in fact that is the reason for bond return to go negative to correct for huge exchange rate gain.

Sir thanks for the explanation.

 

[pmaitra]

Quick reply. Just an example for showing you causation:

1) Low credit demand by both households and firms
2) Low investment and low spending
3) Vicious cycle further deteriorating the aggregate conditions leading to more firms closing shop due to lack of demand

Now, provide QE:

1) Cheap credit
2) Some households/firms will use it
3) Revival of aggregate demand and investment
4) Virtuous cycle follows and economy comes out of mess
5) Due to new investment, real wealth and jobs would be created

It is a tool and use it like one. They is no inflationary pressure in Europe right now, so it makes complete sense.

Let's look at one of the scenarios you presented in your post—Credit demand by household. Let's take a somewhat related scenario, i.e. house buying.

I am sure you are familiar with the US housing bubble, and it was even mentioned at @5:50 in the video posted by @Mad Indian.

Home-buyers had a lot of money, and this inflated the prices of houses.

By "having" a lot of money, I don't mean that people actually had their own money, but had money that they received as loans.​

People were able to "afford" nicer and more expensive houses which they would otherwise not be able to afford. ("Cheap Credit," as you mentioned in your post.)

So, what happened here? There was too much money supply in the housing market, which was a result of manipulation of the monetary system, and the manipulators were the people in the US Congress, who did this for political reasons.

So, if there is too much money supply, it can eventually create a bubble, like it did once before. QE does the same thing. It increases money supply, without actually creating any wealth. So, Ben Bernanke might claim that QE has boosted GDP, but the reality is that such tactics can either have a negative effect or positive effect, as @Mad Indian stated. However, I won't be surprised if you come back after two months in another thread and self coronate yourself by claiming something like I have provided no evidence in my favour.

Bottom line, and I am sorry to say this, your theories are not sound.

 

[Khagesh]

Here is how Leaving Gold Standard & Economic Growth are linked. Decide for yourself how much and how important the link is.

 

[Peter]

@Mad Indian @Sakal Gharelu Ustad

I do not know for sure whether manipulation of currency or the use of gold standard is a good idea. However there should be measures to help the economy in times of crisis. If that involves the manipulation of currency so be it. I think the manipulation of currency can have both advantageous or disadvantageous consequences.
(Note: This is what I have understood. I maybe completely off track. So I would like to be corrected.)

A little analogy

Let me that example of a leak in the radiator. Let us say there is a trucker who has a leak in the radiator of his truck. The cost of repairing that leak is quite high and more than the cost of filling it with a coolant. The trucker is short of money. He can either sell of his truck(thereby relinquishing his job) or he can incur a debt to buy the coolant(a risky venture). He decides to buy the coolant by taking a loan from a friend. This is similar to the manipulation of money by printing more currency. Now two things can happen.

Case 1: Positive
The trucker runs his truck with the coolant and he goes on to do his business with as usual. He makes a huge profit. He uses that money to pay off his debt and also take care of his leak permanently.

Case 2:Negative
The trucker cannot find a suitable contract and earns a meager profit. Soon the coolant he has bought runs out. He is forced to take another loan to buy more coolant. This continues till his debt crosses all limits and he is forced to sell off his truck to pay his debt.

Similarly the fiat and gold currency can have both positive and negative sides to it.
In case of gold currency, there is little scope for the manipulation of currency and thus acquiring astronomical debts. It is like the trucker has no way to get a loan and he would have to sell off his truck and find another job. By doing this he would never have a risk of financial ruin. However he will lose his occupation and have to do something other than trucking.(which will be less profitable as he was a trucker.)

In case of fiat money the govt can print money without the need of anything backing it up. Thus the trucker can take loans to have a quick remedy to his problems. However if there was little profit from the investment of that loan then it can quickly lead to financial ruin.(like the trucker not making profits.)

As for which method is better, I cannot make that call with total conviction. If I go into probability of the trucker losing his truck, then in case of gold standard it would be a sure event that he would lose it. However in case of the latter part there is a lesser probability that he would lose the truck.(I think it is 0.5 at worst case or even less if he takes a second/third loan etc)
So I would choose fiat currency albeit reluctantly.

 

[Peter]

Here is how Leaving Gold Standard & Economic Growth are linked. Decide for yourself how much and how important the link is.

Thanks for sharing.

It is too hard to make a call. Most of the PPP have remained constant. Some of them have fallen while others have increased.

 

[Mad Indian]

DensityDuck
December 13, 2005 at 5:25 am
>An ounce of gold can buy a decent man's suit.
But that is as much of a fiat decision as is anything involving money. Gold is valuable because we define it as valuable; tubuluar fullerenes longer than a centimeter are equally scarce, but nobody is calling for a standard based on that.
I think that most people who call for a gold standard have a mental image of going to the bank, getting a big bag of gold coins, then dumping them in a vat and swimming around like Scrooge McDuck.

From the Link @Sakal Gharelu Ustad posted. @Peter and @Sakal Gharelu Ustad

So if I am understanding this right, gold standard is also vulnerable to inflation just like Fiat currency is, if the govt happens upon a minefield of gold right? Printing more money = inflation, Mining more gold= Inflation.

The only difference hence is that in gold standard, the govt has less control over monetary policy since paper is lot more abundant than gold?

 

[pmaitra]

Here is how Leaving Gold Standard & Economic Growth are linked. Decide for yourself how much and how important the link is.

Good graph, and thanks for sharing.

The graph representing the US Dollar is an exception, because, after being taken off the gold standard, it was turned into the petro-dollar, thus, turning the dollar into an instrument that everyone had to covet, because, one had to have dollars to purchase oil.

P.S.: This is not the same thing as pegging dollar to oil.

 

[Peter]

From the Link @Sakal Gharelu Ustad posted. @Peter and @Sakal Gharelu Ustad

So if I am understanding this right, gold standard is also vulnerable to inflation just like Fiat currency is, if the govt happens upon a minefield of gold right? Printing more money = inflation, Mining more gold= Inflation.

The only difference hence is that in gold standard, the govt has less control over monetary policy since paper is lot more abundant than gold?

Exactly.

I would like to add that the case of aluminium can be good point here. In the 18th century, when a cheaper method of aluminium extraction was unknown, govts used to stockpile aluminium just like gold. In fact aluminium was more precious than certain metals. However as soon as cheaper methods of extraction of aluminium got discovered its price plummeted and now we even use it as a cover foil.
As you know there are huge deposits of gold in the oceans. As there is no cheap way to extract it it remains costly. However one cannot rule out the possibility of anyone discovering a way to extract his gold in the future.

In the mid 1880s, aluminium metal was exceedingly difficult to produce, which made pure aluminium more valuable than gold.[53] So celebrated was the metal that bars of aluminium were exhibited at the Exposition Universelle of 1855.[54] Napoleon III of France is reputed to held a banquet where the most honored guests were given aluminium utensils, while the others made do with gold.[55][56]

Aluminium - Wikipedia, the free encyclopedia

Will Deep-sea Mining Yield an Underwater Gold Rush?

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Now on the issue of that fiat currency. You will see that in the case of taking loans the trucker has a chance of (0.5)^n of losing his truck,where n is the number of loans he can afford to take. What it means is that the trucker does not need to immediately fix the radiator. He can take loans as long as he makes just enough profit to take the next one. This can go on indefinitely. He will only be in trouble if he makes losses and has to borrow additional money to cover his losses.

 

[Khagesh]

Actually what DensityDuck says is also very interesting. Does DensityDuck realize that his suit is useless 2/3 generations down the line even if he stores it and keeps massively good care of it, for the simple reason that the wealth produced by making that suit is a fad and not real wealth. Real wealth gets accumulated and gets communicated to next nearly infinite number of generations. Tubuluar Fullerenes too are in that sense only a silly suit.

Again a Suit that DensityDuck purchases is useless for a bushman in Africa. Real wealth on the other hand gets accumulated and communicated across Jurisdictions. Gold has that property. Tubuluar Fullerenes and Suit do not.

Actually, in terms of the current structure, there is nothing to stop Tubuluar Fullerenes from becoming a standard. Silver Standard was there and it worked for a while. Chinese members would know a lot about it. And lets see if some Chinese member educates us about it.

Gold moves through/across/over/under/inside/outside, your current understanding of what constitutes wealth. Gold is the hyperspace of true wealth.

 

[Khagesh]

Exactly.

I would like to add that the case of aluminium can be good point here. In the 18th century, when a cheaper method of aluminium extraction was unknown, govts used to stockpile aluminium just like gold. In fact aluminium was more precious than certain metals. However as soon as cheaper methods of extraction of aluminium got discovered its price plummeted and now we even use it as a cover foil.
As you know there are huge deposits of gold in the oceans. As there is no cheap way to extract it it remains costly. However one cannot rule out the possibility of anyone discovering a way to extract his gold in the future.

If you are able to bring about a cheap gold scenario you would cause a serious revolution in electronics, electricals and several other things. Actually Silver is quite abundant compared to gold, still it was a working standard and while Indians used beaten silver for decoration of sweets, still we are unable to use it in electricals and electronics. Aluminium is quite extensively used in electrical engineering unlike Silver and Gold.

So what you fear is quite someway off.

Gold is either the evidence that Indian civilization is extremely old with a very very deep experience or some alien civilization is present near about and Indians merely got endowed this knowledge of gold. I don't know which was it.