The Economics Game: Understanding Monetary Policy

[NoStateofMind]

As many of the regular P&N'rs know, I am one of the proponents for the Gold Standard. The Gold Standard has its faults and benefits of which I will try to briefly outline.

Gold Standard:

Pros:

- Holds a store of value

- Encourages savings

- Guards against inflation


Cons:

- Finite resource

- Deflationary


The Gold Standard is seen by many modern economists as an ancient monetary policy reserved for primitive economies. There is more to be said for the Gold Standard than just it being deflationary or unmanageable for a modern economy. The banks' fractional reserve policy has a part to play in Golds' downfall as the national currency. That being said, we are in a modern world where other countries no longer use it to back their currency and therefore it requires that any movement toward precious metals remain on the shelf.


The Fiat monetary system as introduced by John Maynard Keynes (called the Keynesian Theory) is not at all bad per se but it does have its faults. I will again try to lay out a brief outline of pros and cons.


Fiat monetary policy:

pros:

- Elasticity (able to expand and contract with the market)

- Exponential growth possibilities


cons:

- Inflationary

- No intrinsic value




The Keynesian Theory is basically to expand and contract Fiat currency as reflected by the market. When a boom hits money supply is increased as to not impede growth but when a recession hits the MS is reduced to curb inflation. The idea is to keep a steady flow of nominal inflation so as not to choke the economy and spur more growth.

Working in a retirement community, it gives me an opportunity to speak with many knowledgeable people. One of them named Ron was speaking to me about economic policy. In regards to Keynesian Economics he said "Keynesian Economics in theory is excellent, but by god you must practice it!". He was referencing of course the massive amount of money in the market in regards to the ineptness in Washington.

We can gather from the most recent M3 report that since 2000 the rate of increase in the money supply had risen substantially. The government knew people would be watching, so they stopped calculating the report in March '06, citing that it "cost too much" to produce. :disgust:

I will not say anymore that Fiat is bad or is inferior to the Gold Standard. Why? Because in both cases man (politician/political power/corporations) has ruined it. Man is to blame for the "run on gold" by way of the fractional reserve system and as is now, man is also responsible for increasing the money supply when all signs say to decrease it. Politicians and or powerful men regarded their "legacy" or retirement much more important than the citizen. Its not the monetary policy to blame, its the people in control of it.

 

[Nebor]

Do you really feel that gold has intrinsic value?

If we lived in a gold standard economy, and the economy was in deep, dark recession, and I came up to you and said, "Hey there, PC Surgeon, I've got these 5 lbs of gold. I'll trade it to you for 7,000 rounds of 5.56mm ammunition, 50 cans of tuna, and 20 rolls of toiletpaper." Would you take that deal?

Of course not. Because gold, outside of making circuits and other highly technical tidbits, has little practical value. I don't see it as much better than fiat money, other than people don't wear rings made of US dollars.

 

[Dissipate]

The gold standard is not what is needed. Free market currency is what is needed.

Fiat currency is a horrible horrible thing for a variety of reasons. First of all, it allows for an enormous concentration of wealth and power among the central bank and the member banks. But power aside, even if you believe that the people on the board of the Federal Reserve are wise and benevolent, no one ever asks the question: what if they make a huge mistake? The entire economy is f*ked. The entire economy is essentially in the hands of a handful of people.

Second of all, a central bank means central planning. Everyone agrees central planning is bad for practically every single good and service in the economy, and yet we are lead to believe that the supply of money & interest rates should be centrally planned? The Fed essentially plays a guessing game in trying to figure out how to set interest rates and the money supply. The federal reserve is made up of shameless clowns because Keynesian economics is garbage and has no basis in reality. Interest rates are simply the price of money. Money is a good just like any other good, it's price should be set by the market, not clowns & corrupt bastards.

 

[Dissipate]

Originally posted by: Nebor
Do you really feel that gold has intrinsic value?

Intrinsic value can be debated until the end of time. The main thing about gold or any other commodity is that there is only two ways to get it: mine it, or get someone else to give you some. Someone can't just turn on a computer and create a billion ounces of gold. The Fed on the other hand creates brand new fiat every day.

If we lived in a gold standard economy, and the economy was in deep, dark recession, and I came up to you and said, "Hey there, PC Surgeon, I've got these 5 lbs of gold. I'll trade it to you for 7,000 rounds of 5.56mm ammunition, 50 cans of tuna, and 20 rolls of toiletpaper." Would you take that deal?

You wouldn't have to worry about that scenario if there wasn't a central bank because there wouldn't be any single group of people who could mess up the economy and cause a depression like the Fed did when it caused the Great Depression.

Of course not. Because gold, outside of making circuits and other highly technical tidbits, has little practical value. I don't see it as much better than fiat money, other than people don't wear rings made of US dollars.

'Practical value' is in the eye of the beholder, but that's not the issue. The main thing is that you can't simply create gold or any other hard commodity arbitrarily.

 

[Farang]

Please post your credentials to teach me economic theory and then I might read past your second sentence.

 

[Dissipate]

Originally posted by: Farang
Please post your credentials to teach me economic theory and then I might read past your second sentence.

Who are you referring to?

 

[LegendKiller]

Wow, yet another gold idolator system. Surprise.

 

[Farang]

Originally posted by: Dissipate

Originally posted by: Farang
Please post your credentials to teach me economic theory and then I might read past your second sentence.

Who are you referring to?

The OP attempting to write the manifesto of gold standard economics instead of linking to any other source advocating it, relying instead on his own understanding of economics and trusting us to do the same. I'd like to see where his PhD came from because there is a lot of trust going on if I'm supposed to be convinced that fiat monetary policy is bad from such a short comparison between the two.

 

[Dissipate]

Originally posted by: Farang

Originally posted by: Dissipate

Originally posted by: Farang
Please post your credentials to teach me economic theory and then I might read past your second sentence.

Who are you referring to?

The OP attempting to write the manifesto of gold standard economics instead of linking to any other source advocating it, relying instead on his own understanding of economics and trusting us to do the same. I'd like to see where his PhD came from because there is a lot of trust going on if I'm supposed to be convinced that fiat monetary policy is bad from such a short comparison between the two.

This short book written by a well known economist explains why the Fed and central banking is a scam.

 

[NoStateofMind]

Originally posted by: Farang

Originally posted by: Dissipate

Originally posted by: Farang
Please post your credentials to teach me economic theory and then I might read past your second sentence.

Who are you referring to?

The OP attempting to write the manifesto of gold standard economics instead of linking to any other source advocating it, relying instead on his own understanding of economics and trusting us to do the same. I'd like to see where his PhD came from because there is a lot of trust going on if I'm supposed to be convinced that fiat monetary policy is bad from such a short comparison between the two.

Wow, you assume too much. No "manifesto" here. You didn't even read the thread and comment? How idiotic is that?

 

[NoStateofMind]

Originally posted by: LegendKiller
Wow, yet another gold idolator system. Surprise.

Did you happen to read the thread or just kneejerk response kick in?

 

[NoStateofMind]

Originally posted by: Farang
Please post your credentials to teach me economic theory and then I might read past your second sentence.

I'm not teaching anything. Please read before posting because you look like an idiot ATM.

 

[sandorski]

These make more sense as Currency. If your Currency becomes worthless, you can use them as Wheels on Toys and trade them for something useful.

 

[Nebor]

Originally posted by: Dissipate

Originally posted by: Nebor
Do you really feel that gold has intrinsic value?

Intrinsic value can be debated until the end of time. The main thing about gold or any other commodity is that there is only two ways to get it: mine it, or get someone else to give you some. Someone can't just turn on a computer and create a billion ounces of gold. The Fed on the other hand creates brand new fiat every day.

If we lived in a gold standard economy, and the economy was in deep, dark recession, and I came up to you and said, "Hey there, PC Surgeon, I've got these 5 lbs of gold. I'll trade it to you for 7,000 rounds of 5.56mm ammunition, 50 cans of tuna, and 20 rolls of toiletpaper." Would you take that deal?

You wouldn't have to worry about that scenario if there wasn't a central bank because there wouldn't be any single group of people who could mess up the economy and cause a depression like the Fed did when it caused the Great Depression.

Of course not. Because gold, outside of making circuits and other highly technical tidbits, has little practical value. I don't see it as much better than fiat money, other than people don't wear rings made of US dollars.

'Practical value' is in the eye of the beholder, but that's not the issue. The main thing is that you can't simply create gold or any other hard commodity arbitrarily.

Ultimately the only thing of any value is force. Whether you trade in gold, dollars, puppies or cocaine, it's virtually worthless if you have no means to defend it.

Most government's in the world have a monopoly on both force and currency. Our government does not yet have a monopoly on force, but that day is coming. And then it will be, "This $30 is worth 3 weeks of your labor because we say it is. Don't like it, how about nothing then?"

But that's neither here nor there.

People can make gold. I've been working on a process to synthesize it for less than $20/lb, but I'm stuck at around $100/lb. Not enough time to spend in my basement\lab lately, I'm afraid.

 

[Dissipate]

Originally posted by: Nebor

Ultimately the only thing of any value is force. Whether you trade in gold, dollars, puppies or cocaine, it's virtually worthless if you have no means to defend it.

There is a market for insuring and securing tangible valuables.

Most government's in the world have a monopoly on both force and currency. Our government does not yet have a monopoly on force, but that day is coming. And then it will be, "This $30 is worth 3 weeks of your labor because we say it is. Don't like it, how about nothing then?"

Most governments have virtual monopolies on force, including the U.S. government. Basically the government has control of about 99.99% of the use of force, aside from isolated incidents and gangs/mafia.

But that's neither here nor there.

People can make gold. I've been working on a process to synthesize it for less than $20/lb, but I'm stuck at around $100/lb. Not enough time to spend in my basement\lab lately, I'm afraid.

O RLY?

 

[SleepWalkerX]

Originally posted by: PC Surgeon
- Encourages savings

I'd say savings depends more on inflationary/deflationary factors. If gold starts to show signs of inflation (somehow more gold gets introduced in an economy) then individuals have no incentive to save their money as its becoming worth less. However, if signs of deflation show (somehow gold disappears from the economy) then consumers would want to save their money as much as possible as the longer they wait the more value gets added to their gold supply.

Originally posted by: PC Surgeon
- Guards against inflation

It guards against inflation in absence of a gold standard and guards against deflation during a gold standard. Its just another form of money and one that most everyone recognizes has value to some degree.

Originally posted by: PC Surgeon
Cons:

- Finite resource

It wouldn't matter if gold suddenly was suddenly depleted from the Earth's mines with the amount we have today. What would happen is that prices would slowly and steadily decline (oh and people would look at banks in an entirely different way). Now granted, if we had a gold standard eventually it would not be efficient to denominate gold as it would be too small to do anything with. This, of course, would take a long long time to happen. This is also why I'm against the government setting these standards because they are not as flexible as the free market.

Originally posted by: PC Surgeon
- Deflationary

This is not necessarily a bad thing. It would be bad for banks who practice fractional reserve lending and for anyone who trusts these banks with their gold. And bad for the government trying to pay back debts. Its kinda inconvenient for businesses. But its the best thing for citizens.

Originally posted by: PC Surgeon
Fiat monetary policy:

pros:

- Elasticity (able to expand and contract with the market)

- Exponential growth possibilities

But the growth is artificial. Its based upon adding more money. Eventually the tipping point is where the people realize the true worth of the money supply (like what is happening now).

This is all my understanding of it as flawed as it may potentially be. Either way, my view is that we need to let the market decide the value of commodities, including money.

 

[Delita]

Originally posted by: PC Surgeon
As many of the regular P&N'rs know, I am one of the proponents for the Gold Standard. The Gold Standard has its faults and benefits of which I will try to briefly outline.

Gold Standard:

Pros:

- Holds a store of value

- Encourages savings

- Guards against inflation


Cons:

- Finite resource

- Deflationary


The Gold Standard is seen by many modern economists as an ancient monetary policy reserved for primitive economies. There is more to be said for the Gold Standard than just it being deflationary or unmanageable for a modern economy. The banks' fractional reserve policy has a part to play in Golds' downfall as the national currency. That being said, we are in a modern world where other countries no longer use it to back their currency and therefore it requires that any movement toward precious metals remain on the shelf.


The Fiat monetary system as introduced by John Maynard Keynes (called the Keynesian Theory) is not at all bad per se but it does have its faults. I will again try to lay out a brief outline of pros and cons.


Fiat monetary policy:

pros:

- Elasticity (able to expand and contract with the market)

- Exponential growth possibilities


cons:

- Inflationary

- No intrinsic value

- Relies on the fallibility of man



The Keynesian Theory is basically to expand and contract Fiat currency as reflected by the market. When a boom hits money supply is increased as to not impede growth but when a recession hits the MS is reduced to curb inflation. The idea is to keep a steady flow of nominal inflation so as not to choke the economy and spur more growth.

Working in a retirement community, it gives me an opportunity to speak with many knowledgeable people. One of them named Ron was speaking to me about economic policy. In regards to Keynesian Economics he said "Keynesian Economics in theory is excellent, but by god you must practice it!". He was referencing of course the massive amount of money in the market in regards to the ineptness in Washington.

We can gather from the most recent M3 report that since 2000 the rate of increase in the money supply had risen substantially. The government knew people would be watching, so they stopped calculating the report in March '06, citing that it "cost too much" to produce. :disgust:

I will not say anymore that Fiat is bad or is inferior to the Gold Standard. Why? Because in both cases man (politician/political power/corporations) has ruined it. Man is to blame for the "run on gold" by way of the fractional reserve system and as is now, man is also responsible for increasing the money supply when all signs say to decrease it. Politicians and or powerful men regarded their "legacy" or retirement much more important than the citizen. Its not the monetary policy to blame, its the people in control of it.

LULZ

 

[MadRat]

Could it be that our current system is not working because of the head honcho in the White House meddling in affairs he knows nothing about? I'd hate to be the chairman of the Federal Reserve right now. Think of the pressure he's under when the White House calls up and tells him an opinion. Right or wrong, you know that executive opinion will move the Federal Reserve policy.

 

[LegendKiller]

Originally posted by: MadRat
Could it be that our current system is not working because of the head honcho in the White House meddling in affairs he knows nothing about? I'd hate to be the chairman of the Federal Reserve right now. Think of the pressure he's under when the White House calls up and tells him an opinion. Right or wrong, you know that executive opinion will move the Federal Reserve policy.

No, I do not think executive decision or opinion has anything to do with the financial markets at this point.

You guys think the Fed is easing because it makes the economy grow. I know they are easing to keep the system liquid.

It's pretty easy to bandy about conspiracy theories when you really have no idea what shape the capital markets are in.

 

[halik]

Originally posted by: Farang
Please post your credentials to teach me economic theory and then I might read past your second sentence.

That ought to be interesting....

The whole gold standard is nothing but libertopian notion that has failed in practice before - it doesn't prevent government from deficit spending and therefore creating inflationary pressures (ask Nixon) and at the same time it doesn't allow for monetary flexibility.

Also the main advantage of a flexible monetary system is to be able to shorten recession, not to curb inflation during recession. Refer to any variant of the phillips curve model to see how monetary policy can shorten the time it takes to get to a new equilibrium (and reduce unemployment).


"Relies on the fallibility of man".... what?

<- B.S. Economics '06, M.A. Applied Economics '09... both top 5/10 programs in the country

 

[LegendKiller]

Originally posted by: halik


That ought to be interesting....

The whole gold standard is nothing but libertopian notion that has failed in practice before - it doesn't prevent government from deficit spending and therefore creating inflationary pressures (ask Nixon) and at the same time it doesn't allow for monetary flexibility.

Also the main advantage of a flexible monetary system is to be able to shorten recession, not to curb inflation during recession. Refer to any variant of the phillips curve model to see how monetary policy can shorten the time it takes to get to a new equilibrium (and reduce unemployment).


"Relies on the fallibility of man".... what?

<- B.S. Econmics '06, M.A. Applied Economics '09... both top 5/10 programs in the country.

They'll just dismiss the notion and come up with some kind of "inflation = tax", yet they fail to provide who it taxes and to what extent.

Then they'll move onto "gold prevents debt", yet they fail to acknowledge that our government had to take out debt to save the gold standard and we had plenty of debt before that. They also forget to mention that prior to the federal government having massive amounts of debt, the states did.

Then they'll say that gold is more stable. Yet overlook the notion that the GD could have been likely caused by us depressing our interest rates to help the UK refloat their own gold program, after we extended than $200MM in credit. We then did the same to Italy. Both systems failed under the weight of the world, which precipitated a flock away from hard currencies, as people realized they did nothing for economic stability and even caused instability.

They also forget that the very same people they deride for being anti-gold by creating the Fed, or that the Fed was "evil" are the same ones who championed Gold as the only way to go (JP Morgan, Rothschilds, Goldman Sachs...etc) because they are the ones who propped up the gold banks several times, Rothschild propped up Austria's gold system twice. Pierpont propped the US system up twice, and Jack Morgan kickstarted the UK's.

They fail to mention how we will acquire the gold, since we'd have to take out hundreds of billions in loans to do it. They fail to solve how we can encapsulate an infinite economy inside of a finite good, without depressing the economical uses of hard assets.


This naturally leads to a question about how we can keep gold, since when we, and other countries throughout history, have gone into debt, we/they have been unable to keep the gold in system, since it'll have to be used to repay debts, leading to shaky bank foundations (which they attribute to fractional systems). This can also be caused on a bank level, since one bank can destroy another by running the asset book.


Ohh yes, they have all of these great theories, yet theories are bullshit until they are practical and are implemented. At all points in history gold standards have failed in the long run. In a modern economy it'd fail in years as opposed to decades.

They deride the Fed, yet fail to understand it's mandate and reason. They claim that inflation is a "tax", yet fail to understand that it doesn't tax unless you hold cash and the vast majority of people don't. However, the vast majority of people do benefit from the economic stability of the Fed and fiat currency.

The good of the many outweigh the good of the few.

Yes, these gold idolators and believers in "austrian economics" are laughable at best. Had it not been for the Rothschilds the Austrian gold system would have failed more than once, yet they love it to death. They have no practical knowledge, nor in-depth knowledge of history. They jeer liquidity support yet have no concept of what would happen if support weren't forthcoming. They cry foul at the "tax" yet fail to accept that there is a balance to that equation. They lack market knowledge, yet claim they can be good judges of a system that has proven historically unreliable.

But then, those that know, that are the opposide, are judged as "insiders" and profiteers, not as people who might actually know better.

<- MBA, CFA Charter, looking to maybe start another finance/econ degree, perhaps in financial engineering.

 

[piasabird]

Gold is like a stock. It is only what it is worth when it is purchased and sold. Currency is a figment of your imagination and it can devalue to nothing; however, gold can not. Currency has a conceptual value but is not actually a commodity. It is not real. However, Gold is hard to carry around. It is possible that at some point in time that the feds could start treating Gold as a stock and making you pay a tax on your investment. However, as a commodity it is hard to tax on the appreciated value since you dont get a stock certificate when you buy a gold coin or ingot.

Another type of investment that is real is Land. If you own land you can grow food, build a house, and rent the property. It has its drawbacks like taxes, but you can not eat gold. If the economy crashes you still have your land.

 

[halik]

Originally posted by: piasabird
Gold is like a stock. It is only what it is worth when it is purchased and sold. Currency is a figment of your imagination and it can devalue to nothing; however, gold can not. Currency has a conceptual value but is not actually a commodity. It is not real. However, Gold is hard to carry around. It is possible that at some point in time that the feds could start treating Gold as a stock and making you pay a tax on your investment. However, as a commodity it is hard to tax on the appreciated value since you dont get a stock certificate when you buy a gold coin or ingot.

Another type of investment that is real is Land. If you own land you can grow food, build a house, and rent the property. It has its drawbacks like taxes, but you can not eat gold. If the economy crashes you still have your land.

Currency is just standard to allow for transactions - it's a measure of nominal purchasing power. One doughnut = 2 bagels , 4 bagels = 2 cup of coffee, 4 cups of coffee = 1 chipotle burrito ... currency allows you put the value of goods on the same scale.

Commodities (gold, land etc. ) all have inherent value that changes, which is not something desirable for a base unit.
Using fiat money is the natural progression of the system, same way the natives of the Yap island stopped caring about their giant stone wheels' physical location (interesting read btw). It's merely a claim to value, much like an IOU

PS: Gains on Gold futures are subject to 15% capital gains tax, sales on collectibles held more than 1 year (gold coins etc.) are subject to 28% cap gains tax

 

[SleepWalkerX]

Originally posted by: halik
That ought to be interesting....

The whole gold standard is nothing but libertopian notion that has failed in practice before - it doesn't prevent government from deficit spending and therefore creating inflationary pressures (ask Nixon) and at the same time it doesn't allow for monetary flexibility.

So it failed.. because of the government? So we have to change our money supply to suit the government's inept behavior?

Originally posted by: halik
Also the main advantage of a flexible monetary system is to be able to shorten recession, not to curb inflation during recession. Refer to any variant of the phillips curve model to see how monetary policy can shorten the time it takes to get to a new equilibrium (and reduce unemployment).

Lol, phillips curve? Hasn't that been debunked for some time now? Economic growth does not directly cause inflation.. That would be silly.

Originally posted by: halik
"Relies on the fallibility of man".... what?

Or in other words, government intervention.

Originally posted by: halik
<- B.S. Economics '06, M.A. Applied Economics '09... both top 5/10 programs in the country

What kind of economic theory did they teach you? Keynesian economics? I'm taking economic courses in my college next semester. Hopefully they won't teach the same garbage, or I'll have to remain very critical in class.

 

[halik]

Originally posted by: SleepWalkerX

Originally posted by: halik
That ought to be interesting....

The whole gold standard is nothing but libertopian notion that has failed in practice before - it doesn't prevent government from deficit spending and therefore creating inflationary pressures (ask Nixon) and at the same time it doesn't allow for monetary flexibility.

So it failed.. because of the government? So we have to change our money supply to suit the government's inept behavior?

Originally posted by: halik
Also the main advantage of a flexible monetary system is to be able to shorten recession, not to curb inflation during recession. Refer to any variant of the phillips curve model to see how monetary policy can shorten the time it takes to get to a new equilibrium (and reduce unemployment).

Lol, phillips curve? Hasn't that been debunked for some time now? Economic growth does not directly cause inflation.. That would be silly.

Originally posted by: halik
"Relies on the fallibility of man".... what?

Or in other words, government intervention.

Originally posted by: halik
<- B.S. Economics '06, M.A. Applied Economics '09... both top 5/10 programs in the country

What kind of economic theory did they teach you? Keynesian economics? I'm taking economic courses in my college next semester. Hopefully they won't teach the same garbage, or I'll have to remain very critical in class.

It failed because it is based on unrealistic expectations, much like the rest of libertopian ideas that disregard market externalities and human nature.

I want to say you're thinking about the Laffer curve (cut taxes, tax revenue will rise) aka supply side economics. Here's a recent paper about Phillips curve linkie

If your program is any good, they'll cover the same exact (though with less detail). The stuff I'm talking about is regular Graduate economics curriculum