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Inflation in Zimbabwe
April 7, 2008 8:24 AM   Subscribe

Inflation in Zimbabwe recently reached 160,000%. Get in on the ground floor now by purchasing a $50,000,000 bill (currently selling for 20,000x its value). Dare to become a millionaire!
posted by splatta (93 comments total) 5 users marked this as a favorite

 
Back of the envelope math and only a sketchy idea of how inflation works, but I think that $1.00 today would be worth $.22 tomorrow.
posted by DU at 8:37 AM on April 7, 2008


On the other hand, it's really easy to become a Zimbabwean millionaire, even if the currency you have is probably worth more as paper.
posted by WalterMitty at 8:54 AM on April 7, 2008


The destruction of a country's economy and its peoples lives is amusing to you how, exactly?
posted by signal at 8:54 AM on April 7, 2008 [4 favorites]


This is really tasteless. Zimbawean currency values aren't something any of us should be laughing at.
posted by dowcrag at 9:27 AM on April 7, 2008 [1 favorite]


Who had the over/under at 3 posts?
posted by Senator at 9:28 AM on April 7, 2008


So, a question for those versed in macroeconomics or monetary policy: what are the possible ways this could ever be fixed? Short of burning it all and starting again, how do you re-invent a currency system from scratch?
posted by jquinby at 9:33 AM on April 7, 2008 [1 favorite]


That would make for a unique historical collectors item, should the post-Mugabe Zimbabwe ever get back to a more stable economy.
posted by jlowen at 9:34 AM on April 7, 2008


This isn't how I wanted this thread to work out. Sure, there's some snark, but can we move away from criticizing the snark and move on to interesting issues?

Here, I'll start: How do people live with inflation this high? How is interest on debts calculated? Do banks pay interest on deposits?
posted by gregvr at 9:34 AM on April 7, 2008


If you wanted an extremely serious Zimbabwe thread where everyone just sadly posts depressing news stories it's over here. No one paid it much attention though.
posted by Artw at 9:40 AM on April 7, 2008


In 1923, Germany saw inflation of over 800,000,000,000 percent.
posted by rocket88 at 9:43 AM on April 7, 2008


It looks like Hungary saw inflation of 41,900,000,000,000,000 percent at the end of WWII.
posted by gregvr at 9:48 AM on April 7, 2008


Per Wikipedia:
The Post-WWII hyperinflation of Hungary holds the record for the most extreme monthly inflation rate ever — 41,900,000,000,000,000% (4.19 × 1016%) for July, 1946, amounting to prices doubling every fifteen hours.

For the record I don't think the snark is aimed at the zimbabwean's plight, it's aimed at the outrageous markup of the bill on eBay.
posted by nomad at 9:48 AM on April 7, 2008


Man, the morality mutaween is on full patrol this morning. It doesn't look to me like anyone is laughing at this, but I do detect a sense of bewilderment.
posted by crapmatic at 9:49 AM on April 7, 2008 [2 favorites]


It doesn't look to me like anyone is laughing at this

Well, "Dare to become a millionaire!" and an eBay link to a (formerly) high-value note definitely strikes one as jocular, if not mocking.
posted by Shepherd at 9:55 AM on April 7, 2008


Maybe you could post a "." and hope that magically makes the world better.
posted by Artw at 9:57 AM on April 7, 2008 [4 favorites]


Yes, let's all pretend this is not both incredibly absurd AND tragic. We are nothing if not obsessed with the gravitas of tragedy around here. Here... we can have a concern-off! 1... 2... 3... Go!
posted by basicchannel at 10:17 AM on April 7, 2008 [1 favorite]


The dire situation in Zimbabwe is fascinating for economists, primarily as hyperinflation is such a rare event. But its truly amazing how fast hyperinflation grows once started - as recently as 2006 inflation in Zimbabwe just breached an alarming 1,000%.

Timely post, as a few of us in my research cluster at University were bouncing around an interesting paper [.pdf] published by the IMF. It discussed the causes and drivers of Zimbabwe's problems, suggesting a four step solution.

The paper is accessible however if you'd rather not peruse the pdf, I'll briefly summarise and comment each step as necessary:
  1. Increasing transparency and accountability (The Reserve Bank of Zimbabwe has pulled all sorts of unethical tricks to keep the money flowing - for example, in June 2006 they retired the so-called "Special" two year debt and replaced it CDs earning ZERO interest)
  2. Taking actual measures to reduce and eliminate QFAs (Quasi Financial Activities, or activities that Central Banks in some Developing Nations undertake which have economic effects similar to non Central Bank functions e.g., taxation)
  3. Insuring that the RBZ (Reserve Bank of Zimbabwe) has a cash-flow to finance its legitimate functions (compare to Quasi Financial Activities in the previous points)
  4. Recapitalizing the RBZ once macrostabilization has been achieved (once they get inflation under control, restructure the nations balance sheet so folks can live normally)
The balance sheet is of particular interest; Zimbabwe is effectively bankrupt as nonearning assets amounted to about 83 percent of total assets as of October 31, 2006, and foreign liabilities dwarf foreign assets by a ratio of about eight to one. This is by no means a strong balance sheet; indeed, at present foreigners own Zimbabwe outright. Given the RBZ's history and lack of credibility, renegotiating that debt will be difficult at best.

Another curiosity - we've seen periods since 2003 of both negative and positive real interest rates in Zimbabwe. Sometimes the real rate has approached 150%. But until they stop issuing paper high rates will only punish folks living there as the underlying problems haven't been solved.

I've seen another (don't have citation with me at present) IMF paper which claimed Zimbabwe could sharply reduce hyperinflation in about one year, and bring it back into line with global norms in about three. A painful exercise to be sure, but it could be done and the global community would no doubt be eager to help these folks.

But, of course, someones gotta go before this good stuff can happen.
posted by Mutant at 10:23 AM on April 7, 2008 [8 favorites]


How do people live with inflation this high?

With great hardship. Hyperinflation means that currency has basically stopped working. That $50M note may notionally be worth a penny, but no one's going to take a hundred of them for a loaf of bread. Since the currency is essentially valueless everyday trade becomes a matter of barter or, if you're lucky, black market trading in a more stable currency. Needless to say any higher forms of finance - loads, investment, wages, etc - are entirely broken. It's kind of like carpet bombing destroying an entire city, only it's the financial infrastructure that's being levelled.

If we're lucky Mugabe will be forced out relatively quietly, there will be a year of hardship and chaos in Zimbabwe, and then things will slowly start working again with lots of help from the world community. Or else it will degenerate into open civil war with guns and mines augmenting the famine, AIDS, and malaria.

Dare to become a millionare! lulz! Surely there's a funny cat macro to make the economic misery of 13 million people understandable for today's digital hipsters?
posted by Nelson at 10:32 AM on April 7, 2008


Short of burning it all and starting again, how do you re-invent a currency system from scratch?

You go to a commodity money standard, policed carefully. Inflation happens because the government prints too much money.

Mugabe was originally blaming 'foreign intervention', but there is no intervention short of counterfeit notes that can do this to a currency, except for the issuing authority itself. Had it been counterfeit money causing the problem, they could have gone to a different note standard and nailed the problem fairly early. These things are quite noticeable before they turn into complete disasters.

The government of Zimbabwe did this to its own citizens all by itself, first by destroying their economic base via taking land from highly skilled and productive farmers (who happened to be white) and giving it to unskilled and, thus, unproductive farmers, who happened to be black. So, suddenly, instead of being a large net exporter of foodstuffs, they abruptly didn't have enough to feed even themselves anymore, and the government had to pay to import grain.

I'm not clear on the details, as I haven't seen any sources on exactly what the government did. I suspect this is probably what happened: there simply wasn't the money to buy that much food. There wouldn't have been that much money even when the economy was fully healthy, and with the loss in revenues from grain exports as well, it was a gigantic blow to the government's finances. Apparently, instead of cutting other spending so that their overall expenditures matched their real income, they tried to buy food by printing excess currency. This is monetary inflation, a form of 'stealth taxation'. The sudden availability of all the currency probably caused some short-term stimulus, but with the magnitude of what they were doing, it would have rapidly become apparent to other players in the Zimbabwean economy that the currency was being abused, and prices would have started to go up. This would have forced the government to print even more money to buy food, meaning prices went up even more, and so on and so on.

The government was simply trying to extract more value from the economy than the economy could supply. In doing so, they have wrought total devastation. Currency isn't wealth, and no matter how much currency gets printed, the actual wealth in the economy doesn't get any larger. In their insistence on trying to run their programs past the ability of the economy to support, they've destroyed it entirely. It's the financial equivalent of a charred, smoking crater.

The US would be wise to learn from this, but I don't think it will. Wishful thinking is even more profound and even more destructive here than it is in Zimbabwe... it's just that we have foreign governments supporting our foolishness, at least for now, and very sophisticated financial systems to allow the government to extract more value from the economy than it can pay for.

This will not last forever, and the end results are going to be strikingly similar.
posted by Malor at 10:34 AM on April 7, 2008 [12 favorites]


Time Magazine article from 1980 on Hyperinflation.
posted by basicchannel at 10:36 AM on April 7, 2008


Malor - thank you. Excellent recap, esp. the currency != wealth observation.
posted by jquinby at 10:37 AM on April 7, 2008


Before World War I Germany was a prosperous country, with a gold-backed currency, expanding industry, and world leadership in optics, chemicals, and machinery. The German Mark, the British shilling, the French franc, and the Italian lira all had about equal value, and all were exchanged four or five to the dollar. That was in 1914. In 1923, at the most fevered moment of the German hyperinflation, the exchange rate between the dollar and the Mark was one trillion Marks to one dollar, and a wheelbarrow full of money would not even buy a newspaper. Most Germans were taken by surprise by the financial tornado.

--The German Hyperinflation, 1923
posted by basicchannel at 10:38 AM on April 7, 2008


The price of beer in Zimbabwe.
posted by EarBucket at 10:46 AM on April 7, 2008 [3 favorites]


giving it to unskilled and, thus, unproductive farmers, who happened to be black.

And, perhaps more importantly, mates with Muagbe, generally these veterans you hear a lot about.
posted by Artw at 10:46 AM on April 7, 2008


Nelson writes "Dare to become a millionare! lulz! Surely there's a funny cat macro to make the economic misery of 13 million people understandable for today's digital hipsters?"

Fer cryin' out loud. Slapstick is rooted in misery. Have you ever heard of gallows humor? You should hang out with ER doctors for a while.

Unless someone is making fun of your own mother, there's no reason to get so personally offended. Lighten up.
posted by krinklyfig at 11:35 AM on April 7, 2008 [1 favorite]


My dad's girlfriend is a Jewish Zimbabwean, and as such her relatives and friends are some of the wealthiest citizens of Zimbabwe. They frequently don't have running water or electricity. One of them takes buckets of water from his pool and uses them to flush his toilet. If the rich are being hit that bad, that can only mean the poor have probably lost everything.

Don't buy Zimbabwean money. The sooner its regime dies, the better.
posted by Citizen Premier at 11:40 AM on April 7, 2008


Malor has it, except for the last 2 sentences. Malor has my respect, but I do not share his entirely and unwaveringly pessimistic view on the American economy that he has shared on many economic topics.

The main difference is that America is not going to turn over the means of production to the proletariat anytime soon.

What America has experienced the last 7 years or so is an act of theft, specifically the Treasury being robbed by high industry, aided by the government, under the guise of war.

But, it is a one-time theft, and it can be recovered from.

America produces wealth on an almost daily basis. America created perhaps the second most important industry in history (behind agriculture) just 30 years ago, the modern computer (hardware and software) industry.

And the "dot com" commercial revolution, even with its early over-enthusiasm and subsequent correction, is undeniably among the most important industries in the world now, and something where a world-changing product was "created" just in recent memory.

And, America seems poised to create yet another world-changing industry in the next 20 years in the energy sector. Whether creating low-cost photovoltaics or ambient temperature superconductors or some sort of renewal bio-fuel (unlikely to be the candidates we currently have).

Zimbabwe, even at its best, was still at the early stage of a third-world economy: natural resource exploitation.

America has challenges, no doubt. The End of Oil (tm) will be a real (i.e. catastrophic) problem if we don't get alternatives on the ground in time. Climate change could fundamentally shift that most important of all industries, agriculture.

The housing bubble is a short term problem, and will be catastrophic for some individuals, but in the long run will have negligible effect on the economy as a whole. It is a correction, not a collapse. There will be no set of circumstances that ever occur that make the tangible possession of real estate worthless, unless the entire human race relocates en masse to Mars.

So while we have a difficult road ahead, and it will take some real discipline and planning to overcome, there is no reason to believe we will experience anything even similar to Zimbabwe's current circumstances.
posted by Ynoxas at 11:43 AM on April 7, 2008 [4 favorites]


Yah, it's not a white vs. black thing... it's a smart vs. stupid thing. Land reform isn't an evil in and of itself, and if handled properly, could have gone a long way to sharing prosperity.

Instead of training and equipping farmers, they handed huge rural estates to politically connected cronies and whoever was bully enough to run the whites, the blacks, the anyone-who-isn't-as-well-armed off the land without learning how to work the land. Food production, and therefore exports, fell through the floor. The economy imploded.

And now Mugabe, instead of a heroic liberator, is just another African strongman, an Idi Amin who's damned his country and countrymen to hell for generations, rather than a Nelson Mandela who set in place long-range reforms that kept South Africa a first-world nation while putting it on the path to greater wealth and opportunity for all.
posted by Slap*Happy at 11:58 AM on April 7, 2008 [4 favorites]


How do people live with inflation this high?

A black economy in dollars and relatives working outside the country sending back money to their families - if it wasn't for the latter the country would have totally collapsed.

And it's more of Mugabe looting the economy for his cronies / tribe than any black Africans being too stupid to farm. But it all goes back to a drawing lines on the map thing and the country has been heading in a bad direction all the way from the civil war back in the 70s
posted by fearfulsymmetry at 12:18 PM on April 7, 2008


I have a Z50,000,000 note - fifty million Zaires - with a picture of Mobutu Sese Seko on it. The printing is lower quality on one side - they were running out of money as they printed them.
posted by WPW at 12:21 PM on April 7, 2008


jlowen: That would make for a unique historical collectors item, should the post-Mugabe Zimbabwe ever get back to a more stable economy

You'd think, but probably not so much. My brother in law's family is from Germany and he's got a stack of marks in excellent condition from the hyperinflation days, and last we looked they were only worth maybe .50 each, presuming you can find someone interested in buying them.

It's actually interesting that he has them at all, and in such good crisp condition. He got them from his grandma, who when she was a kid had the very important chore of taking stacks of marks just like these and scrunching them up, then flattening, then scrunching them up again, to soften them up. To use as toilet paper. Because it was cheaper by volume to get these marks than it was to buy toilet paper back then.

Hyperinflation sucks.
posted by barc0001 at 12:48 PM on April 7, 2008


If the rich are being hit that bad, that can only mean the poor have probably lost everything.

Not so. Hyperinflation generally redistributes wealth within an economy. In fact, if you are in debt, hyperinflation is a huge windfall.
posted by rocket88 at 12:57 PM on April 7, 2008


There are an estimated 2 - 3 million Zimbabwean economic refugees in South Africa (with another 5000 crossing the border every week). They send back enough foreign currency into Zim to prevent total collapse but I fear if the election situation (the Zimbabwe Election Commission refuses to release presidential election results, probably because Mugabe lost) is not resolved then even that may not be enough. Meanwhile these pictures are supposedly the kind of luxury Mugabe lives in.
posted by PenDevil at 1:20 PM on April 7, 2008


Have you ever heard of gallows humor?

Yeah, gallows humour is appropriate if you're the one in the shadow of the noose. But if you're in the peanut gallery watching the hanging? Not so much.

Look, obviously no one wants their fun on Metafilter spoiled. Hyperinflation is bizarre and bills with seven zeroes on them are funny looking. I made a lolcat, too.
posted by Nelson at 1:44 PM on April 7, 2008


Why do dictators always have such wretched taste? I mean, really.
posted by dirtynumbangelboy at 1:50 PM on April 7, 2008


rocket88: That's not what happens at all: hyperinflation completely destroys the way the pricing mechanism works to signal shortages in a market economy and wages inevitably fall behind the inflationary curve.

For ordinary people, the only "winners" are those with fixed rate debt who manage to keep their jobs. Everybody else finds that they are unable to pay their debts as their wages fail to keep pace with the increasing repayments as their creditors demand ever higher interest rates.

The rich who own assets outright will remain rich. The poor and middle classes tend to have either debts or a limited amount of capital stored in cash or other currency-denominated savings: They get to lose everything. Even the rich find the value of many of their assets drops in real terms due to the destruction of the economy around them, but at least they get to preserve some of their capital.

Hyperinflation really, *really* sucks. It's worse than deflation.
posted by pharm at 1:54 PM on April 7, 2008


There is a group of villagers, some of them friends of mine, in Zimbabwe trying to make an intentional sustainable community and seeing what they can learn from that. Kufunda Village provides a little ray of hope.

Thanks for the economics of this situation. Knowing people in the midst of it of course increases anxieties. Having a small handle on the mechanics of what is going on helps me to understand what they are facing once the political situation stabilizes.
posted by salishsea at 1:57 PM on April 7, 2008


Malor -- "You go to a commodity money standard, policed carefully. Inflation happens because the government prints too much money. "

Not really. We've already tried that and it really doesn't work that well. Why? Well, the growth of your money supply is tied to the supply of the commodity you've chosen. The only way to increase the growth of your economy is to acquire more of the commodity.

I've posted this before, but The Spanish looted South America solely for the gold, the wealth. Other countries have done the same in other regions. You think we've got troubles now from oil wars?

I'm more of an econometrician than economist, but I do recall from my economics classes at Business School many arguments on why commodity based currencies simply will not work, not in this day and age. The United States and the G20 all have advanced economy's. Commodity based currencies are inflexible and atavistic.


"I'm not clear on the details, as I haven't seen any sources on exactly what the government did."

Well, you could start by taking five minutes or so to read the paper cited above; the IMF has laid out both the cause of the problem as well as the solution. Without mentioning, I might add, basing the Zimbabwe currency on a commodity.


"The US would be wise to learn from this, but I don't think it will. "

Of course the US will - and is learning. Why on earth would people trained in this field not pay any attention at all to a contemporary example of hyperinflation, happening in real time? On the contrary, there are a large number of papers being published on Zimbabwe, analysis' being done, solutions proposed. Speculating that folks trained in this field would ignore the lessons is absurd.

We all know here is inflation in the US and the rest of the G20. Are the official stats totally correct? Nope, and for many reasons. But are the official numbers that far off? Is there currently hyperinflation anywhere in the G20, hyperinflation as folks in finance commonly use the term? Not even close.

As the IMF paper mentioned, one of the fundamental problem Zimbabwe has is " nonearning assets amounted to about 83 percent of total assets as of October 31, 2006 ... "

We know that isn't the case in the United States. Why? The United States still attracts Foreign Direct Investment.

Foreigners aren't investing in the United States for zero return, especially now when money can move globally so quickly, attracted by the highest returns. No, unlike Zimbabwe, the greater bulk of American assets are performing.


Ynoxas -- "So while we have a difficult road ahead, and it will take some real discipline and planning to overcome, there is no reason to believe we will experience anything even similar to Zimbabwe's current circumstances."

Absolutely. But these facts (that I agree with) won't sell newspapers or make for histrionic warnings of doom, chaos and dark times ahead.

I'm long both gold and silver, so I'd have everything to gain from a collapse. That being said, I'm still long shares and equities. If I though there were hyperinflation ahead the last place I'd want to be is long shares. Or bonds for that matter (at least until after the initial rate shocks that is). I still (as previously posted) think there is a lot of value out there in high yield, particularly in (carefully selected) financial services & banking assets.
posted by Mutant at 2:37 PM on April 7, 2008 [2 favorites]


Malor writes "I suspect this is probably what happened: there simply wasn't the money to buy that much food.

But how do we know they had an excess demand for food to begin with? The assumption is that they mismanaged the nationalized farms, which eventually halved both the export crop production and the corn production in 8 years. So a drastic reduction of incoming hard currency and an increase of staplefood price, dictated by costant demand and reduced production ; govt prints money to compensate the failure of princecontrol on food , but it gets out of hand because the production isn't restored and it's all multiplied by increase of demand of everything else. But did real wages increase proportionally , thereby explaining the propagation method ?

Zim apparently had a good education system ongoing , or at least good enough to produce a number of competent farmers to replace the 4 thousand evicted ones. Why was it so hard to replace the old management with decent technicians?

If anything this demonstrates you can't have your nation real economy depending on such a restricted number of people.
posted by elpapacito at 2:41 PM on April 7, 2008


One thing I don't get w/ the Zimbabwe situation - why can't they just lop, like, 6 zeroes off their currency? Sure, it wouldn't make any economic difference, but you'd have to think that it would make their leaders seem a bit less absurd.

Didn't a bunch of European countries do this a while back?
posted by Afroblanco at 3:00 PM on April 7, 2008


Does this remind anyone of the inflationary currency in Galactic Pot Healer that Joe Fernwright has to spend every day before it becomes worthless?
posted by tehloki at 3:15 PM on April 7, 2008


Err, I forgot the second part of my comment.
How long is it possible to sustain this level of inflation? Not just historically, but theoretically?
posted by tehloki at 3:16 PM on April 7, 2008


tehloki writes "How long is it possible to sustain this level of inflation? Not just historically, but theoretically?"

I'm no economist, but seems to me that when people stop using the currency as currency and instead barter with each other (and maybe use the currency as toilet paper, which happened in Germany), then that currency no longer has any validity in the eyes of the people, and it's effectively useless until it can come around again to a reasonable level. How long this takes, either to get to that point or to come out of it, I'm not sure, but seems as if hyperinflation can take off very quickly.
posted by krinklyfig at 3:52 PM on April 7, 2008


Afroblanco -- "why can't they just lop, like, 6 zeroes off their currency? Sure, it wouldn't make any economic difference, but you'd have to think that it would make their leaders seem a bit less absurd.

Didn't a bunch of European countries do this a while back?"


Great observation; Turkey, for example, did just level of revaluation, back in 2005. Good thing too, as for years the joke in Europe was you'd become a millionaire just by getting off the plane in Istanbul and changing 100 quid for local currency.

But currency revaluations are expensive for many reasons (not just printing & distributing new coins and bills), and Central Bank credibility damage immense if the underlying economic problems aren't first fixed. In Zimbabwe's case, they aren't. That IMF paper I linked to above notes what got Zimbabwe into this mess, and outlines a solution.

Also even if you either have or on the path to resolving the underlying economic problems (too much damn money) then unless there are well developed capital markets and other mechanisms in place, the revaluation attempt will fail.


tehlokl -- "How long is it possible to sustain this level of inflation? Not just historically, but theoretically?"

Not a real answer to your (very interesting) query, but Germany's hyperinflation lasted about one year (1923), Chile had hyperinfationary conditions for about two years (early 70's), with other countries seeing hyperinflation for both longer and shorter periods.

Turkey, for example, had a little over one decade (off the top of my head, someone else please correct) of first excessive then hyperinflation. Can't recall how that broke down, but as other folks upthread have noted, hyperinflation is grinding and destroys pretty much all wealth.

So it seems that as long as folks external to your economy are funding the party (i.e., providing money) the good times will continue.

On preview, krinklyfig makes a very good point that complements mine rather well.
posted by Mutant at 4:09 PM on April 7, 2008


why can't they just lop, like, 6 zeroes off their currency?

They already lopped three zeroes off in 2006, with the introduction of the current "second dollar". A "third dollar" has been proposed for some time now, but the situation's been deteriorating so quickly that they've resorted to high-denomination second-dollar "bearer cheques" instead (you know you're in trouble when your paper money starts coming with an expiry date).

Nowadays government-issued currency is going to be basically worthless no matter what's printed on it.
posted by dansdata at 4:10 PM on April 7, 2008


Afroblanco: You can't just lop zeros off currency - all the zeros are still there on the paper. Now you could print new currency but unless there's faith/confidence in the value of the new currency, it would be just as worthless.

Now one way to give a currency value is for the government to peg it against something that has tangible worth, like say a loaf of bread or an ear of corn. That's what above commenters were referring to by "commodity-based currency/monetary standard."
posted by junesix at 4:17 PM on April 7, 2008


wikipedia

Zimbabwe's current economic and food crisis, described by some observers as the country's worst humanitarian crisis since independence, has been attributed, in varying degrees, to a drought affecting the entire region, the HIV/AIDS epidemic, and the government's price controls and land reforms.[26]

Life expectancy at birth for males in Zimbabwe has dramatically declined since 1990 from 60 to 37, the lowest in the world. Life expectancy for females is even lower at 34 years.[27] Concurrently, the infant mortality rate has climbed from 53 to 81 deaths per 1,000 live births in the same period. Currently, 1.8 million Zimbabweans live with HIV.

posted by Brian B. at 6:35 PM on April 7, 2008


Now one way to give a currency value is for the government to peg it against something that has tangible worth, like say a loaf of bread or an ear of corn. That's what above commenters were referring to by "commodity-based currency/monetary standard."

Indeed. And despite Mutant's claim that
We've already tried that and it really doesn't work that well.
that was exactly how Germany developed a new currency that avoided inflation.

As for the argument that
the growth of your money supply is tied to the supply of the commodity you've chosen. The only way to increase the growth of your economy is to acquire more of the commodity.
makes me immediately ask, "What's wrong with a stable currency?"

As Malor points out, wealth != currency.

Under a gradually increasing commodity-based currency (e.g. on the gold standard), prices gradually fall over time due to increased productivity.
posted by kevinsp8 at 7:06 PM on April 7, 2008


Hmm, I'd like to explore the racial aspect of this debacle. Why did this guy evict the white farmers? Why were they the sole source of wealth for the nation? Africa has resources, why can't their currency be backed by their oil or diamonds which are worth way more than gold? Were the whites working to establish themselves as the elite class (they are 1% of population yet hold 70% of commercially viable land) like most black countries worldwide?, Were there repercussions for these evictions? sanctions? NGO's, The British SIS?

I read that Shortly after Mugabe started redistributing the land, Britain Kicked Zim out of The Commonwealth of Nations based on human rights abuses. Timing seems suspicious. Zim being a former colony of Britain, The white Landowners were all of British descent. Furthermore, egalitarianism is also one of the "values" The Commonwealth of Nations purportedly adhere to. 70% of arable land belonging to 1% is not egalitarian. What exactly does is the Commonwealth of Nations mean? It looks very unclear as to it purpose. It is a wide range of nations and races (Most former colonies of Great Britain) allied with Britain. Britain claims they all share "common values".

"[Mugabe claims] The Commonwealth's attempts to force political changes in his country are motivated by racism and colonialist attitudes and that the White Commonwealth dominates the Commonwealth of Nations as a whole."

If you ask me TCN is a form of neo-colonialism. No one has been talking about Foreign nations role in this. Someones got their hands in this country's pockets and another on it's throat. Tell the truth!! All this econ-talk is dumb because once things have reached such and absurd point there is no use of quantifying and proposing bootstrap solutions. I said this before and I'll say it again The IMF is home of the blackhearts and foster inequality more than anything.
posted by Student of Man at 9:30 PM on April 7, 2008


Hmm, I'd like to explore the racial aspect of this debacle. Why did this guy evict the white farmers? Why were they the sole source of wealth for the nation? Africa has resources, why can't their currency be backed by their oil or diamonds which are worth way more than gold? Were the whites working to establish themselves as the elite class (they are 1% of population yet hold 70% of commercially viable land) like most black countries worldwide?, Were there repercussions for these evictions? sanctions? NGO's, The British SIS?

White farmers dispute the 70% figure, and regardless, they are murdered on a regular basis. Here is a recent article pre-election on the problems facing the opposition, who apparently won the recent election, but are denied victory.
posted by Brian B. at 9:42 PM on April 7, 2008


Student of Man:

From Wikipedia: "these sanctions only target government officials and not ordinary citizens.[75] [...] It should be noted that Rhodesia had a successful export-led economy despite harsh sanctions applied to the whole nation by the UK and other world powers."


"Nationalization" is controversial, but I suspect choices Mugabe has made ("abandoned earlier efforts to develop a market-oriented economy", putting cronies who didn't know how to farm in control of farms, printing oodles of McBucks, and stifling democratic opposition) have harmed his country more than foreign nations.

From Wikipedia I also learned they already knocked 3 zeros off the bills in August 2006.
posted by kevinsp8 at 9:48 PM on April 7, 2008


Instead of training and equipping farmers, they handed huge rural estates to politically connected cronies and whoever was bully enough to run the whites, the blacks, the anyone-who-isn't-as-well-armed off the land without learning how to work the land. Food production, and therefore exports, fell through the floor. The economy imploded.

Please refrain from commenting on situations that you clearly aren't familiar with.

I personally know 2 white families that are in the hopeful process of rebuilding farms, from scratch, in Zimbabwe, because their former ones were taken from them by force. One of the families was employing over 200 local blacks on their farm, where they raised ostrich, cattle, and operated a small shoe and textiles factory for low-cost clothing for local poor. When you employ people in a place like Zim, not only do you give them the means to survive, but you give them dignity.

One night, with the wife and young children thankfully away with relatives, the farmhouse, with the father and a friend of his in it, was surrounded by an angry mob of local blacks, with the rather shady and undefined backing of the local government. It took all night to get the police to come out and escort them safely to the local magistrate. When they arrived there they were informed that their property, their life investment was no longer theirs.

Imagine that for a second. Look at everything you have, and imagine it is all gone. Imagine feeling blessed to be allowed to leave with what you could carry, if you were that fortunate.

My friends were almost that lucky. They got the police to escort them back to their house - most of the property had been ransacked at that point and all of the livestock was gone. In the house, the new "owner" was there, to tell the police what they were allowed to take, and what they could not take. They had to ask if they could take their children's toys, but they could not. They were the property of the new owner's children now. They got some clothes, some personal pictures, and enough food for a couple of days. That was about it.

This (and in some cases much worse) happened to hundreds, possibly thousands of predominantly white farmers in Zimbabwe, a land that remains lush and extremely habitable for raising crops and livestock, yet now its people languish for lack of ability to do just what the white farmers were doing with the land. The simple facts are that a very tiny few of the farms were owned or operated by local blacks when the rioting and raiding started, and those that were so owned were most often passed up for more alluring white-owned targets.

It was very much a racial issue, and it still very much is. My brave friends returned, even after that, in the hopes that this can be overcome and real change can happen. They envision a Zim where local blacks own and operate their own successful farms along with them - indeed that's what they were training their workers to do, and what they are beginning to due again.

Only time will tell if the culture can change to actually facilitate this.
posted by allkindsoftime at 12:44 AM on April 8, 2008 [5 favorites]


kevinsp8 -- "Indeed. And despite Mutant's claim that
We've already tried that and it really doesn't work that well.
that was exactly how Germany developed a new currency that avoided inflation."


Not really. The Bundesbank - forerunner of today's Euro - was a remarkably prudent Central Bank, and didn't allow the excesses that would debase the Deutsche Mark. Historically Germany's currency was based on another precious metal, Silver, but with (like many commodity currencys) a fixed conversion rates.

Sometime around 1900 Germany rebased the Deutsche Mark on Gold, but ultimately dropped the commodity link of their currency when WWI erupted and the reason is obvious - they needed money to fight the war, and commodity based currencies are inflexible.

Of course Goldbugs (I'm not using that word in the pejorative sense, rather to identify people who argue from specific viewpoint) seize upon the hyperinflation that followed as "proof" that all fiat currencies are destined for eventual debasement, but that's not why Germany had such a horrible experience.

The underlying reason is they just printed too much damn money. Let's face it; even if we were to go back on a commodity based standard, unless you've got a strong, independent Central Banking function goverment's will find a way to fund their activities.

The fundamental reason why the Deutsche Mark was so stable (and the Euro today) is attributable to a prudent, proactive, transparent and accountable Central Banking function. The IMF paper I linked to above made the same claim with respect to Zimbabwe's problems. Lack of transparency and accountability is key to Zimbabwe's problems, not the lack of a commodity base to the currency. I note again that the IMF certainly isn't arguing that a return to a commodity based currency will fix Zimbabwe's problems. Folks at the IMF know full well the problems associated with any commodity based currency (a few points I'll get into below).


"the growth of your money supply is tied to the supply of the commodity you've chosen. The only way to increase the growth of your economy is to acquire more of the commodity.
makes me immediately ask, "What's wrong with a stable currency?"


Great question, and absolutely nothing as you've phrased it. However you're ignoring (as are the other proponents of commodity currencys in this thread) a few points: No, we've tried commodity based currencys in the past and while they are attractive because of their simplicity, they just won't work today.

Again, this isn't my real area of economics, but I suspect commodity based currencys would work well for any economy based solely on the primary or secondary sectors - natural resources or agriculture.

An advanced, services oriented economy like most of the G20's todays needs more flexible and agile Central Banking tools. Commodity based currencies are atavistic.
posted by Mutant at 1:04 AM on April 8, 2008 [1 favorite]


It's extremely likely that poor monetary policy on the part of the Fed in the 1920s -- in essence, violating the gold standard -- was what caused the mania and subsequent bust.

The Great Depression was the best possible outcome. As we are finding now, if you try to spend your way out of economic problems by toying with the money supply, the subsequent economic distortions get bigger and bigger and bigger until you end up in total collapse.

Had we been on a proper currency, our mania in the late 90s would have been far smaller, and the subsequent bust would have been, relatively speaking, fairly mild. Instead, by trying to prevent all bad things from happening, ever, the Fed caused two more bubbles, far far larger, to be blown up in their place. The subsequent destruction will be immense.

If they manage to put off the reckoning awhile longer, which they may, then the price gets higher still. After a few more boom/bust (mostly bust, I imagine) cycles, we end up as Zimbabwe.

The Great Depression was a good outcome, relatively speaking. Manias are terrible things, the financial equivalent of a nuclear holocaust. There's no path out of a mania that anyone would consider pleasant. Depressions are merely the least bad of many choices that are far worse, as you can ask the people of Zimbabwe. In hyperinflation, virtually everything is destroyed; in a depression, at least the core economy survives.

Fiat money allows wishful thinking to rule. It's slow economic suicide. It feels just wonderful at first, much as meth probably does when used to boost personal productivity, but the long-term costs are hideous.

Fiat money is a lie. It is the promise of value where no real value exists. No system based on a lie can prosper forever. Real economies are about trading goods and services, not pieces of marker paper.
posted by Malor at 4:38 AM on April 8, 2008


Ahh, I see. Say no more, thanks for that article Brian. B. It's all clear now.
Mugabe forever!!
posted by Student of Man at 6:57 AM on April 8, 2008


Malor -- "It's extremely likely that poor monetary policy on the part of the Fed in the 1920s -- in essence, violating the gold standard -- was what caused the mania and subsequent bust."

Specifically what "poor monetary policy" are you referring to? There must be specific actions (or lack of) that you can cite? I'm dubious, because from everything I've read & learned at Business School on the topic, speculation and lending was totally, utterly out of control during the decade leading up to the bust.

Galbraith ('The Great Crash', 1954/1997) writes a key cause of the collapse was lax securities (read that as "non existent" by today's rigorous standards) supervision and associated problems, rather than inappropriate Central Bank operations (although The Fed was not totally exonerated). For example, at one point 1928 margin requirements were only 10%! By contrast, today most stocks are 50%, sometimes higher and sometimes not marginable. The required margin is a function of multiple variables and changes often. I never trade on margin myself, so someone please correct if there are lower rates. There may be, but not across the board and by no means 10% - I seem to recall the lowest available today is 30%.

And what was worse than the unrealistically low margin requirements, folks could borrow the necessary deposit money from their broker to purchase securities. THE SAME BROKER YOU'D BUY THE SECURITIES FROM. Meaning all you needed was a view on the markets and a broker and you too, could load up on all the securities your tolerance for risk (or broker) would allow. No need to pony up your own cash, no messy credit checks. Worse case - you'd lose your securities. That you purchased with 100% credit. Also - as strange as this sounds now - there were minimal laws in place regarding the disclosure of information related to the shares you purchased; companies (and brokers) made up all sorts of rosy pictures about the firms future prospects. And The SEC had no teeth back then; banks were getting away with all sorts of conflicts of interest - forming companies to be taken public, forecasting earnings, pitching the shares to the public, lending money to the retail crowd to purchase securities, holding positions as they hyped up the shares and selling at the top, on and on. All sorts of crazy stuff, totally out of control, total madness.

Indeed, Galbraith's view is reinforced by passage of The Securities Act of 1933 and further tightening in The Securities Act of 1934, both of which laid the foundations for the highly regulated system we've got in place today.

Sorry, but direct supervision of the securities market - just one of the causes of the 1929 crash by the way - never was a responsibility of The Fed. Curious, but it does seem to have fallen under the jurisdiction of the Zimbabwe Central Bank, with the consequences we were originally discussing in this thread.

But getting back to Gold. As previously posted Eichengreen believes because The United States was tied to the Gold standard the Depression was worsened. It's no surprise that countries whose currencies were not tied to Gold, or who abandoned the Gold standard suffered far, far less than the United States, Britain, all countries that maintained the commodity link. For example, in Japan, then Minister of Finance Takahashi Korekiyo abandoned the Gold standard in 1931, and started a debt fueled economic expansion. The result? Well some folks believe he saved Japan from the Great Depression. His success in this role was such that he is the only former bank official with his likeness featured on a Japanese banknote (he was later assassinated by Right Wing fanatics).

Nope, in spite of what folks were taught in High School economics, the Great Depression wasn't truely global in scope. Some countries, those that either weren't on the Gold standard to begin with, or who were quick (like Japan) to abandon the linkage, either totally avoided or cut the depression short.




"Had we been on a proper currency, our mania in the late 90s would have been far smaller, and the subsequent bust would have been, relatively speaking, fairly mild."

But manias can happen even when currencies are backed by a commodity. We've seen that many, many times during the history of commodity based currencies. So would our current mania have been smaller? I don't know and neither do you. Nor does anyone else for that matter, as it all conjecture. Of course, if you have a model or citation that disproves this point I do apologise but please post it supporting what appears to be your opinion.


That being said, the (multiple) pitfalls of basing your money supply on a commodity are well illustrated. And I suspect new for most everyone participating in this thread. Gold based currency is not a panacea, it raises a host of unique problems that are as intractable and difficult to deal with as fiat currencies. And inflation or deflation? By all accounts the scourge of fiat based currencies? Well, the history of finance has shown us these have happened in the past with commodity currencies.




"Manias are terrible things, the financial equivalent of a nuclear holocaust. "

Here again we differ in the finer points; sometimes investment manias are valid - when underlying fundamentals have changed to support the bubble. We call that a Rational Expectations Bubble. So I'd disagree that all manias are the financial equivalent of a nuclear holocaust. It really depends upon what precise mania we're discussing.



"Fiat money allows wishful thinking to rule. It's slow economic suicide. It feels just wonderful at first, much as meth probably does when used to boost personal productivity, but the long-term costs are hideous.

Fiat money is a lie. It is the promise of value where no real value exists. No system based on a lie can prosper forever. Real economies are about trading goods and services, not pieces of marker paper."


Well, you keep posting this stuff (the same grim pronouncements that we find on multiple blogs out there) but without suggesting a solution. Identification of a problem is only part of it; whats the proposed solution?

Fiat currencies are the best that we've got at present to support modern economys such as those enjoyed by the United States and the wider G20. The same flexible economic models that the Developing Nations aspire to. We can't return to commodity based currencies; the associated problems are far too unpalatable for such a drastic action to even be considered seriously. And by that I mean by mainstream economists; I'm well aware of what blogger think and post, sometimes I read them myself. But I also read books & journals on the topic, tempering the single minded, almost always negative view that many of the blogs you've quoted in the past present.

Keynes (1924) famously referred to Gold as "...a barbarous relic" for very well thought out, very well argued reasons.

So it's fair to ask what are your reasons for repeatedly insisting a return to the Gold standard is necessary?
posted by Mutant at 6:57 AM on April 8, 2008


by trying to prevent all bad things from happening, ever, the Fed caused two more bubbles, far far larger, to be blown up in their place

This is in no way caused by the type of currency we use.
posted by oaf at 7:00 AM on April 8, 2008


Fiat money is a lie.

I don't see the big deal with fiat money yet. Money is a medium of exchange. When did we need to insure that it was anything more than this in the longterm? For whose benefit? So buy gold with it. It works in the short term to make secured loans, such as buying houses. I would like to see it argued positively for the average wage earner, rather than using isolated cases of hyperinflation to argue against all fiat money.
posted by Brian B. at 7:30 AM on April 8, 2008


Pretty much agree with Malor's points, but let me address a few of Mutant's specific points.

You've used the word "atavistic" several times now. I find this defined as "The return of a trait or recurrence of previous behavior after a period of absence." This is the pattern with fiat money, which judging by history all fail. Recurrence of previous behavior (hard money) always seems to 'atavistically' return.

I agree that a central bank or government CAN have a non-inflationary money policy (indeed, Greenspan stated that central banks in his view should run things as if they were on a gold standard), but the temptation to print more money to win elections, win wars, combat crises, etc. always seems to be too great.

>Sometime around 1900 Germany rebased the Deutsche Mark on Gold, but ultimately >dropped the commodity link of their currency when WWI erupted and the reason is >obvious - they needed money to fight the war, and commodity based currencies are >inflexible.

That's like saying the wealth of a country is inflexible. Yeah, it kind of is. If you wish to spend more money than you have, you either borrow it or confiscate it. Inflation is a form of confiscation.

>The underlying reason is they just printed too much damn money.

Exactly. That's why precious metals prevent so much chicanery: they can't be printed.

>Let's face it; even if we were to go back on a commodity based standard, unless you've >got a strong, independent >Central Banking function goverment's will find a way to fund >their activities.

I'm sure they'd love to find a way to print gold, but to my knowledge it hasn't been found yet.

>The fundamental reason why the Deutsche Mark was so stable (and the Euro today) is >attributable to a prudent, proactive, transparent and accountable Central Banking >function.

Partly true. The other reason was because people had faith in the currency because it was linked to real assets in the country.

>The IMF paper I linked to above made the same claim with respect to Zimbabwe's >problems. Lack of transparency and accountability is key to Zimbabwe's problems, not the >lack of a commodity base to the currency. I note again that the IMF certainly isn't arguing >that a return to a commodity based currency will fix Zimbabwe's problems. Folks at the IMF >know full well the problems associated with any commodity based currency (a few points >I'll get into below).

I do not accept a priori that the IMF is an authority on all controversial financial matters. From what I understand, their interventions in ailing countries have often focused on raising taxes to balance budgets or create surpluses at all costs, while ignoring money supply policy. Their record of intervention has not met with uniform praise by those 'helped'.

> * Lack of control of exchange rates

Nonsense. The currency can be revalued with respect to the commodity at any time. For instance, the government of the U.S. has previously devalued the U.S. dollar with respect to gold from $20 an ounce to $35 and later lower.

> * Deflationary bias - you've pointed out that prices fall over time due to increased >productivity, but failed to follow through to the obvious conclusion - we don't all become >wealthier as wages fall as well. [....[ We all prefer increased wealth to decreased wealth. A >little inflation is a good thing.

Yes, but wealth isn't money. Money is a placeholder for wealth. Wealth is what money can get you. A slight deflationary bias results in people being encouraged to save and invest, rather than consume, and savings and investment are what build the wealth of a country.

> I don't think anybody in Japan during their "lost decade" was particularly comfortable with >prices (and presumably wages) falling across the board.

I don't believe they were on a hard money system at that time.

> * Spikes in inflation - What happens when large gold fields are discovered? Your money >supply has sharply increased, especially so if your government doesn't control the gold. >Not only is this inflation by definition, its the reason many wars were fought over gold. >Governments feared debasement of their currencies by whomever had the gold they >didn't.

This is the beauty of gold: most of the gold ever mined is above ground. Despite all sorts of mining efforts, the gold supply has never in the past century ever increased more than a few percentage of the total. All the easy-to-find gold has already been found. There is no more reason for a government to go to war over gold under a gold standard than under a fiat system. If the country has a larger gold supply in circulation, then prices for goods in terms of gold will simply rise. No wealth will have been created. True, more goods from other countries could be purchased, but having a fiat system doesn't make gold worthless, and so there is just as much incentive today to go to war over gold. I take your point about the destabilitzing nature of huge sudden increases in the gold supply, but this is something that for geological reasons hasn't happened for a long long time. We're at or beyond 'peak gold'.

> * Political linkage - Follows naturally from the above point; if your currency is tied to Gold >(or another commodity) all of a sudden you become very, very interested in what happens -> politically - in any nation that mines Gold.

Not particularly. Gold can be purchased, which is generally cheaper than going to war for it. I see wars over oil (wealth), but not gold (money) during the hundred years prior to the end of Bretton Wood.

I think you're confusing money with wealth. Increasing the gold supply just increases the money supply, but does not create wealth. Wealth is factories and resources. Gold is mostly useless except as a promise that it can't be inflated into worthlessness, and thus a guarantee of a stable value for the medium of exchange. It's exactly as if the central bank said 'We're going to be using pretty pieces of paper as a medium of exchange, and we promise not to unduely increase its supply" and kept the promise.

You can have a gold standard with next to no gold. You just have to guarantee convertibility, and if redemption exceeds your central bank's supply, then more gold is imported (at the cost of real wealth).

> * Depression [...] So once again we see that lack of flexibility is a key problem of any >commodity based currency.

I do not pretend to know the reasons for the Great Depression, but many far smarter than I have argued that it had nothing to do with a gold standard. Zimbabwe has (too much) flexibility and has a hyperinflationary depression.
posted by kevinsp8 at 7:31 AM on April 8, 2008


We can't return to commodity based currencies; the associated problems are far too unpalatable for such a drastic action to even be considered seriously.

Of course we can. It's not like 1970 was in the Stone Age, you know. We had checking accounts, a stock market, CDs.... hell, we even had roads. I would argue that virtually all of the financial 'developments' since then have been abstractions of debt, designed to extract value from the economy without providing real value in exchange. We don't actually need most of the financial systems from post-1970, particularly the leveraged speculation community, which is purely about extracting value from the economy. And of the leveraged speculators, it's the currency traders that are some of the most hurtful, because currency trading is absolutely zero sum, every time. Every single time they win, the rest of us lose, and we didn't get a damn thing for it.

With properly backed currencies, there would be essentially zero speculation in that area, and speculation in general would be greatly diminished. This would be enormously good for us; we can get back to investment instead.

What fiat money has given us is a corruption of the fundamental market mechanics; instead of being a way to properly allocate resources among real investment, it's turned into a giant casino. It's sucking the life out of the real wealth production of the world. Many of the entities on Wall Street are immensely wealthy, but a very large percentage of them generate none of it themselves. They extract it from the economy and keep it, by manipulating the abstraction of debt that is modern money.

Wall Street should be modeled after Warren Buffett, who builds things, but instead it's modeled after George Soros, who takes them from other people. Slowly, slowly, it's bleeding us to death.

Keynes' ideas are failing. They weren't good in the first place, but without the check of commodity money to prevent the worst of his excesses, the world economy has put itself onto a suicidal course. And we can stop it, in its tracks, by simply going back to commodity-backed money.

I know we won't do that. The price will be perceived as being 'too high', because the short-term pain is extreme. We have put off thirty years of economic adjustments by playing with our currency, and the powers that be fully realize that we would have to pay for all thirty years of maladjustment at once. This will be "too painful", and we won't do it. Instead, to avoid short-term pain, we will embrace far, far more of it over time. We will continue to live with the cancer instead of having the tumor removed and going through chemotherapy. Barring some revolutionary technological development, on the order of fusion power, we're going to end up a lot like that movie, Children of Men, with a few very wealthy people living reasonably normal lives, and the rest of the country damn near in the third world.

You can see it already, in places. Visit Detroit sometime. Detroit was the center of our manufacturing power, and it looks like a second-world country now. Virtually all of that destruction has happened since 1970, and I don't believe that's a coincidence.

Oh and oaf chimed in with this little gem:

This is in no way caused by the type of currency we use

Oh yeah? What's your basis for that assertion? I've talked at great length about how the endless liquidity on demand by the Fed, papering over rough spots, has totally prevented the American economy from adjusting to the deflationary reality of globalization. Instead of deflating, we've been on a wild inflation tear for the last fifteen years... it's just mostly been in areas we like, real estate and stocks. It's still inflation and it's still very, very damaging, particularly in the insane excess of 1998-2008.

Would you like to back yourself up with more than a casual one-liner?
posted by Malor at 7:36 AM on April 8, 2008


I do not accept a priori that the IMF is an authority on all controversial financial matters.

If you can believe Confessions of an Economic Hitman, the IMF is part of a large system explicitly designed to put countries in economic thrall to the United States, by getting them to take on more debt than they can support.

It is certainly true that anytime the IMF gets involved, countries mysteriously fail to thrive.

I am deeply worried that the IMF appears to be lobbying for more power over the United States itself.
posted by Malor at 7:40 AM on April 8, 2008


Oh, and:

You can have a gold standard with next to no gold. You just have to guarantee convertibility, and if redemption exceeds your central bank's supply, then more gold is imported (at the cost of real wealth).

Exactly right. This prevents really severe trade imbalances. If gold redemptions by foreign countries get too high, the money supply is diminished, the economy cools off, and the country can't afford to import as many goods. This makes local goods more attractive/cheaper, which encourages local manufacturing to expand, which increases exports again, bringing gold back into the country. Foreign countries then go through the exact same cycle.

It's an automatic limiter, one that works with no intervention at all. There's no way you'd end up with the wild trade imbalances we have running today; there wouldn't be the money to support it.

The actual amount of the commodity isn't that important, although a very small amount would be subject to rapid fluctuations, which would be pretty disruptive. We'd want something that there's a lot of and which has a predictable supply.

A commodity money standard forces a country to actually pay for what it wants. Truth is the center of all economics. Good trade and sound decisions are all based on truth; the vast majority of the regulation in financial markets is about increasing the honesty and transparency of those markets. Why on earth wouldn't you want a bedrock truth supporting the rest of the system?

I don't have any big specific thing, btw, about gold in particular. I don't care what gets used, as long as it's not printable on demand by politicians. Gold's fine, but it can be anything we agree on.
posted by Malor at 7:58 AM on April 8, 2008


Would you like to back yourself up with more than a casual one-liner?

Would you like to show that my "casual one-liner" isn't correct?
posted by oaf at 8:18 AM on April 8, 2008


Would you like to show that my "casual one-liner" isn't correct?

You can start here.
posted by Malor at 8:58 AM on April 8, 2008


kevinsp8 -- "That's like saying the wealth of a country is inflexible. Yeah, it kind of is. If you wish to spend more money than you have, you either borrow it or confiscate it. Inflation is a form of confiscation."

But you don't have this flexibility if you're on a Gold standard. If you wish to sharply expand your monetary supply - to fight a war like Germany, or a depression as in Japan's case, you've got two options - seize more Gold thus expanding your money supply. Or abandon the Gold standard, and then expand your money supply (hint: devaluing is abandoning the standard, the fixed peg by another name). Can't have it both ways; your supply of money is fixed by your supply of Gold.



"Exactly. That's why precious metals prevent so much chicanery: they can't be printed."

Actually, the history of finance tells us differently; both The Spanish and The Romans experienced inflation in precious metals backed currencys. The Romans, under The Augustan Monetary System, had problems with inflation in a currency regime that was famously backed by both Gold & Silver. Admittedly, the problems they experienced had more to do with their coins being increasingly adulterated by alloy, reducing, for example, Silver content from 90% to 4% (can't recall how Gold was debased). However the end result was indeed inflation. Due to chicanery. So no, precious metals links DO NOT contravene basic human nature.



"I do not accept a priori that the IMF is an authority on all controversial financial matters."

Gee I don't know, we see lots of opinions here on MeFi. And of course, some opinions are backed up by citations to what for all accounts we can reasonably consider higher authorities. So take your pick. The IMF, of course, is but one view. However I'd consider the IMF far, far more credible than many of the blogs I've seen posted here in the finance threads as "evidence" of a view. Of course, typically the blog references are a lot more dramatic, shrill and emotive than dry, factual IMF opinion; its that damn dismal science at work again. Economics is usually boring when the professionals opine.


"Nonsense. The currency can be revalued with respect to the commodity at any time. For instance, the government of the U.S. has previously devalued the U.S. dollar with respect to gold from $20 an ounce to $35 and later lower."

Ah good point. I should have posted that the exchange rates couldn't have been changed without changing the commodity peg. And just to make sure we're both discussing the same details, the same events But we were talking about a commodity backed - stable currency!! How could this happen? Well, as you've correctly pointed out, the government and the government alone decided the value of the US Dollar. Nice one.

In other words, centralised control of the currency. Surely you can't be suggesting that after we refix the value of the US Dollar to Gold we employ a Command Economy, where the US Dollar's rate of exchange isn't determined by independent market participants, all taking their own view of the fair value of a currency, rather the rate of exchange is set by the government? The same government that issues the currency controls the value of the currency?

Let me say it again: nice one.


"I don't believe they were on a hard money system at that time."

Well, the point was a cornerstone of Modern Finance is that we all prefer increased wealth, NOT decreased wealth, comforted, of course, that our ever smaller paycheques will purchase more and more goods & services. However rational that approach could be, our brains aren't wired that way. We all want more resources, sadly, we're all greedy at heart. It's a biological thing, and finance has come far in acknowledging these fundamental drives.


"This is the beauty of gold: most of the gold ever mined is above ground. Despite all sorts of mining efforts, the gold supply has never in the past century ever increased more than a few percentage of the total."

Ah very interesting point. This spreadsheet (free registration required, chose "academic research" as profession) shows global reserves between 1948 and 2006.

In 1948 there were 30,182.6 tonnes above ground. In 2006 there were 30,383.8 tonnes above ground. But the reserves seemed to swing about some, reaching a high of 38,346.7 tonnes in 1965 or a change of roughly 26%. Indeed, from 2000 to 2006 we see a decrease in Gold reserves of some 8%, in just a seven year period.

Why? Nobody seems to know, industrial uses can't completely explain these swings, hoarding would already be accounted for. So apparently the Gold just appears, later to disappear? Or perhaps nobody knows just how much Gold there really is? After all, this is a rather large measurement problem.

So the question is, should we accept a commodity with such a high variance in known reserves as a base for the US Dollar? For the Euro? For a global currency? I don't think so. After all, the reason folks argue for a return to the Gold standard is for stability. Changes - unexplained changes mind you - in known reserves of some 8% in seven years, some 26% in 58 years hardly sounds stable.

Meanwhile, gold miners, folks in the industry, have another view, and have sharply increased their exploration budgets. Because of the higher prices, those who work in the field are risking their companys future prospects, their own jobs and in many cases (junior miners) their own personal fortunes, on bets that they will either discover new gold fields, or recover additional gold from existing fields. Either way the probable end result (assuming folks in the mining industry are behaving rationally that is) is more gold, more money chasing a limited supply of goods - a classic definition of inflation.


"There is no more reason for a government to go to war over gold under a gold standard than under a fiat system. "

Historically, many wars have indeed been fought over gold. Reason has nothing to do with greed. Nor for war, for that matter.

All the same, great points kevinsp8!posted by Mutant at 9:07 AM on April 8, 2008 [1 favorite]


I was looking through your post history, and I find it a little sad that you could say this so recently:

Of course there is. The ink-and-paper lobby is the reason why we haven't gotten rid of dollar bills, despite the fact that our dollar is worth far less than the Canadian dollar was in 1989, when their $1 bill was withdrawn.

and then turn around and argue that fiat money isn't a problem.

Wouldn't it be nice if dollar bills were, you know, worth printing? A 1970 dollar sure would be.... it'd be worth about 25 of the ones we're using now.

Now, we're a long way from Zimbabwe, but that's the exact same thing, in tiny print. There's no sound reason for currencies to be worth that much less. A dollar should be worth as much as it when it was printed. The inflation since, the 25-times devaluing of the money in your pocket, is wealth that has been invisibly stolen from you by the government and the banks over the last thirty years. Yes, your income has gone up over those last thirty years, but according to the Social Security Administration, it's increased about 6.25 times, from $6,186.24 in 1970 to $38,651.41 in 2006, the last year they seem to be reporting on.

If you had 6,186.24 1970 dollars in your pocket, that's 176.75 ounces, which would be worth about $160,000 today, assuming a $900/oz price. (it's a little higher right now, about $915.)

In 1970, the average house price was $23,400.00, about 3.75x the average wage. In 2006, the average house price was about $320K... and that's near the peak of the bubble. (I'd use 2007, but Social Security doesn't post that number yet.) In modern dollar terms, that's about 8.3x average earnings.

But if you take your 1970 dollars into 2006, they were worth, at the time, about $575/oz, or $100K... substantially more late in the year, peaking around $750, but somewhat less early on. $575 looks like a fair average price. So, lo and behold, in the height of a bubble, affordability in terms of 1970 dollars is actually a little better than it was in 1970.

I dunno about you, but I think an average adult wage of $160k in this country would be pretty damn nice. It sure beats $38,651.41. And that's assuming zero real wage growth... which, in an era of global deflation, might be too optimistic, but then again it might not.

We are being raped, just very slowly, so we don't notice.
posted by Malor at 9:34 AM on April 8, 2008


Why? Nobody seems to know, industrial uses can't completely explain these swings, hoarding would already be accounted for. So apparently the Gold just appears, later to disappear? Or perhaps nobody knows just how much Gold there really is? After all, this is a rather large measurement problem.

You know, I'm really starting to distrust you, Mutant. You work for the banks, so you should know perfectly well that the central banks of many nations were conducting coordinated sales of their gold all through the late 1990s; they had a special agreement, the name of which escapes me, so that they didn't all sell it at the same time and depress the price too much.

The gold didn't go anywhere. And I think you know that.
posted by Malor at 9:36 AM on April 8, 2008


You can start here.

That comment is a good description of what's going on (note the comment after it), but it doesn't refute my statement above: "This is in no way caused by the type of currency we use." The problem is the Fed's attempt to avoid any pain at all, and the tactics they've used to do so (so far).

Allowing something to happen and causing it to happen are two different things.
posted by oaf at 9:41 AM on April 8, 2008


I'm not really sure that an extreme outlier like Zimbabwe is really a valid datapoint when it comes to whether Ron Paul is crazy or not.
posted by Artw at 9:44 AM on April 8, 2008


But you don't have this flexibility if you're on a Gold standard. If you wish to sharply expand your monetary supply - to fight a war like Germany, or a depression as in Japan's case, you've got two options - seize more Gold thus expanding your money supply. Or abandon the Gold standard, and then expand your money supply (hint: devaluing is abandoning the standard, the fixed peg by another name). Can't have it both ways; your supply of money is fixed by your supply of Gold.

You say you can't fight wars on a gold standard, then you proceed to explain exactly how you can fight wars on a gold standard. Confiscate wealth. The only difference is with hard money, the populace immediately sees what you are dong and can react accordingly. Are you arguing against hard money because you feel countries ought to be able to fight wars that their own citizens oppose, and fiat money printing is a sneaky way to subvert democracy to that end?

I take your point that gold can be subject to cheating. Not a perfect form of hard money, but better than anything else ever tried (can be weighed and assayed, virtually indestructilbe).

>Economics is usually boring when the professionals opine.

Boring doesn't equal correct. But I agree that reasoned argument should be preferred to shrill grandstanding.

Surely you can't be suggesting that after we refix the value of the US Dollar to Gold we employ a Command Economy, where the US Dollar's rate of exchange isn't determined by independent market participants, all taking their own view of the fair value of a currency, rather the rate of exchange is set by the government? The same government that issues the currency controls the value of the currency?

I have read people argue both ways on this one, either allowing the market to create and control money, or having the government do it. I don't know which would be better. I think we both agree that even on a gold standard, the government can revalue the currency if it chooses. I would argue that it should generally choose not to, as this distorts economic decisions, but at least if it does so, it's obvious what it's done, and citizens can react as they see fit. Inflating a paper currency, however, is insidious and results in 'mysterious' inflation.

However rational that approach could be, our brains aren't wired that way. We all want more resources, sadly, we're all greedy at heart. It's a biological thing, and finance has come far in acknowledging these fundamental drives.

I think most people in Zimbabwe would like lower salaries which which they could actually buy something.

>Ah very interesting point. This spreadsheet (free registration required, chose "academic >research" as profession) shows global reserves between 1948 and 2006.

These (I believe) are gold reserves held by governments. Gold is found in other forms (jewellery, private holdings), and will come out at the right price. Very little gold disappears. Total mining production each year is and can only be a small fraction of the total above-ground supply (unlike silver, which gets used up in industry and isn't worth recovering). Governments are always changing their reserves, buying and selling to other countries or individuals. This needn't change its value, as paper money on a gold standard generally operates on a fractional reserve system.

So the question is, should we accept a commodity with such a high variance in known reserves as a base for the US Dollar? For the Euro? For a global currency? I don't think so.

Fiat money is backed by... faith. The supply of this is notably unstable. While gold is an imperfect standard for stable money, I have seen none better.

Either way the probable end result (assuming folks in the mining industry are behaving rationally that is) is more gold, more money chasing a limited supply of goods - a classic definition of inflation.

Well, the gold supply inflates at, say 2% per year, and the goods the world produces increase at, say, 3%... I'm failing to see a problem here. I'm not arguing that hard money creates perfect price stability, just much more price stability.

Historically, many wars have indeed been fought over gold. Reason has nothing to do with greed. Nor for war, for that matter.

Well, gold can be exchanged for paper at the rate of $900 an ounce, so why is no country going to war to conquer South Africa right now? I note Iraq has few gold deposits.
posted by kevinsp8 at 9:55 AM on April 8, 2008


I should retract part of that last statement -- banks are big entities, and you wouldn't automatically know what other parts of the same bank is up to, much less other banks. I'm holding you responsible for knowing something that you could easily not know.

That said, however, that argument is incredibly disingenuous. You're saying that these banks, who are to be trusted with the complexities of managing a world economy, of handling derivatives of such complexity that they make math majors weep, of understanding, managing, and transferring risk in ways that boggle the mind.... aren't capable of counting coins?

That has to be among the most ludicrous arguments I've ever seen.

They should come up with Banker Barbie... "Inventory is haaaard!"
posted by Malor at 10:00 AM on April 8, 2008


The gold standard causes inflation... of comments!
posted by Artw at 10:23 AM on April 8, 2008 [2 favorites]


I'm not arguing that hard money creates perfect price stability, just much more price stability.

I'm not sure that's a safe argument to make. I don't think hard money will produce price stability. What it will produce is overall economic stability, by correctly sending signals through the economy as supplies of various goods and services change. It prevents maladjustments from getting too severe.

Price stability is a bad thing to try for, because supplies of many goods wax and wane, and that should be communicated in pricing. Managing for price stability, in fact, is exactly what got us into this hideous mess, because prices SHOULD have been declining, sharply, from the deflation of labor in a global economy. The Fed managed for price stability, and injected huge amounts of money into the system to offset the deflation they clearly saw.

Managing an economy is a bad idea, whether the Fed or the Politburo is doing the managing. Nobody is omniscient. Putting too much power in too few hands has been a bad idea every single time it's been tried. Price stability should be an accidental outgrowth of sound money, not something that's manipulated for. Anytime you push on an economy, you get weird results in unexpected places, so the best possible idea is not to push at all.

I'm quite sure the Fed was acting in good faith, but it was an error of unprecedented magnitude, and has gotten us into an equally staggering mess. Two billion dollars a day in trade deficit (I think it's more now, actually), a fifty trillion dollar government debt, two enormous, deflating manias with the unhandled residue of a third, gigantic ongoing fixed expenditures that far exceed our income, foreign dollar holdings in excess of six trillion dollars, and two simultaneous wars to boot.

And yes, I'm somewhat hyperbolic, but think about those numbers... if there has ever been a time worthy of frantic screaming and handwaving, this is it. This is destruction-of-way-of-life material, not just routine dry economic jargon.

When I contrast the US with Zimbabwe, it is not at all far fetched. We're doing the same thing they did; living far beyond the ability of our economy to support. The results probably won't be identical, but they're going to be equally unpleasant.
posted by Malor at 10:23 AM on April 8, 2008


Good point, Malor, I stand corrected.
posted by kevinsp8 at 10:25 AM on April 8, 2008


I'm sorry, I know I'm late to the party, but I had to say that this sentence about the out-of-control behavior in equities markets in the 1920's...

And what was worse than the unrealistically low margin requirements, folks could borrow the necessary deposit money from their broker to purchase securities. THE SAME BROKER YOU'D BUY THE SECURITIES FROM. Meaning all you needed was a view on the markets and a broker and you too, could load up on all the securities your tolerance for risk (or broker) would allow. No need to pony up your own cash, no messy credit checks. Worse case - you'd lose your securities. That you purchased with 100% credit.

...could easily be re-written like this to describe the out-of-control housing market in the early 2000's...

And what was worse than the unrealistically low margin down payment requirements, folks could borrow the necessary deposit money from their broker mortgage lender to purchase securities houses. Meaning all you needed was a view on the markets pulse and a broker and you too, could load up on all the securities houses your tolerance for risk (or broker) would allow. No need to pony up your own cash, no messy credit checks. Worse case - you'd lose your securities houses. That you purchased with 100% credit.

(Okay, so that last bit only really applies in states with non-recourse mortgages. But California, home to the biggest part of the bubble, is one of them!)

And this, I had to say, just made me giggle...

The SEC had no teeth back then; banks were getting away with all sorts of conflicts of interest...lending money to [their own] retail [operations] crowd to purchase securities, holding positions as they hyped up the shares and selling at the top, on and on. All sorts of crazy stuff, totally out of control, total madness. Indeed, Galbraith's view is reinforced by passage of The Securities Act of 1933 and further tightening in The Securities Act of 1934, both of which laid the foundations for the highly regulated system we've got in place today.

The more things change... Requiet in Pacem, Glass-Steagal! Hello, attempts at a super-SIV, the underhanded 'rescue' of Bear Stearns, the most recent attempts to qualify student loan debt as AAA-rated securities for use at the Fed window, etc...

The more I read lately, the more I think our uber-pessimistic friend Malor is right. No offense, Malor, but this makes me very sad.
posted by Asparagirl at 10:47 AM on April 8, 2008


Malor -- "I would argue that virtually all of the financial 'developments' since then have been abstractions of debt, designed to extract value from the economy without providing real value in exchange.... "

Well, the way you've phrased it makes it difficult to prove the point, but let's see how I do. So I don't agree that "virtually all" developments are bad. A few, sure. But the greater majority? Virtually all? No way.



"We don't actually need most of the financial systems from post-1970, particularly the leveraged speculation community, which is purely about extracting value from the economy. "

Ok, would you care to outline what this deleveraging you're suggesting would do to the economy? I've got a very good idea, but this is your position so I'd like to hear yours. What would the size of this deleveraged economy be? How flexible? The impact on jobs? On food prices? On commodity prices in general? And how tumultuous? Again, I don't want to put words in your mouth so please indulge me.


"...because currency trading is absolutely zero sum, every time. Every single time they win, the rest of us lose, and we didn't get a damn thing for it."

Please provide an illustration of how "the rest of us lose" when an American farmer, expecting to be paid in Canadian Dollars for her crops, engages in currency speculation to fix the US Dollar / Canadian Dollar exchange rate, thus locking in a future profit. The only person that loses in that trade is the speculator on the other side, who has the opposite view of the end exchange rate. Your statement "the rest of us lose..." is flat out wrong.


"Wall Street should be modeled after Warren Buffett, who builds things, but instead it's modeled after George Soros, who takes them from other people."

Again, not true at all. Bombastic to be sure, but neither Wall Street nor The City (in London, where I work) is modeled after Soros. There are most certainly market participants who strive to trade as Soros perhaps used to, but by the same token there are no shortage of folks that seek to emulate Buffett. So this blanket statement, this indictment of an entire industry, is NOT true across the board.


"Keynes' ideas are failing. They weren't good in the first place,..."

Another question - what specifically about Keynes ideas do you consider not "good"? And which are "failing"? I'm sure you're aware that Keynes' ideas aren't his alone, that there is an entire school of economics, of thought based around what you're attributing to him and him alone.


"You can see it already, in places. Visit Detroit sometime. Detroit was the center of our manufacturing power, and it looks like a second-world country now. Virtually all of that destruction has happened since 1970, and I don't believe that's a coincidence."

What happened in Detroit isn't explainable solely by fiat currencies; mismanagement had something to do with it. Union strong arming had something to do with it. The emergence of incredibly cheap manual labour in India and China had something to do with it. The list goes on and on. Make sure you include shitty ass, unreliable cars some where in there. Detroit killed itself. The US Dollar didn't kill Detroit.



"The actual amount of the commodity isn't that important, although a very small amount would be subject to rapid fluctuations, which would be pretty disruptive. We'd want something that there's a lot of and which has a predictable supply."

Yeh, only problem is I've presented a spreadsheet showing the known reserves of Gold bounce about a great deal (reasons explained below).


"...the vast majority of the regulation in financial markets is about increasing the honesty and transparency of those markets. Why on earth wouldn't you want a bedrock truth supporting the rest of the system?"

Because that bedrock truth DOES NOT EXIST. See the references to Gold above. I don't consider 26% variance or a fifty year term, an 8% change over a seven year term to be indicative of financial "bedrock". But then again, I work in finance so maybe I've got different standards when it comes to money than most folks (I'm terribly frugal, by the way ... )


Malor -- "You know, I'm really starting to distrust you, Mutant. You work for the banks, so you should know perfectly well that the central banks of many nations were conducting coordinated sales of their gold all through the late 1990s; they had a special agreement, the name of which escapes me, so that they didn't all sell it at the same time and depress the price too much."


Wow Malor. Now that's one way to avoid answering difficult questions! Of course the other way you've employed before is to ignore them. You've ignored about half a dozen since I started posting in the MeFi Finance threads. Well, never to worry. Someone else cooperatively explained what happened, corroborating what I learned since posting. Thanks for your comment though.



kevinsp8 -- "Are you arguing against hard money because you feel countries ought to be able to fight wars that their own citizens oppose, and fiat money printing is a sneaky way to subvert democracy to that end?"

Of course not. Commodity based currencies are inherently inflexible. The right or wrong of war has nothing to do with my point. Hard money is too limiting, as we found out during the Great Depression. Read my prior post; Japan dodged the Depression. American didn't. Japan dropped the Gold standard. America didn't. Japan's response was flexible. America's wasn't.


"...but at least if it does so, it's obvious what it's done, ..."

Maybe so, but it took The Romans about a century to figure out what was going on with their currency, and they were a rather clever bunch. So maybe it is obvious, but obvious only in hindsight?


"I think most people in Zimbabwe would like lower salaries which which they could actually buy something."

But you're avoiding the point. How would you want to live? With a shrinking paycheque? Every year, perhaps every month your take home pay goes down a little bit? Living in the hope that prices decline as well? Never receiving a pay increase as the overall trend is DOWN. No, we still have much to learn about humans and finance, but we do know our brains are programmed so we prefer increased wealth, not decreased. Its tied to parts of our emotional brain that causes us to feel happy. By increased wealth. That's one of the reasons why otherwise reasonably intelligent folks get scammed, or caught up in investment bubbles. We all prefer increased wealth to decreased wealth.



"These (I believe) are gold reserves held by governments. Gold is found in other forms (jewellery, private holdings), and will come out at the right price. Very little gold disappears."

Sure, I suspected that as well and researched more after posting. Their web site actually tracks supply & demand statistics for 2006/07. If we add these together to the baseline data we're actually close - only about 0.04% of the gold disappears, so I'm fine with that.

But looking closely we see that in 2006 alone about 11% of the identified reserves are in private hands. If this explains prior swings, then as much as 26% of Gold was in private hands in 1965. How can a currency be based on a commodity when the entire supply isn't totally controlled? How would a new Gold standard account for this? Would private ownership be outlawed (again) in the United States? Globally, when we can't even agree on climate control or outlaw whaling? Sure, maybe the G20 could agree, but what about the Developing Nations? The non Aligned Nations? Those that are totally hostile to Western values? I'm sorry, but the entire exercise seems very, very messy, very academic.


"Fiat money is backed by... faith. The supply of this is notably unstable. "

Not all fiat currencies and not in all times. The Deutsche Mark (now Euro) is a good example of a strong, relatively stable currency.


"Well, gold can be exchanged for paper at the rate of $900 an ounce, so why is no country going to war to conquer South Africa right now?"

At least two reasons that I can immediately think of. First Gold at $900 an ounce is cheap in real terms, far cheaper than it was during the last speculative peak in the 80's (I'm still long btw, not so much adding to my Gold position as I am Silver, for my own reasons). Secondly, if we could put Gold to immediate and pervasive use - as we can oil - then I suspect there would be wars over Gold. Again.
posted by Mutant at 11:01 AM on April 8, 2008


A 1970 dollar sure would be.... it'd be worth about 25 of the ones we're using now.

By which you mean that if you bought a dollar worth of gold in 1970 it would be worth $25 now?

By that twisted logic, a dollar in 1997 is worth about $200 current dollars, because you could have bought Apple stock.
posted by ROU_Xenophobe at 11:20 AM on April 8, 2008


Aspargirl -- "The more things change... "

More properly, as I've posted many, many times on MeFi, they go in cycles. So everything old is new again.

If you've been a life long student of the markets or studied the history of finance you don't really see new things; just variations on old themes, the same old problems we've struggled with - and overcome - before.

The current credit crisis? Zimbabwe? We'll get through them like we have other crisis'. In spite of the bombast, the grim predictions of uncertain times ahead, I'm always reminded of a quote I picked up when I first started working in this business, during a US Government Bond market meltdown, when I asked why anyone would go long in this market - my boss at the time deadpanned me and asked

So when have times never been uncertain?
posted by Mutant at 11:25 AM on April 8, 2008


Commodity based currencies are inherently inflexible.

It seems to me that U.S. was mostly on some form of peg to gold up until Nixon removed it in the 70s. And went from an infighting colony to a superpower. Perhaps inflexibility isn't so bad. Perhaps 'flexibility' is akin to 'instability', 'unpredictabillity'. Mugabe was a little too 'flexible' with property rights. Investors and entrepreneurs make malinvestments when they can't predict the money supply.

Japan dodged the Depression. American didn't. Japan dropped the Gold standard. America didn't. Japan's response was flexible. America's wasn't.

This proves correlation (sample size=2) but not causation.

but it took The Romans about a century to figure out what was going on with their currency, and they were a rather clever bunch.

Perhaps they didn't have electronic scales and other accurate weights and measures then.

But you're avoiding the point. How would you want to live? With a shrinking paycheque? Every year, perhaps every month your take home pay goes down a little bit? Living in the hope that prices decline as well?

Hard to say as I've never experienced it, but you could turn the question around... how would you like to live with constantly rising prices, living in hope your paycheque increases as much? Are people really so simple that they'll buy that amp 'cause you can turn it up to 11?

Its tied to parts of our emotional brain that causes us to feel happy. By increased wealth. That's one of the reasons why otherwise reasonably intelligent folks get scammed, or caught up in investment bubbles. We all prefer increased wealth to decreased wealth.

Yeah, that's kind of what I'm arguing here, citizens get scammed by their governments cause all the money has more zeros on it. Works for a while, but there's a price to pay, and an endgame.

How can a currency be based on a commodity when the entire supply isn't totally controlled?

Why do you assume it has to be? The point of a gold standard (and I think Malor grasps this concept better than I) is that it's self-adjusting.

Not all fiat currencies and not in all times. The Deutsche Mark (now Euro) is a good example of a strong, relatively stable currency.


I agreed previously that one could have stable money without resource backing, and certainly a country that suffered like Germany because of hyperinflation would have the experience of history to encourage them not to inflate... as the U.S. dollar falls it will be interesting to see what European central bankers choose to do... I think they'll find there's a cost to not inflating along with the U.S., and end up doing it. Fiat currencies sometimes last quite a while... but none has been real money as long as gold.

if we could put Gold to immediate and pervasive use - as we can oil - then I suspect there would be wars over Gold. Again.


Perhaps. But then, you argued that with a gold standard it's too hard to raise armies to fight, so perhaps it all balances out. The peg to gold went out in the 1970s, when was the last war over gold?
posted by kevinsp8 at 11:34 AM on April 8, 2008


By which you mean that if you bought a dollar worth of gold in 1970 it would be worth $25 now?

Dollars were gold in 1970. 1 dollar was 1/35th of an ounce. That's how they were defined.

By that twisted logic, a dollar in 1997 is worth about $200 current dollars, because you could have bought Apple stock.

Except in unusual times, gold isn't an investment, it's just a fairly permanent store of value. You're nearly always better putting money to work, instead of just sitting on it. But if you had exchanged 35 dollars for one ounce of gold in 1970, and then exchanged it for dollars again now, it would now be worth about nine hundred.

The average wage in 1970 was a little more than 175 ounces of gold per year. Argue all you like, but that's how wages were defined; wages were in dollars, and dollars were gold. Think about that a minute. 175 ounces of gold ON AVERAGE, which means normal factory workers. There are many highly-paid professionals nowadays that don't make that much.

Think about it from another angle; that ounce of gold has been sitting in a drawer somewhere for thirty years, doing nothing but gathering dust, but now you can get 25 times as much for it. That's not because it's worth more, but because everything else is worth LESS. If you had invested in Apple, in other words, your REAL return was about 36 times, not nine hundred. (which is still very solid performance, no quibbles there.) But with Apple, you ran many risks of failure; with gold, you had only the risk that you might lose it, easily offset with good storage. No risk of default, no risk of bankruptcy, just a coin sitting there.

There's a reason we're so deeply in debt to maintain our accustomed standards of living; it's because our real earnings have dropped dramatically. There's a reason why we can't afford to fix our damn roads and pay our damn bills, and it's because our wealth is being siphoned away from us. We are bleeding wealth, have been for thirty years, and our anemia has progressed to the point that we're having heart attacks.

And people actually argue, fervently, that this is a good thing, while their country is bankrupted around them.
posted by Malor at 11:50 AM on April 8, 2008 [1 favorite]


Malor: Here's something I don't understand about gold. How do you account for the speculative aspect of it. For instance, gold since 2001 has rised, let's say, 30% a year. Yet by no measure has inflation increased that much. You could argue, well, gold was undervalued before that. But then if gold can be undervalued so much, how can it be said that it's such an infallible measure of value? "Gold manipulation!" people say, but that's a bit facile.

In 2001, your ounce of gold was worth, in nominal terms, perhaps 3.5 times as much as it was in 1970, and in real terms lost you a lot (inflation was much greater than that).

I see your point about much much wages have decreased in terms of gold since 1970. But we're in a bit of a parabolic spike right now... if gold were, say, back to $400 an ounce, as it was a couple years ago, the wage would be $70000, which sounds more realistic.

I posit: gold is actually overvalued now, as people are flocking to it due to loss of faith in paper money.
posted by kevinsp8 at 12:00 PM on April 8, 2008


What happened in Detroit isn't explainable solely by fiat currencies; mismanagement had something to do with it. Union strong arming had something to do with it. The emergence of incredibly cheap manual labour in India and China had something to do with it.

The fact that Detroit automakers now build cars almost solely to pay their retirees' benefits has a lot to do with it.
posted by oaf at 12:02 PM on April 8, 2008


There's a reason why we can't afford to fix our damn roads and pay our damn bills, and it's because our wealth is being siphoned away from us.

I'm not sure that follows. Inflation redistributes wealth, from savers to debtors, and from taxpayers to the government ("the inflation tax"). If anything, government should be bloated and able to do whatever the heck it pleases (which it is). If it chooses wars and roads over paying off debt and building roads, that's nothing to do with it not having any funds.
posted by kevinsp8 at 12:05 PM on April 8, 2008


gold is actually overvalued now

And that's part of the problem—gold is worth what it is for the same reason a dollar is worth what it is.
posted by oaf at 12:11 PM on April 8, 2008


kevinsp8 -- "It seems to me that U.S. was mostly on some form of peg to gold up until Nixon removed it in the 70s. And went from an infighting colony to a superpower. Perhaps inflexibility isn't so bad."

Sure, if you've got an industrial economy that's spot on. A Services oriented economy like the United States and most of the G20 have need advanced economic tools. Commodity based currencies don't provide enough flexibility and, as previously posted, devaluing is hardly maintaining a stable currency. That drop from $20/oz to $35/oz was painful. All your inflation in one (unhealthy) dose.

"This proves correlation (sample size=2) but not causation. "

Actually, the book cites multiple examples. I only illustrated Japan as I could find free citations on the web. So the sample is much higher than two, but I'd suggest grabbing a copy of the book and reading it for yourself. The conclusion is clear - every country that remained on the Gold standard during the Depression suffered horribly. Those that either weren't on it to begin with, or dropped out either totally dodged it or suffered less.


"Perhaps they didn't have electronic scales and other accurate weights and measures then."

Wait - you're proposing that paper currency be retired in favour of coins? Wow, interesting.


"Hard to say as I've never experienced it, but you could turn the question around... how would you like to live with constantly rising prices, living in hope your paycheque increases as much? Are people really so simple that they'll buy that amp 'cause you can turn it up to 11?"

Dude, I'm frugal. Run my affairs so I can bank 85% of each paycheque. Its' the way we all used to live. It's the way we all should live. So I'd be indifferent. But if you flip it about it's nonsensical; one of the fundamental lessons we've taken away from the nascent science of behavioural finance is that we prefer increased wealth, not decreased . We can't change this. I haven't seen any research saying why this is so, but we know it is. So flipping it about just avoids the entire question / problem. Folks won't live in an era of diminishing horizons.


"Why do you assume it has to be? The point of a gold standard (and I think Malor grasps this concept better than I) is that it's self-adjusting."

Well, we saw that in 1965 only 75% of Gold was controlled by governments. The rest in private hands. So let's assume the United States has a stable Gold backed currency. What happens if the missing 25% of known reserves (not to be confused with reserves to be discovered in the future, your musings about "peak Gold" aside) suddenly showed up on your border? What hilarity would ensue as a hell of a foreigners started to buying stuff? How would you control inflation then? Money supply just increased by 25%. No, you can't under those circumstances.


"as the U.S. dollar falls it will be interesting to see what European central bankers choose to do... I think they'll find there's a cost to not inflating along with the U.S., and end up doing it."

I tend to agree with this point, and have seen the problem since 2004 when I first assumed my Gold positions. There are some interesting times ahead. But let's widen the discussion somewhat, as finance these days is global. My view (and I'm arranging assets accordingly): ECB won't inflate as much, if recent events are any guide. BOE I'm not so sure about, prolly will do what the US asks / expects, especially so as I think we're close to the top of the Sterling / Dollar trade (Sterling is gonna fall on its own, no matter what The Fed does/doesn't do). BOJ probably nothing at all in response to US actions - see next point. China is a wild card, as is India but we're biased down in these markets. And Russia? Awash in petrodollars, hostile to US interests, perturbed about NATO expansion, still aggrieved about loss of empire? I don't know how to play that one, but lets just say I'm not putting any of my money into Eastern Europe, not even new EU entrants. And there are some damn good deals out there, especially so if you're liquid and the leveraged folks drop out.

But more germane to your point, after this The United States economy will emerge stronger and more resilient. But it will be painful.

Ok, I'd love nothing more than to dive into this thread all night, but I was working in New York for the last eight days (Mrs Mutant & I made it to a meetup!), returned Sunday night and idiot that I am, I went straight to work. So I'm more than frazzled, probably on Iceland time (aint' EST or GMT) and have to finish cooking Mrs Mutant's dinner then I'm down - I'll pick up tomorrow as and when I can.

Thanks for a great thread guys!!
posted by Mutant at 12:16 PM on April 8, 2008


Run my affairs so I can bank 85% of each paycheque.

If you can do that, you have a fairly high income to begin with.
posted by oaf at 1:30 PM on April 8, 2008


>A Services oriented economy like the United States and most of the G20 have need advanced economic tools.

So you'd be OK with, say, Zimbabwe having a commodity-based currency?

>Actually, the book cites multiple examples. I only illustrated Japan as I could find free citations on the web. So the sample is much higher than two, but I'd suggest grabbing a copy of the book and reading it for yourself. The conclusion is clear - every country that remained on the Gold standard during the Depression suffered horribly. Those that either weren't on it to begin with, or dropped out either totally dodged it or suffered less.

If you're speaking of The Great Crash by Gailbraith, allow me to quote from it:

"As noted, it is easier to account for the boom and crash in the market than to explain their bearing on the depression which followed. The causes of the Great Depression are still far from certain. "

As a counterpoint, let me suggest Gold: The Once and Future Money by Nathan Lewis. In it, he argues that while booms and busts are expected with capitalism, the depression would have been harsh and brief if it weren't for what the government tried to do to 'fix' it. This included raising taxes and tarrifs, despite what Keyes advocated in General Theory, as well as all sorts of 'central planning' edicts like wage and price controls and production quotas.

"Much has been written about finance minister Koreikyo Takahashi's apparently proto-Keynesian program of yen devaluation... but little attention has been given to the fact that Takahashi refused to raise taxes, as virtually every other major government had done, arguing that thax hikes would worsen the economic downturn... Japan also did not reciprocate in the worldwide tariff wars... The Fed did exactly what it should have done in the 1930s: assuage potential liquidity-shortage problems while remaining solidly fixed to the gold standard. This was the conclusion of economists at the time as well... Currencies around the world were... devalued... it didn't do much good."

Wait - you're proposing that paper currency be retired in favour of coins? Wow, interesting.

Good point. That's a rebuttal I could have used against your objection to the gold standard on the basis that Romans were fooled by adulterated coins: coins are no longer needed.

But if you flip it about it's nonsensical; one of the fundamental lessons we've taken away from the nascent science of behavioural finance is that we prefer increased wealth, not decreased . We can't change this. [...]Folks won't live in an era of diminishing horizons.

Well, except folks did, when most of the world was pegged to gold until the 70s. I recall no laments from this lengthy time about life must be getting worse because prices were stable. I do recall laments from the 70s about how inflation was destroying the economy, people's savings, people's purchasing power, and people's inability to live on fixed incomes. In fact, I read of the President speaking to the nation about a crisis of confidence in the country. Was this all psychological aberration?

What happens if the missing 25% of known reserves (...) suddenly showed up on your border? What hilarity would ensue as a hell of a foreigners started to buying stuff? How would you control inflation then? Money supply just increased by 25%.

And equally, foreign investment by means of any currency causes prices to change. What's your point? In any case, arguing that a fiat currency is better than a gold standard because it is possible to have inflation with gold rather doesn't address the objection the fiat currency is much more liable to inflation.

And Russia? Awash in petrodollars, hostile to US interests, perturbed about NATO expansion, still aggrieved about loss of empire? I don't know how to play that one, but lets just say I'm not putting any of my money into Eastern Europe, not even new EU entrants.

As Soros says in his latest book, "I don't discuss Russia because I don't want to invest there."

>But more germane to your point, after this The United States economy will emerge >stronger and more resilient. But it will be painful.

Time will tell. I agree with your silver play, but you're really bearish on China and India in the long term?
posted by kevinsp8 at 1:39 PM on April 8, 2008


# TIPS, or Treasury Inflation Protected Securities allow holders to protect themselves from inflation. Sounds like a real value (in more ways than one) is received by the owner of such bonds. These were first offered by The Treasury in 1997 (but probably existed in some form before then).

Calling this a positive development due to fiat money is like saying that firefighting is a positive development from arson. If you don't have monetary disorder, you don't need to measure the monetary disorder and try to compensate a few of the losers. (further, these securities are largely worthless; the government has recently put very sharp caps on how many you can own, and further, the official government inflation numbers are bogus anyway, which we have already discussed and agreed about.)

# The growth of the commercial paper market during that period is remarkable; n 1971, outstanding commercial paper totaled about 4% of bank loans, but by 1991 this ratio had increased to nearly 17 percent. So cheaper financing and more choise - sounds like a winner to me.

Sure, it looks great to you. More money, yay!

But it's NOT more wealth, not really. This is exactly what's wrong. We go around and around about how the money supply is all fucked up, and here's one of the biggest indicators... commercial paper isn't regulated like banks, and it's one of the sources of the new bullshit liquidity. You talk about how the banks are so regulated, but then you point at numbers like this, showing how irrelevant that is.

In that paragraph there, you're praising all the wonderful heat we're getting from arson.

Small investors weren't left out either, Money Markets deposits as a share of retail savings increased from essentially zero to almost 40% between 1975 and 1991. Higher interest rates, breaking the stranglehold of banks, giving smaller savers alternatives, choices - what's not to like? So I'll call that a winner.

Ok, on this one, I agree with you. I would also call this a clear winner. I see no downside. So yes, that's a positive development since 1970, but I don't think it's one that requires fiat money to happen. I think that would work just as well with commodity money.

Asset backed securities -- hah, better not mention those as we'd likely not agree. But I can present an eloquent and well researched view these do in fact add benefit. IF properly managed that is.

Well, we've gone around and around on those already. In my view, those are THE central problem. They are the matches and the gasoline that the arsonists are using.

Please provide an illustration of how "the rest of us lose" when an American farmer, expecting to be paid in Canadian Dollars for her crops, engages in currency speculation to fix the US Dollar / Canadian Dollar exchange rate, thus locking in a future profit. The only person that loses in that trade is the speculator on the other side, who has the opposite view of the end exchange rate. Your statement "the rest of us lose..." is flat out wrong.

In every currency trade, there's a winner and a loser. Guaranteed. The currency speculators pull enormous sums of real value out of the economy and give very little back. At least, with real commodities, they provide a floor-and-ceiling service for pricing, but there's no reason for currencies to float like that in the first place, so we're paying these gigantic sums, real value, for absolutely nothing in return.

To go back to the farmer: he shouldn't need to worry about Canadian versus US dollars, because the exchange rate should be essentially fixed at all times. He has to buy insurance -- pay a speculator -- to protect against a loss that would be impossible with sound money.

You're expecting Joe Farmer to pay for fire protection from the arsonists, and you're using the existence of fire insurance companies as evidence that arson is good.

With floating currencies, we all lose. We take losses we shouldn't take. We can protect ourselves against them by buying 'insurance', but it's a loss that should virtually never happen to begin with.

Because that bedrock truth DOES NOT EXIST. See the references to Gold above. I don't consider 26% variance or a fifty year term, an 8% change over a seven year term to be indicative of financial "bedrock". But then again, I work in finance so maybe I've got different standards when it comes to money than most folks (I'm terribly frugal, by the way

This, sir, is a bullshit argument, top to bottom. You are asserting that banks are too irresponsible to be able to take inventory. Somehow, INVENTORY is too hard a problem for them to solve, but they're supposed to be in charge of MONEY?

I'm having trouble thinking of how to communicate just how stupid I think this argument is. It's so profoundly, unbelievably dumb that it stuns me. This is what prompted my 'distrust' comment above. You can't POSSIBLY be making this argument honestly.

If you actually are, if you actually believe this... if you think banks are too stupid to manage inventory, why the FUCK do you praise them to the skies and want them so central to the economy? You have a disconnect the size of Kansas here.

Another question - what specifically about Keynes ideas do you consider not "good"? And which are "failing"? I'm sure you're aware that Keynes' ideas aren't his alone, that there is an entire school of economics, of thought based around what you're attributing to him and him alone.

The entire concept that economies and money need to be managed by some central authority. Mint and currency services, sure. Guarantees and regulation to ensure open and financial markets, absolutely... that's utterly required, in fact. But Keynes' fundamental idea that we should actively manipulating the economy from a central source is extremely destructive.

Ok, would you care to outline what this deleveraging you're suggesting would do to the economy? I've got a very good idea, but this is your position so I'd like to hear yours. What would the size of this deleveraged economy be? How flexible? The impact on jobs? On food prices? On commodity prices in general? And how tumultuous? Again, I don't want to put words in your mouth so please indulge me.

Jobs based around the manipulation of currency would evaporate. That means a lot of Wall Street, but we don't really need most of Wall Street anyway. Some of it, sure, but nothing like what we have now.

You have confused the modern economic system, which is largely based around endless supplies of paper, with a real one; you think that pushing the paper around creates wealth. Sometimes it does, but only when it makes us more efficient/better at making things, improving our standard of living. Wealth is, fundamentally, physical things. Knowledge is incredibly useful, absolutely central to progress and improvement, but it's not directly wealth. Investment allocation mechanisms generate wealth only insofar as they make us better at producing things. We have gotten profoundly worse at producing things since we went to fiat money, and I'm quite certain these things are closely linked.

The fallout from deleveraging and going back to honest money would be enormous, on the order of the Great Depression. But if we don't, the ultimate result will be even worse; we'll end up as Zimbabwe.

We don't have good options.

So this blanket statement, this indictment of an entire industry, is NOT true across the board.

No blanket statement is true of any industry, but all you have to do is look at the damn stock market's reaction to news to realize that it has nothing to do with investment anymore. It's turned into a gigantic casino. Even you have used that specific wording, and you realize just exactly how pervasive that culture is. Wall Street is mostly speculation these days, with far fewer investors than it needs, and it's corrosive.

What happened in Detroit isn't explainable solely by fiat currencies; mismanagement had something to do with it. Union strong arming had something to do with it. The emergence of incredibly cheap manual labour in India and China had something to do with it. The list goes on and on. Make sure you include shitty ass, unreliable cars some where in there. Detroit killed itself. The US Dollar didn't kill Detroit.

Oddly, I agree individually with every sentence in there, but I still disagree with the conclusion. Detroit is a symptom. That's what the REAL economy looks like. The bullshit speculative empire that's been built on its corpse is falling apart; it's a house of cards with little real wealth generation capability. Detroit is just the worst of it, but I think a great deal more of the country is going to end up looking the same way.

Going back to Japan and the Great Depression:

It's no surprise that countries whose currencies were not tied to Gold, or who abandoned the Gold standard suffered far, far less than the United States, Britain, all countries that maintained the commodity link.

They also suffered less because they had less boom before. Less boom equals less bust.

Note also that, once we recovered -- having stayed on the commodity money system, we became an unbelievably vast superpower, with economic output that equalled the entire rest of the world. All we needed was a jumpstart; after a decade of suffering, the economy had become incredibly efficient. Those wimpy wishful thinking economies couldn't even come close to keeping up with us; all of them combined couldn't.

From great pain, comes great rewards.

How can a currency be based on a commodity when the entire supply isn't totally controlled?

A currency is just a guarantee. Originally, miners would take raw gold to the Mint, and would receive coins in exchange, less a percentage for the cost of smelting and coining. I think the fee was a few percent, but not too bad. All the Mint was doing was guaranteeing a standard of purity and weight for a particular commodity, and was charging a fee for doing so. This is an excellent function of government, but can be handled privately as well.

When you have paper markers for the currency floating around, or checks, the fact that some gold is in private hands is entirely irrelevant. THIS piece of paper is convertible into gold. As long as that promise is good, it doesn't matter who else has gold or in what quantity. Gold can trade privately or it can trade publicly. It doesn't matter. A paper currency is a different form of guarantee of weight and purity, but it's still the same basic idea as coins.

Money is just the most commonly-accepted commodity. All the later fictions piled on top are just ways for people who manipulate money to extract value from the economy in exchange for, basically, nothing. The currency supply doesn't need to be managed, it just needs to be an absolute guarantee. If you hold a bill, it needs to be an absolute that you can convert it into the commodity, even if every other person on the planet decides to cash in their currency at the exact same time. From there, it handles itself.

Managing the money supply is like managing the soap supply. If there's not enough soap, more will be produced. If there's too much, less will be made. Money works the same way, and there can be multiple kinds of thing that function as money, because there are multiple commodities that would work just fine. If gold got scarce or oversupplied, people might trade in silver or copper or, hell, computer chips or something.
posted by Malor at 3:14 PM on April 8, 2008


oaf -- "Run my affairs so I can bank 85% of each paycheque.

If you can do that, you have a fairly high income to begin with."


Oh my gosh - critical thinking skills!! I've told you income (in proportional terms); aren't you missing the other side of the equation, cost? Of course you are. As previously posted, Mrs Mutant & I live very cheaply, well below our means. We live absolutely, not relatively. So with our mindset, its not tough to save such a high percentage of take home.



Malor -- "Calling this a positive development due to fiat money is like saying that firefighting is a positive development from arson."

Hold on Malor, please don't backtrack from your earlier edicts. You stated, very clearly, "I would argue that virtually all of the financial 'developments' since then have been abstractions of debt, designed to extract value from the economy without providing real value in exchange.... "

The operative phrase here, the usual dramatic, over the top statements, that (as always it would appear) have little backing except for your own opinion would be the all of the financial 'developments' since ....

So you agree with just one, quibble about one and ignore the other two. Ok, accept one, refute one, ignore two. Thats a start. Well done. At least you're not ignoring all of my questions. Thanks.


"But it's NOT more wealth, not really. This is exactly what's wrong."

No, please don't try to (repeatedly, you do this all the time) put words in my mouth. I never said it was wealth; I said it was a new source of financing that freed the SMEs from having to approach banks as their sole source of funds. Big difference, so I'll be pedantic here - not wealth. Money. Another source of money. Not wealth.


"Ok, on this one, I agree with you. I would also call this a clear winner. I see no downside. So yes, that's a positive development since 1970, but I don't think it's one that requires fiat money to happen. I think that would work just as well with commodity money. "

How so? Interest rates are largely fixed, not market driven under commodity based currencies. what role does interest rates play, since the growth of your money supply is tied to the discovery of Gold? Also, currency exchange rates are controlled by whomever sets the peg, and now that we're talking about this, interest rates as well. So I honestly don't see how this would work. Please explain.



"In every currency trade, there's a winner and a loser. Guaranteed."

Now hold on. Your exact statement - previously - was "...it's the currency traders that are some of the most hurtful, because currency trading is absolutely zero sum, every time. Every single time they win, the rest of us lose, and we didn't get a damn thing for it.". The most important part of your post is ""Every single time they win, the rest of us lose..."

So I'm confused. Do we all lose all the time as you originally posted? Or is there just a single winner and a single loser? "Guaranteed", of course? As you've now posted?

Well previously you said "The growth of derivatives is a terrible problem. I don't understand them very well, and I don't think very many people do; "

Actually, I do understand derivatives (to some extent, I can do the math, know the product, but as there is alwaysmore to know, would never say "very well"), but your statement was (as usual) blanket, wide sweeping, authoritative in its pronouncement. And, by the way, wrong. We all don't lose. There is only a single winer, and a single loser. Not, by any stretch of imagination (or Financial Engineering as I've learned it) all of us. But now you appear to be backtracking? Changing scope? Narrowing the focus? Good. Because your original statement was wrong.


"To go back to the farmer: he shouldn't need to worry about Canadian versus US dollars, because the exchange rate should be essentially fixed at all times. He has to buy insurance -- pay a speculator -- to protect against a loss that would be impossible with sound money."

No, I won't lay this one totally at your feet (except for strongly repeating stuff you've read), however what if the farmer were speculating on the price of corn? Not exchange rates but the fundamental, market driven price? Still, a speculator - who is willing to absorb risk - is involved. One winner. One loser. But "sound money" - as the folks on For Sound Money.com call it - isn't involved unless you're talking about taking this to its inevitable conclusion - a full Command Economy, with fully controlled prices / exchange rates / whatever. Is that what you'd propose for the United States, the G20, under a commodity based currency? I'm genuinely curious so please don't ignore this query.



"I'm having trouble thinking of how to communicate just how stupid I think this argument is."

Well come on Malor, given our difference in backgrounds, both professionally and educationally, don't you think that perhaps that I might be in a position to offer perhaps a little insight, a different viewpoint from what you've rad on the 'Net? That perhaps you're jumping to conclusions, operating from a rather closed minded perspective? Or are you assuming you know best from your blog readings? After all, I've considered your arguments in the past, without resorting to profanity, to personal attack (e.g., "stupid").

So if, as you suggest, words fail you on this topic, why not try more education? After all, I'm well aware of the six or so blogs you read, that you quote (copiously, sometimes verbatim and almost always without citation I might add) here on MeFi; I'm also aware that in spite of all my coaxing and trying to debate you that you've never once reverted to a book or journal article (well maybe once or twice, but it was surely one of those "popular" finance books that we see carried about at those trendy parties in New York these days), no, just the same relatively small collection of (inevitably grim) intellectually weak and highly self referential blog posts. Largely uncited, of course.


"if you think banks are too stupid to manage inventory, why the FUCK "

Please. Words Education. Do try harder. This does get wearisome, thread after thread seeing you swear. I apologise for frustrating you, but I'm only asking questions about the THE TOPIC AT HAND.


"The entire concept that economies and money need to be managed by some central authority. Mint and currency services, sure. Guarantees and regulation to ensure open and financial markets, absolutely... that's utterly required, in fact. But Keynes' fundamental idea that we should actively manipulating the economy from a central source is extremely destructive."

But a Gold standard is based on a pegged rate of exchange. Who then decides the rate of exchange? We saw previously in the United States that The President apparently devalued the US Dollar, from $20/oz of Gold to $35/oz. The US President, alone, and at the stroke of a pen, in one day no less. So our next President decides? If not, then who?


"You have confused the modern economic system, .."

Come on, I know the difference. And I can explain it. Maybe not all of it, but large parts, and in great detail. I'm not confused on this topic. At all.


"The fallout from deleveraging and going back to honest money would be enormous, on the order of the Great Depression."

No, actually the GDP hit would be far, far worse than The Great Depression. There have been academic papers breaching on this topic. I've read some of them. I don't think you have. Or if you have you aren't citing.


"It's turned into a gigantic casino. Even you have used that specific wording, and you realize just exactly how pervasive that culture is."

MALOR STOP. You've misquoted me on this topic at least twice now, and never pointed to where I said this in spite me asking. So will you please stop, once and for all, now? Or will you ignore this question like you did last time? Just to clarify, YOU keep referring to modern finance as a Casino. Then you claim I called it a Casino. Please show me where I said this. I honestly don't think for the life of me I have, and I've asked before when you've misquoted me. Come on. It's one of those difficult questions you've ignored.



"They also suffered less because they had less boom before. Less boom equals less bust."

Oh perhaps, but you can't provide a source to backup what is clearly your opinion so why should we argue about it? After all, this is a convenient excuse and if you had a corroborating source you would have posted it. You didn't post a source, so you (as usual) don't have a source. This is your opinion only. Its pretty simple really.


"Managing the money supply is like managing the soap supply. If there's not enough soap, more will be produced. If there's too much, less will be made."

Yeh, great, but Malor when you read this did you take in the rest of the lecture? No, don't bother answering. But please explain, in your own words, how reserve requirements, economic capital and regulatory capital all figure into this wonderfully simple world that's you've appropriated to explain modern banking?


Ok, now I've really done it. Damn me again for checking MeFi before I sleep. Back later today for followup. Thanks for great debate folks!!
posted by Mutant at 5:27 PM on April 8, 2008


aren't you missing the other side of the equation, cost? Of course you are.

I can't even pay the rent with 15% of my gross income, and it's partially subsidized and split with another person. Food and electricity take up another few percent.

You live in a city (and a country) that's even more expensive to live in than this one. Either you make significantly more than I do (and significantly more than the national average), or you're homeless and starving.

Sure, I save way more than most Americans. But 85%? You may be living beneath your means, but if you're living that far beneath your means, you make enough money to make most of the world jealous.
posted by oaf at 7:44 PM on April 8, 2008


oaf -- "You live in a city (and a country) that's even more expensive to live in than this one. Either you make significantly more than I do (and significantly more than the national average), or you're homeless and starving."

Well, a couple of points here. No doubt London is eye poppingly expensive, but I've structured our cost side somewhat differently than might be assumed.

First of all, when I purchased the flat we live in I purposely chose a place sorely in need of renovation (a lot of renovation, and although I've been diligently working away on it for seven years and I'd like to say its ok, it's well, it's home) and walking distance to work.

Financed an 80% LTV, 25 year fixed rate mortgage, aggressively paid down principal and refinanced when I suspected interest rates would move in my favour (now funding the bulk of our mortgage at 4.99% fixed) so now the mortgage payment is about seven percent of take home.

Next up: council tax, utilities, food. Well, living in The Ghetto is indeed cheap, with one of the lower Council tax burdens in Central London and the entire South East. So that works. Utilities? Can't do much about the cost of gas, etc. But I did have these way serious double glazed windows put in about four years ago. No more drafts, heat bills cut dramatically. Helps that only the downstairs is heated as well.

Now food. Well, that is indeed a problem, especially so with recent commodity price shocks (more on that later). Food. I do all our shopping, and we purchase pretty much the same stuff every week. So I know the prices of our target goods (fish, rice, potatoes, fresh fruit, veggies, cheese, honey, flour, toilet paper, etc) and simply won't purchase unless I'm either getting fair value or A DEAL. This AskMeTa reveals some of my (I admit borderline obsessive) focus on getting cheap but high quality food.

As I've mentioned on MeFi before, I keep about six months worth of food in the flat; eight cabinets in the kitchen and a big walk in closet upstairs. If something we normally purchase is on sale we'll load up - bigtime. Mrs Mutant and I will happily go to Sainsburys for what we call "opportunistic shopping"; we need nothing but we're just seeing if the The Bastards running the place have something that we usually purchase on sale. If so we grab as much as we can. Case in point: store brand granola bars were recently on sale for 40% off - we purchased three dozen packs of six, enough to last the two of us close to six months if not longer.

Also I cook. A lot, so we're not purchasing prepared foods rather ingredients that we'll use to make something. Case in point: I can make a pot of ass kicking tomato sauce in perhaps four hours; this provides ten servings, we eat two day of cooking and freeze the rest. I put the cost per serving at roughly 0.20p to perhaps 0.30p, direct cost (tomatoes, etc, ain't figured out how to make tomato sauce without using gas yet but I'm still working on that one ...)

Now the commodity price shocks; yeh, rice, wheat, other staples are getting hammered. My solution? We're up to 22Kg or rice stored away, and our target is to get forty kilos packed away. Same solution for pasta, anything that uses wheat. Prices are gonna skyrocket across the board as soon as the producer price shocks ripple down to consumer levels. Its started, but will get worse over the next six months or so. Just my view, but I'm putting my money (and shopping time) where my mouth is on this one.


"You may be living beneath your means, but if you're living that far beneath your means, you make enough money to make most of the world jealous."

Dude, I've spent a lot of time on the ground in Africa, both cities and remote border regions. I've been to India, Turkey, Egypt, lots of interesting (and perhaps not so nice) places. Believe me, a good chunk of the world is jealous of anyone lucky enough to be living in America or Europe.

That being said, I'm blessed to be working in my particular field, but as I've previously posted, I'm only in it for the money. I love finance with a passion, but my value system is out of whack compared to most of the folks Mrs Mutant & I (we're both bankers) work with.

So just because we live in London doesn't mean we have to follow the crowd, spend the average 40% of net on mortgage, have a car, buy all sorts of crap and eat out the average five meals a week. Like our profligate peers do.
posted by Mutant at 1:39 AM on April 9, 2008 [2 favorites]


recent commodity price shocks

Thank you for bringing that up. I've been looking for an excuse to say PEAK FOOD for a week now.
posted by oaf at 9:10 AM on April 9, 2008


And I'd love to be able to get a mortgage, but I don't think I will be staying here, and you can't buy property here unless you're already wealthy.
posted by oaf at 9:15 AM on April 9, 2008


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