i actually agonized a little over this one--i mean, is it better to post something that's likely to bore most of my readers, or post nothing at all? and then i remembered i write this blog for my own amusement, which answered the question.
for what it's worth, the following is a modified excerpt from a recent (i.e., 20 minutes ago) email to my friend and frequent commenter noblesavage regarding his contempt for my beloved gold standard [and yeah, we actually back-and-forth about shit like this].
if you happen to be one of the few who not only read all the way to the end of this post but actually get it, then good for you.
there's only two kinds of money, rob: (1) money backed by a fixed, finite, rare and tangible commodity, such as gold or silver; and (2) fiat money (i.e., money which is backed by nothing other than its issuing government's dubious guarantee of value).
most governments start out with the former, and end up with the latter.
see, they start out with the former because they have no choice--they're new, and people are willing to accept their money only if it's backed by something real, like gold.
but there's a funny thing about governments, rob: once established, they always wants to grow, grow, grow--and growth takes more money.
problem is, a government only has two ways to get more real money: (1) taking it from its own citizens via taxation; and/or (2) taking it from other countries by force (i.e., war or colonization). of course, there's just so far any government can go with either one.
which is why, to feed their insatiable appetites for expansion, most governments eventually say fuck it, drop the gold standard and declare that their currency is worth whatever they say it's worth.
and my god, rob, once they've freed themselves from the annoying requirement of backing their currency with tangible assets like gold, amazing new vistas open--hell, now they can pretty much print as much money as they fucking want, and who's to stop them?
[of course, if you try this at home they'll throw you in jail for a thousand years, but for some reason when a government does it, it's ok--splain me that, will you, rob?]
and once a government finally takes this step, what inevitably happens next, as night follows day? why, inflation, of course--i.e., more money in circulation chasing the same amount of goods means that it'll take more money to buy said goods.
it happens slowly (hell, our overlords aren't stupid--if a cup of coffee went from a nickel to two dollars overnight it would freak people out, but somehow it's ok when it happens over fifty years).
until, as a consequence of this slow madness, something really bad happens, the government needs lots of money fast, and the printing presses shift into high gear.
then all of a sudden you find yourself needing a wheelbarrow of your once-stable currency to buy a loaf of bread.
* * * * *
what i've just described has happened to every fiat currency that's ever existed on the face of the earth, and as much as you don't want to believe it, it's now happening to ours. tell me, rob--why do you think we're somehow magically exempt from the laws of nature?
8 comments:
Question, because you are opining on the subject and I'm just going to assume that you KNOW (which may be naive of me but I like to think I have a little innocence left):
In the modern world with so many nations emerging and so many economies expanding (the current recession presumably being a road bump, not a terminal obstacle), COULD there be enough precious metal to back up all the world's currencies? I know we've still got a gold reserve, but its worth must be only a fraction of the amount of of paper in circulation. I've always been concerned that we abandoned the gold standard, debased the coinage, etc., even though I readily admit that economics isn't one of my strong points. I just thought it a very bad idea that could lead to serious economic problems.
Not all of our politics may be as divergent as you mentioned a while ago.
color me confused (possible still drunk from vacation, more likely this money shit just confuses the hell outta me).
break it down in terms i can understand: fashion, or the quick increase in cigarette taxes that prompted me to quit.
please? thank you.
ps: hollywood, ft. lauderdale and south beach were devine. i have pictures of the wrought iron fence surrounding Versace's old mansion. i was quite surprised to see the original emblem there.
For Judi -- this is the skinny: money is ultimately based upon trust. You trust that when you accept some green pieces of paper from someone, you will be able to give those same green pieces of paper to someone else and be able to get things -- cigarette and vodka being two worthy purchases.
With a gold based currency, if you wanted, you could take those pieces of paper and go to some bank and get the value of it in gold.
The problem with a gold backed monetary policy is that it is very inflexible. It dramatically limits the amount of currency you can circulate. So, countries began to say you could redeem three quarters of the value in gold...and then less than that, so on an so forth. Richard Nixon was the president that finally dropped this fractional rate rouse.
Now, the United States dollar is back by nothing more than the full faith and credit of the United States.
Really, most all currencies are based upon trust.
When you have economic panics, the trust in the currency is broken: you do not believe those little pieces of paper are what they state they are.
Perhaps the most famous example of a market panic was Germany after World War I. Crushing debt caused hyper inflation. There was even a trillion mark coin that was minted. People really did have these giant shopping carts full of paper currency to buy a loaf of bread...and the price would go up throughout the day. This caused enormous political instability as well and, well, you know the story.
But, short of this example, there really aren't too many modern day economic panics. Argentina around 2002. The Asian economies a little earlier.
The British pound has been around for a long time. It has never faced (as a fiat currency at least) hyper-inflation.
Much of the world experienced stagflation in the 1970s (inflation coupled with stagnant wages, low growth, and high unemployment).
Take a look at world inflation rates:
http://spreadsheets.google.com/pub?key=phNtm3LmDZEOLE3kXHaLRaA
Outside of Zimbabwe, there really is not a nation out there with hyper inflation.
An interesting paper to look at:
http://www.clevelandfed.org/research/Commentary/2006/0515.pdf
Contrary to guttermorality-economics, modest inflation of 2 to 4 percent is the goal of the United States Federal Reserve.
Now, finally to a critique of the guttermorality post:
The problem with this is that it is basically wrong. The United States periodically had severe recessions and even depressions (there were several depressions in the Nineteenth Century). We remember the Great Depression mainly because it was the last -- and pretty much the longest.
These economic contractions were all under a gold standard for the currency.
Having your currency tied to gold is designed to instill trust. But when trust is not there (for whatever reason), no currency can operate.
My larger point, that guttermorality seems to have glossed over, is that the current economic situation, while not great is hardly the worst. It is also showing the beginnings of a bottom -- and with that an eventual recovery.
There are always people predicting economic doom. When there is a crisis, this becomes the dominant view. Outside of a panic, however, it is always a fringe view except in the remotes areas of Montana where survivalists and gold bugs are a pretty healthy majority living in cabins with bomb shelters.
will: tell you the truth, i wish i knew. conventional wisdom says it's impossible to grow a modern economy without a "flexible" currency--and god knows how high the price of gold would have to be set to back all the worthless pieces of paper passing as money out there.
judi: noblesavage is right--where once our money was backed by gold, now it's backed by "faith." tell me, how much faith do YOU have in your government these days?
and finally,
noblesavage:
1. boom-and-bust cycles are a hallmark of free-market capitalism, so yeah--there will be panics from time to time. but unlike all the previous, forgettable little panics in our past, we remember the "great" depression not because it was different in nature than the others, but because it was the first time that big government stepped in to "fix" things. as a result of said "fixing," what shoulda been a minor 3-4 year panic turned into something much "greater."
2. you will note that nowhere in this post did i call for a return to the gold standard--what i did here is explain the chain of events which inevitably occurs when one goes off of it--and what's happening now.
3. when the apocalypse comes, right before i load up my gold and guns and head up to ruby ridge, i'm so gonna stop by your place, set up my boombox and do the "i told you so" dance under your bedroom window.
Mikey, I'm not certain I've ever had faith (at least not blind faith) in our government...if I had to guess I'd say not since 9/11.
that said, i suppose it's no coincidence that all of these 'let us pay you for your used gold' outfits have popped up everywhere of late?
And finally, Ruby Ridge, really? Wouldn't you be better off crossing the border back into your home state--the great republic of Texas? Word is we're going to try and secede. Again. ;)
judi: it's no coincidence, babe--people are waking up.
and tell you what--i want to move back to texas about as much as you want to move back to florida ;)
The dollar is finished. Within our lifetimes too. Mark my words...
wat: actually, probably within my cat's lifetime.
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