Magpie

Absolutely. They need to blame someone, so expect workers who want to maintain their real income to get it in the neck.

In a way that's just another way of saying what I said. An increase in money supply is always likely to increase prices of goods and labour, but it's worth understanding the mechanisms by which that does or doesn't happen. Politicians have duped themselves into thinking they have cured inflation when in fact they just found ways to brush it under the carpet, but now all the inflationary pressure is out there and kicking. I think that even though there is a lot of money being destroyed at the same time, this is going to lead to prolonged inflation, even if they get the money supply under control short term. But I never like arguments that are too reductionist about inflation and insist that you should only look at the monetary inflation. There are other demand-side mechanisms which affect price inflation both short and long term. Population falls or economic decline can both cause demand for money to fall, meaning the price of money falls, meaning you get price inflation. Population growth or economic growth can do the opposite and cause price deflation. Both of these mechanisms can operate without the money supply changing. That's why I think too narrow a focus on monetary inflation can be misleading, though to be sure the far worse crime over the last decade has been total disregard of the money supply issue by governments.

I just meant that he is trying to deny any other mechanisms. Personally I think it's useful to distinguish different meanings of inflation - monetary inflation, cost inflation, wage inflation, asset inflation etc. Defining inflation as monetary inflation is fair enough, but it you also need a vocabulary to describe events such as the post-Black Death inflation, which wasn't to do with money increasing, but to do with demand falling. So in my view, that was a price inflation, not caused by a monetary inflation. But most price or wage inflations do tend to derive from monetary inflation. Yes, but then why do prices and wages continue to increase after the money supply is constrained? Because expectations have been set and because the wage-price spiral continues to operate. I think it's fair enough to point out that the fundamental cause is monetary inflation, but the actual mechanism through which it operates is also worth examining. We've had huge money supply growth in the past without a wage-price spiral. Why? Because globalisation kept the costs of goods low, and even though asset prices were rising sharply this didn't affect most people (other than via house prices), so wage demands weren't too strong. Now that inflation is feeding into everyday costs, wage demands will rise. The monetary inflation is the same, but the effects are different.

I'd say that's disingenuous, and an attempt to assert that all inflation is monetary inflation. Now of course monetary inflation causes prices to rise. But the evidence of the 1970s is that when costs rise, workers become far more militant about demanding pay rises. And also that this militancy persists even past the moment of maximum inflation in costs - the idea of 10% or whatever a year becomes normal, and people feel cheated if they don't get it - one reason the unions became a problem in the late 1970s. Then if the wages are pushed up, of course costs get pushed up. We have a global economy so some of the effects of this may be more muted than in the past, but even so it's only common sense that if prices rise for whatever reason, people become more motivated to ask for more money. Employers don't pay more for labour voluntarily, so higher money supply doesn't lead directly to wages rising, only via wage demands.

Yes, so there is an indirect effect - if the price falls too close to the price of production, production falls, and overall the supply is constrained. But how big a proportion of the gold market is newly mined gold? A few per cent at most? So the effect is far less direct than some would suggest - there is a connection, but it's a relatively weak one.

Gold isn't endless, but the end of gold is of less concern for the world economy than the end of oil - there will still be extant gold whereas oil is used up. And the price of oil is mainly based on current production, whereas the gold in circulation includes gold that was dug up years and centuries ago. So a gold supply shortage should have a less direct effect on the price than an oil supply shortage, in theory.

Well, I suppose the question was meant to exclude any reserve currency including gold. Though I'd acknowledge that in a floating system with no reserve fiat currency, gold (along with other commodities) would be likely to attain at the very least a talismanic position as a 'fixed point' to compare currencies to.

One question that occurred to me listening to it again - does the world need a single reserve currency? It is taken for granted in the article we do. But perhaps it's a historical accident that following the end of Bretton Woods, the US was in such a position of hegemony. Could the global economy survive without a single reserve currency, or with a few different currencies that were equally strong. Another way of viewing the problem outlined in the article is that the dollar's role as emergency currency actually undermines the free market in currencies in developing countries, as well as leaving the US in an anomalous position with regards to its deficit etc. Maybe it would be better if there wasn't the option of flight to dollar safety (as increasingly there isn't...)? I'm honestly not sure of the answer to this question, but as the dollar loses its power, it may be a question that is put to a practical test. If you don't end up with gold or commodity backed money, it's unlikely to be the first stage, more likely to be the solution applied to an ongoing crisis after the dollar loses its current hegemony.

Steve Netwriter linked to this article a while back - it has an interesting discussion of the exact reasons why using the dollar as a reserve currency is problematic. http://www.resourceinvestor.com/pebble.asp?relid=42919

That is hilarious isn't it. Meaningless government bullshit, but of a comical sort.

Again, I'll reply in the money thread, not here.

Thanks - I'll reply in the money thread as I'm conscious of taking up goldbug bandwidth.

Actually rather than disrupt this thread, I'll move to another thread What Should Money Be, as wren suggested...

Do you have any stats to back that up?

Good point, I sometimes blur the issues. Although, shouldn't the distinction really be between gold + fractional reserve, rather than gold + fiat. The latter could be taken simply to mean that people exchange notes for actual gold reserves, rather than for fractional reserves, which is a more complex issue. But in any case I'm talking about both - gold-backed fiat with fractional reserves is flexible, but only up to the point where the gold supply and fractional reserve will allow expansion to, then it becomes a rigid barrier. Some would argue that this is the point where an economy naturally needs to hit a barrier in terms of monetary growth. I would argue that sometimes it is, sometimes it isn't, and when it isn't you get unnecessary deflations. Look at the 1873-96 UK depression for an example of a deflationary depression that certainly wasn't helped by the monetary system. Remember, I don't think any monetary system is flawless...

The problem in the past was that it didn't allow flexibility in the money supply - if the economy grows faster than the gold supply you end up with deflationary conditions which can be problematic in a variety of ways. Inflations and deflations are both a pain in their own ways. The ideal system would be perfectly regulated to grow and shrink with the economy at exactly the right rate. Neither the current system nor the gold standard can deliver this. Further back in time, before we had a banking system in the modern form, it was extremely difficult to raise money for capital projects. The leaders of states (kings or whatever) tended not to sit there and think oh dear, no money to spend. They either taxed, or went to war to get more gold. You can argue about whether fractional banking, usury, issuing of equity shares or whatever is the solution to freeing up capital of course.. I think one of the epistemological problems people have is the idea that money can be 'real', rather than 'nothing'. Money is actually a representation of future exchange value. Whether it uses a real object as a reference point or floats in relation to all goods, it is still 'nothing' in and of itself. Objects that we want to have or to use have value. Money merely represents that value. Sometimes we use goods such as gold which are in themselves valuable to represent value, and this creates a different system than if we use something nearly worthless like paper. But money is not in itself real and is always created by social convention. Money creation (as in fiat, fractional reserve etc) can be a good thing and it can be a bad thing, depending on what use it is put to. A silly example I often refer to is babysitting circles who use tokens to exchange babysitting nights. They have created a kind of money from nothing. It has enabled them to exchange goods and services. That is a useful thing. At a broader level you need money that is accepted by all, either because it is state sanctioned or because it is in itself acceptable. Gold fulfils the latter conditions so would do well in a state of monetary anarchy, but does that make it innately superior to something that is state-sanctioned? And more importantly would monetary anarchy make for a better run society? I'm not convinced.

That depends entirely on whether cost inflation is higher than wage inflation. For most of the century wage inflation has outstripped cost inflation, leading to rising real incomes on average. So what you are saying has been factually inaccurate for most of the last century, although it is probably the truth right now. One of the big mistakes we have made in the UK is to allow too much of this extra income to be absorbed by banks via the interest on ludicrous property prices. If we had a better regulating lending system, then we might actually be able to see the effects of that increased real income. As it is we just spend it on mortgages and rent.

Don't get me started on exponential graphs. The curve gets steeper as you go on, right? But then if you redraw the graph starting at a later point, suddenly the whole thing looks completely different. Any steady change has an exponential effect. People too often look at an exponential graph and conclude that therefore everything is getting worse and worse, because they're drawn with "now" at the right hand end, the steepest point, so "now" looks worse than the past. I think this is a fairly inevitable result of having one fiat currency as the reserve and is one of the flaws in the current system - combined with the decline of the US empire of course. I saw a great article on this, in fact I think Steve Netwriter linked to - I'll try to dig it out. You have a point here, but I'd argue that's all because of the way the system is currently administered (eg repeal of Glass Steagall, minimal regulation of banks, allowing offsheet nonsense, zero regulation of hedge funds etc etc) rather than because of 'money-as-debt' per se. Overall it would be hard to argue that the fiat money era has made the poor poorer, although it may be an accident of history that incomes have generally increased. I do have some sympathy incidentally with the argument that more (or eventually all) money should be government issued through a national dividend or whatever - I think something like that is a more progressive argument than arguing against fiat in general and trusting in gold. No, but when we had gold we still had corrupt governments and we had a huge disparity between rich and poor. My argument isn't that the current system is perfect, but that it's mistake to think that gold+free markets would magically fix the problems. For me, returning to the gold standard is a fantasy that distracts people from analyzing more realistic alternatives and monetary reforms.

Hi, no time for a long answer, but a few quick points: I agree the repeal of Glass Steagall was a scandal. Not convinced by the idea it gets worse every cycle. The 1970s was pretty awful - some of the fall-out depends on other conditions. but this is an awful one largely because governments (and the electorates and media who should monitor them) have been unusually supine in the face of banking power. Some truth in that, although I'm less bothered by it than some. I think state spending and modest inflation can be perfectly acceptable as I don't regard protecting rich people's wealth as the most important aim of society. But the danger of allowing deficit spending and inflation is that it does tempt politicians to abuse the opportunities it creates. Totally agree with that though - it's the Enronisation of government. I think this is the key point for me - there is no perfect solution. Whatever system we have, we need to aim to restrain the worst excesses of bankers, governments, the ruling class, whatever. I'd argue that the main effect of almost any political system is for the ruling classes to protect their own interests regardless of the costs to the poor or non-ruling class. The modern system is a bit more subtle in the way it achieves this than aristocracy or monarchy, and better at placating the underclass, but the basic drive is the same. It's not the monetary system itself which is corrupt but the people who administer it. There were plenty of corrupt and awful states who had gold coinage, after all.

Yeah, because the biggest thing these guys have to worry about is the price of gold.

I have to agree. Israel's sabre-rattling this week is exactly the kind of signal that might eventually lead to another major spike in oil and gold. And the neo-cons want something like that, as they think it will keep Obama out of the White House.

He, not she... A few thoughts on that article. 1) "The average price of gold over the last thirty years, in today’s dollars, has been $506 per ounce" Interesting - now that we're a good way above that (even in 2000 dollars), goldbugs are having to find new justifications to suggest that we are still below the natural level. 2) Oil-gold ratio - I've said before I think there are pretty compelling reasons why this should shift in oil's direction as fears of oil's decline grow. Having said that I don't think the $2000-3000 for gold indicated by current gold prices and the long term average is impossible over the next few years if global conditions become chaotic enough. 3) The Bernard M. Baruch quote sounds impressive, but actually it's a classic weak argument. Gold has been currency for that time, but that doesn't mean it always functioned prefectly or that it was the perfect solution. Gold as currency solved some problems and created others, just like any currency system would. An equivalent argument would be to say "Monarchy has worked down from ancient times … When something holds good for thousands of years I do not believe it can be so because of prejudice or mistaken theory" and then use that to argue for a return to absolute monarchy as a solution to the problems of democracy. I don't think anyone would accept that as a decent argument.

I think 'they' are more likely to foment some trouble with Iran (good for McCain as it plays to foreign policy), or just use the fact they control the Diebold machines to rig another election. They don't seem to be having much luck at controlling the economy just now, so I can't see how they can magically fix it to influence the election.

I know. That's why I started out talking about usury, the issuing of shares and fractional banking. I used terms loosely in that post, but it was all the various kinds of adaptations from a pure system of coinage with no lending and no fractional reserves that I was referring to as underpinning the industrial revolution.

Interesting - I agree that the fact that fiat was part of the industrial era doesn't mean that it's always the right choice, and that there were many other factors at work. Apart from anything else, fiat and central banking does tend to foster a climate of "perpetual growth" and as we reach the end of oil, that might be fairly calamitous. Nice idea, but might be a few years off.