tag:blogger.com,1999:blog-970611666708740586.post5462723705796301076..comments2023-08-28T11:48:39.554-07:00Comments on Reserved Place: US economic policy shot in the foot #3: GoldRebelEconomisthttp://www.blogger.com/profile/13241098878248190971noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-970611666708740586.post-30807742440415944352010-10-15T15:42:44.059-07:002010-10-15T15:42:44.059-07:00Note to self:
Someone more famous (Edwin Truman) ...Note to self:<br /><br />Someone more famous (Edwin Truman) with the same view ("America should open its vaults and sell gold"): http://www.ft.com/cms/s/0/2bbd4dbe-d5fe-11df-94dc-00144feabdc0.htmlRebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-30599595335374081822010-01-15T01:28:47.732-08:002010-01-15T01:28:47.732-08:00Anyone experience anything about the easy google p...Anyone experience anything about the easy google profit kit? I discovered a lot of advertisements around it. I also found a site that is supposedly a review of the program, but the whole thing seems kind of sketchy to me. However, the cost is low so I’m going to go ahead and try it out, unless any of you have experience with this system first hand?<br /><br />www.onlineuniversalworkAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-24590784107527839422009-01-07T15:29:00.000-08:002009-01-07T15:29:00.000-08:00Now we are getting into wider, albeit interesting,...Now we are getting into wider, albeit interesting, issues Devin, which I have not yet investigated enough to have much of an opinion on.<BR/><BR/>I am sceptical of the idea that fractional reserve banking necessarily leads to bank runs - it seems to me that, even system-wide, it must be possible to devise some braking mechanism - but I am not sure that fractional reserve banking adds to economic efficiency either.<BR/><BR/>Another issue that I am aware of but open-minded about is whether deposit money growth in excess of base money growth is inflationary, because for every unit of deposits that might exert an effect on prices there is a unit of debt that might exert the opposite effect.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-72650678129133747422009-01-05T20:07:00.000-08:002009-01-05T20:07:00.000-08:00Rebel-In a world with a "Money Market Investor Fun...Rebel-<BR/><BR/>In a world with a "Money Market Investor Funding Facility", there is no difference between M1 and MZM. There is no imaginable circumstance in which helicopter Ben allows the money markets to implode ( and without the Fed's backing, they would indeed implode, 1930's style). A promise by the Fed to print a dollar is as good as a dollar itself. <BR/><BR/><I>...under a gold standard, the growth of gold deposits could exceed the growth of the stock of monetary gold.</I><BR/><BR/>A competent central bank under a gold standard should not allow growth of deposit receipts to exceed the growth of the gold stock. A competent central bank under fiat money should not allow the growth of zero maturity money to exceed the growth of M0. In either circumstance, excess growth of broad money will eventually trigger a bank run when people realize there is not enough base money to back the deposits in the bank.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-19693923079243976402009-01-05T13:51:00.000-08:002009-01-05T13:51:00.000-08:00Devin,You make a reasonable point about preparing ...Devin,<BR/><BR/>You make a reasonable point about preparing for future mismanagement. Essentially, you are saying that large tail risk justifies holding lots of gold. But this should be explained so that the US authorities (ie the government; the US gold does not belong to the Fed) are accountable for that decision.<BR/><BR/>Even then, I would argue that it would be wise to diversify into other real assets. Holding mainly gold leaves the US highly exposed to idiosyncratic risk affecting gold, such as a technological shock that allows a large increase in gold supply.<BR/><BR/>I thought your idea of the dollar dilution rate looked a little high. The appropriate comparison with the dilution rate of gold is the dilution rate of base money (ie dollars in circulation), not MZM. If MZM can grow faster than the stock of base money (as it has), then it could be expected that, under a gold standard, the growth of gold deposits could exceed the growth of the stock of monetary gold.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-87506491363911355512009-01-04T14:37:00.000-08:002009-01-04T14:37:00.000-08:00I do not think that government should make policy ...<I>I do not think that government should make policy on the basis that it might "destroy its currency" and prompt "a run on the dollar"!</I><BR/><BR/>One does not want to run a ship into an iceberg, but that does not mean you sell off the lifeboats. Even if the current leadership is confident in its ability to keep the dollar stable, given the propensity of the American public to elect incompetent stewards, a current steward should prepare for future mismanagement by holding on to the gold stocks.<BR/><BR/>A fiat currency requires a very strong government, both internally and externally. Internally, the government must be politically strong enough to resist the temptation to dilute away debt or recessions. Externally, the government must be strong enough to convince other countries to accept its fiat currency as a medium of exchange. The US government is growing weaker on both accounts. A prudent Fed should realize this and keep the lifeboats ready.<BR/><BR/>If China grows tired of holding diluting dollars as foreign reserves, the only practicable alternative is gold (or perhaps silver). China or the Gulf Countries switching to gold would be enough to cause gold to replace dollars as the world's reserve currency. Given that the American people and government depends on the dollars' reserve status for an unhealthy portion of its economic consumption, this would be trouble. If the government had for reason dumped its gold reserves years before, a new gold standard would go from being trouble to outright catastrophe.<BR/><BR/><I>To argue that the return on gold will not be expensively low requires a forecast of currency growth that suggests that the Fed will breach its price stability mandate.</I><BR/><BR/>This sentence, particularly the word "price stability" is the crux of the problem. The Fed does attempt to achieve price stability as defined by the CPI. The trouble is that the CPI has little to do with <I>monetary stability</I> and it's monetary stability that is so important.<BR/><BR/>For instance, imagine due to a technological breakthrough, productivity was growing at 10% a year. The Fed could then dilute (grow the money supply) at 10% a year and achieve perfect price stability. But from a monetary perspective this would be disaster. Everyone would trade their dollars for gold, and get an 8% year real return. The dollar would be toast. <BR/><BR/>From 1998 to the 2008 <A HREF="http://www.seattle.gov/financedepartment/cpi/pdfs/US_CPI_History_--_Monthly.pdf" REL="nofollow">the CPI increased</A> by 2.7% a year. During this same time period, the MZM measure of money supply was <A HREF="http://research.stlouisfed.org/fred2/data/MZM.txt" REL="nofollow">growing by an astounding 8.8% a year</A>. <BR/><BR/>The CPI was in its target range. But the money supply was in the danger zone. The result was multiple asset bubbles, and a near currency crisis in the first half of 2008. Changes to the CPI ( hedonics, removing real estate prices, etc ) have rendered it useless as a measure of monetary stability. As long as the Fed clings to the CPI number, the dollar will be in mortal danger.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-13574563634614592222009-01-04T09:17:00.000-08:002009-01-04T09:17:00.000-08:00Devin, Without doubt, selling gold would have been...Devin, <BR/><BR/>Without doubt, selling gold <I>would have been</I> a spectacularly bad decision, as it has proved to be for the UK - it may well have cost us more than defending sterling's ERM band. But whether it <I>would turn out to be</I> a bad decision looking forward is a different question.<BR/><BR/>By dilution, I assume you mean the rate of growth of the stock of currency in circulation (if so, your figure looks a little high to me). Here, the point is not just what has happened, and what will happen (and on that, I regret to say that I suspect that you will be right and that inflation will be accepted as a way of relieving the US debt burden), but what is consistent with other economic policy. To argue that the return on gold will not be expensively low requires a forecast of currency growth that suggests that the Fed will breach its price stability mandate. I do not think that government should make policy on the basis that it might "destroy its currency" and prompt "a run on the dollar"!<BR/><BR/>The purpose of foreign exchange reserves is not to make money, but whatever that purpose is (let's assume that the US reserves are held for contingency purposes, although a clear statement of what their purpose actually is would be welcome), it is surely prudent management to serve that purpose at a low cost and low risk. I find it hard to believe that eight thousand tonnes of gold just happens to have been the best solution for the last thirty-odd years. If a key objective is to preserve real value, then it would seem sensible to diversify into other real assets, especially ones with high contingency value such as rare industrial metals, oil, grains etc.RebelEconomisthttps://www.blogger.com/profile/13241098878248190971noreply@blogger.comtag:blogger.com,1999:blog-970611666708740586.post-66155637561966397592009-01-03T17:02:00.000-08:002009-01-03T17:02:00.000-08:00Selling gold would be a spectacularly bad decision...Selling gold would be a spectacularly bad decision by the United States government. <BR/><BR/>Pretty much all the major currencies were diluting at a rate of about 8-10% year for the past decade. Gold dilutes at about 2% a year. Thus the natural return on gold in terms of euro or dollars or yuan or any other diluting currency will be about 6%. That's a better return than pretty much any other investment.<BR/><BR/>Also note that the U.S. has come dangerously close to destroying its currency twice in the past thirty years ( 1979 and early 2008). If someday the government goes to far, and there is a run on a dollar, the only suitable replacement is gold. By holding on to its reserves, USG can at least assure that the flight to gold won't be a complete catastrophe. <BR/><BR/>Of course this whole discussion is silly. If the USG was out to make money, it could just set a 0% dilution policy for the dollar. Doing that would drive a huge flight from euros, yuan, etc, into dollars, generating a huge windfall for everyone holding dollars currently.Anonymousnoreply@blogger.com