M. Porcius Cato's Blog

Thank you Milton Friedman.

 

One might ask:

Why is the economy not producing more jobs?

Why do we have a trade deficit?

Why are we losing the high paying 'nuts and bolts' jobs?

Why is there a 'sub prime' problem?

Why is our national debt the highest it has ever been?

 

Unionism is an integral part of capitalism. Do you belong to a union?

 

Just to keep you from calling me a communist traitor, I have been a capitalist all my adult life, i.e, my wallet was on the hook every day and no one ever 'bailed' me out of my blunders. Thank you, Misters Volker and Greennspan.

Fiat money...

None of these questions have anything to do with the manufacturing sector, but they're all interesting questions anyway.

 

First, on the issue of job creation, I'd point out that the purpose of the economy isn't to produce jobs but to produce wealth. If we merely wanted to produce jobs, we could do that overnight by taking any job worth double minimum wage and split it into two minimum wage jobs. Would it produce jobs? Of course. Would it produce more wealth? Hell no. Clearly, the measure of a sound economy isn't merely the number of jobs produced. If we lived in a world of 100% unemployment, where everyone simply lived off the labor of their robots, I'd not complain--I'd be too busy reading Tacitus.

 

On the issue of the trade deficit, I again see no problem. Again, consider the worst case of a trade deficit--the world sends us all their goods, and we ship them nothing but portraits of dead Presidents in return. I'd call that a bargain! In fact, one can project that there will be trade deficits until the wages of foreign producers (adjusted by the exchange rate) rises to the level of their competitors. The problem isn't that we have an enormous trade deficit; the problem is that it won't last forever.

 

What about the problem of sub-prime mortgages? Again, I don't see a broad problem for the economy unless the government does something really stupid like bailing out the losers who made these crappy mortgages in the first place or cranking up the Mint to paper-dollar over the losses. Then there will be inflation, which--with high unemployment--is the worst thing that can happen to an economy.

 

The risk of inflation is largely driven by runaway government spending. Our national debt is nominally very, very high (though as a % of GDP not the highest ever) because the damned fools in Washington spend money like a drunken sailor. Of course, that's unfair to drunken sailors--at least they spend their own money.

 

I also have no problem with the concept of unions per se, and at one time, I was very active in my union, served on the bargaining team, and even sang a union song. The experience taught me that unions have a critical role to play in some cases but are also infected with Marxist ideology and ultimately propped up by physical force. The whole experience was totally Kafkaesque--we had a damned good case for higher wages, management recognized it, but feared raising the wages of our unit lest they be forced to raise wages for already over-paid units. Luckily, we cobbled together a method for recalculating the number of hours worked that gave us a whopping 30% increase in real wages while making it look like we got only a 3% rate increase (thereby keeping the other union off management's back). The Marxists screamed bloody murder about Labor solidarity blah blah blah, but the union members acted rationally and approved the deal.

None of these questions have anything to do with the manufacturing sector, but they're all interesting questions anyway. [in toto they absolutely do]

 

First, on the issue of job creation, I'd point out that the purpose of the economy isn't to produce jobs but to produce wealth. [How can a nation produce wealth without jobs?] If we merely wanted to produce jobs, we could do that overnight by taking any job worth double minimum wage and split it into two minimum wage jobs. [That is exactly what has happened. Slaughter houses dumped their high paid employees and hired illegals.] Would it produce jobs? Of course. Would it produce more wealth? Hell no. [Agreed. Who would be able to buy or lease an automobile?] Clearly, the measure of a sound economy isn't merely the number of jobs produced. If we lived in a world of 100% unemployment, where everyone simply lived off the labor of their robots, I'd not complain--I'd be too busy reading Tacitus. [Don't you mean Cicero? Who would build the robots?]

 

On the issue of the trade deficit, I again see no problem. Again, consider the worst case of a trade deficit--the world sends us all their goods, and we ship them nothing but portraits of dead Presidents in return. [unfortunately , that is not what the Chinese are buying.] I'd call that a bargain! In fact, one can project that there will be trade deficits until the wages of foreign producers (adjusted by the exchange rate) rises to the level of their competitors. [Presently, they do not have competitors.] The problem isn't that we have an enormous trade deficit; the problem is that it won't last forever. [Of course the present trade deficit doesn't matter. The Chinese were buying Treasuries. Now they are buying companies and ganging up with Black Rock to buy America(n). Helped to keep our interest rates low. Soon they will be in bed with 'Hedge' (pardon me, margin - Reg. T - evasion) funds and my favorite - LBO's]

 

What about the problem of sub-prime mortgages? [You forget sub-prime car and credit card loans that have been securitized.] Again, I don't see a broad problem for the economy unless the government does something really stupid like bailing out the losers who made these crappy mortgages in the first place or cranking up the Mint to paper-dollar over the losses. [That is exactly what the Fed has done - FF @~ 4 3/4% and re-discount @ 5 1/4%]Then there will be inflation, which--with high unemployment--is the worst thing that can happen to an economy. [Do you know that after a certain period, the unemployed are no longer accounted as such?]

 

[Then there will be inflation? What is it that we have now? The CPI & PPI are compound numbers. The bases were re-set last century in order not to alarm the polloi. Have you looked at M1 and M2 lately?]

 

The risk of inflation is largely driven by runaway government spending. [Agreed - mostly. Credit cards and the

'no money, no job' loans help the matter.] Our national debt is nominally very, very high (though as a % of GDP not the highest ever) because the damned fools Thieves.] in Washington spend money like a drunken sailor. Of course, that's unfair to drunken sailors--at least they spend their own money. [it's plain old astronomical. If the Chinese weren't buying Treasuries, the long bond would be back to 14%. Personally, I'd love that.]

 

I also have no problem with the concept of unions per se, and at one time, I was very active in my union, served on the bargaining team, and even sang a union song. The experience taught me that unions have a critical role to play in some cases but are also infected with Marxist ideology and ultimately propped up by physical force. The whole experience was totally Kafkaesque--we had a damned good case for higher wages, management recognized it, but feared raising the wages of our unit lest they be forced to raise wages for already over-paid units. Luckily, we cobbled together a method for recalculating the number of hours worked that gave us a whopping 30% increase in real wages while making it look like we got only a 3% rate increase (thereby keeping the other union off management's back). The Marxists screamed bloody murder about Labor solidarity blah blah blah, but the union members acted rationally and approved the deal. [Put another way: When one is satiated wiyth the fruit of the union tree, it becomes a Marxist tool.I never belonged to a union. But, tell me what is Marxist about living wages and safe working conditions? Was it Marxism when U.S. Steel used to set the selling price for steeel?]

Your unique way of formatting replies makes it difficult to reply to your point-by-point interjections.

Your unique way of formatting replies makes it difficult to reply to your point-by-point interjections.

 

You might like to respond to the general idea of the topic of the 'interjections' in what ever way you choose.

 

On to something else, the answers to which I no longer know. Are the special Treasuries the Social Security, Medicare, and other government trust funds, invested in, counted in the reported Public Debt? If they still exist, are the Special Treasuries that are/were issued to pre-refund municipal bonds counted? I've checked the Bureau of Public Debt site and found no answer.

Fiat money...

 

I doubt if a modern economy could exist without fiat money. The transaction amounts are much too great.

When the Spanish introduced New World gold to Europe, there was a great inflation!

Fiat money...

I doubt if a modern economy could exist without fiat money.

You are absolutely right, and that is the THE problem. Actually, I should say modern war-driven economies.

The transaction amounts are much too great.

If a nation has a fixed currency standard and a certain amount of wealth, then all other amounts are relative to that... until you want to force a debt based monetary system in order to sped more money than is available.

When the Spanish introduced New World gold to Europe, there was a great inflation!

Of course. The supply of the actual commodity which has intrinsic value had increased. Paper money has no intrinsic value, whoever controls the supply has the ability to do what the Spanish did, but all that is involved is the allocation of credit, WITH INTEREST. The only limit they have is the point at which they have sucked out all the value that the original gold currency contained.

Moonlapse, are you advocating a commodity based monetary system?

Absolutely.

 

"Bankers own the earth; take it away from them but leave them with the power to create credit, and, with a flick of the pen, they will create enough money to buy it all back again. Take this power away from them and all great fortunes like mine will disappear, and they ought to disappear, for then this world would be a happier and better world to live in. But if you want to be slaves of bankers and pay the cost of your own slavery, then let the bankers control money and control credit."

Josiah Stamp

 

"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs."

Thomas Jefferson

 

"A great industrial nation is controlled by it's system of credit. Our system of credit is concentrated in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the world--no longer a government of free opinion, no longer a government by conviction and vote of the majority, but a government by the opinion and duress of small groups of dominant men."

Woodrow Wilson

 

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."

Alan Greenspan

 

I would never advocate a fiat monetary system, because it will always be used for its capability to extract wealth and control. Why do you think the system was implemented right before the first World War? Why do you think the dollar is dropping against other currencies? What do you think is happening in the Middle East? We are trying to prop up the dollar with the commodity of oil, because the dollar is becoming worthless. If the dollar becomes worthless, then what happens?

Again, I don't see a broad problem for the economy unless the government does something really stupid like bailing out the losers who made these crappy mortgages in the first place or cranking up the Mint to paper-dollar over the losses.

Ha! Like the government would ever do something stupid like that!

 

Oh, wait ...

In his new book, Greenspan repeats his views about the overwhelming benefits of the gold standard for a stable money supply. I'll see if I can find the original quote because it's quite revealing.

 

I should add that a gold standard doesn't mean that people would have to actually carry out transactions in gold. All that matters is that bank notes are redeemable in gold.

I would love to see a return to the gold standard, with the control of money given back to Congress and the selection of Senators given back to the states, as prescribed in the Constitution.

 

Basically, repeal all the screw-ups made in 1913.

If bank notes are redeemable in gold, there is no need for a national currency.

From Greenspan's new book:

 

pp. 480-481: "I have always harbored a nostalgia for the gold standard's inherent price stability--a stable currency was its primary goal. But I've long since acquiesced in the fact that the gold standard does not readily accommodate the widely accepted current view of the appropriate functions of government--in particular the need for government to provide a social safety net. The propensity of Congress to create benefits for constituents without specifying the means by which they are to be funded has led to deficit spending in every fiscal year since 1970, with the exception of the surpluses of 1998 to 2001 generated by the stock market boom. The shifting of real resources required to perform such functions has imparted a bias toward inflation. In the political arena, the pressure to make low-interest-rate credit generally available and to use fiscal measures to boost employment and avoid the unpleasantness of downward adjustments in nominal wages and prices has become nearly impossible to resist. For the most part, the American people have tolerated the inflation bias as an acceptable cost of the modern welfare state. There is no support for the gold standard today, and I see no likelihood of its return. [...]

 

We know that the average inflation rate under the gold and earlier commodity standards was essentially zero. At the height of the gold standard between 1870 and 1913, just prior to World War I, the cost of living in the United States, as calculated by the Federal Reserve Bank of New York, rose by a scant 0.2 percent per annum on average. From 1939 to 1989, the year of the fall of the Berlin Wall and before the onset of the post-cold war wage-price disinflation, the CPI rose nine-fold, or 4.5 percent per year. The reflects the fact that there is no inherent anchor in a fiat money regime. What constitutes its "normal" inflation rate is a function solely of a country's culture and history. In the United States, modest amounts of inflation are politically tolerated, but inflation rates close to double digits create a political storm. Indeed, Richard Nixon felt the political need to impose wage and price controls in 1971 even though the inflation rate was below 5 percent. Thus, while political considerations mean that the gold standard can be ruled out as a way to suppress a forthcoming rise in inflationary pressures, ironically, politics driven by an irate populace just might accomplish the same purpose."

 

What follows is a very scary scenario regarding the combination of the collapse of social security and currently high inflation, requiring a rise in the interest rate in the double digits and a "return of populist, anti-Fed rhetoric, which was lain dormant since 1991."

 

Greenspan's book is definitely worth a read.

How would a gold standard work? Assume that a bank has 100 ounces of gold (capital and depositor's gold). How would it go about making loans (and protect itself against 'runs')? Would it be a gyro bank?

How would a gold standard work? Assume that a bank has 100 ounces of gold (capital and depositor's gold). How would it go about making loans (and protect itself against 'runs')? Would it be a gyro bank?

 

Typically, banks made loans and conducted business via bank notes that were redeemable in gold, which were kept in deposit. This is really no different from the fiat currency that we all expect banks to disburse on demand. Then, as now, there was a short-term risk of runs on the banks, which banks dealt with then, as now, by borrowing from other banks. Of course, the cost of a panic isn't trivial, but the benefits of stable currency are well worth it.

Is there any limit to this expansion? Do you think that one could conduct Wall Street's business today and how?

 

Once there were Gold Certificates issued by the Treasury or Fed (no longer remember) prior to the great Depression. They were in circulation. Didn't stop the Great Deflation.

 

The Federal Reserve used (?) to balance check clearance balances with special Gold Certificates. Oddly enough, those districts losing Certificates would find themselves in economic trouble.

 

-----------------------------------

 

Buy the bye, did you delete TWO posts of mine, as is your privilege?

Is there any limit to this expansion? Do you think that one could conduct Wall Street's business today and how?

Absolutely there is a limit to the expansion of gold and thus to the expansion of prices. If we were to go back to the gold standard (at $733 = 1 gold dollar), there would certainly have to be a change in denomination, but there's no reason that one couldn't trade any number (or denominations) of proxies for gold reserves.

 

Once there were Gold Certificates issued by the Treasury or Fed (no longer remember) prior to the great Depression. They were in circulation. Didn't stop the Great Deflation.

The gold standard doesn't protect against every deflationary pressure known to man. Obviously, if the sum total of goods triples overnight, the gold value of each of those goods will decline.

 

Buy the bye, did you delete TWO posts of mine, as is your privilege?

 

Don't know. I just deleted anything that didn't have to do with the topic of gold. My general policy is to try to keep threads focused on one topic at a time and to purge all emoticons that I can find.

Gaius, here's some related reading on the Depression from a gold standard perspective, if you are curious:

 

http://www.mises.org/rothbard/agd/contents.asp

 

There's a link to a full PDF text beneath the title.

Again, I don't see a broad problem for the economy unless the government does something really stupid like bailing out the losers who made these crappy mortgages in the first place or cranking up the Mint to paper-dollar over the losses.

Ha! Like the government would ever do something stupid like that!

Oh, wait ...

 

Maybe they'll come to their senses now that everyone from Alan Greenspan to Paul Krugman (see NYT today) recognizes that a bail-out is a cure worse than the disease.

Again, I don't see a broad problem for the economy unless the government does something really stupid like bailing out the losers who made these crappy mortgages in the first place or cranking up the Mint to paper-dollar over the losses.

Ha! Like the government would ever do something stupid like that!

Oh, wait ...

 

Maybe they'll come to their senses now that everyone from Alan Greenspan to Paul Krugman (see NYT today) recognizes that a bail-out is a cure worse than the disease.

People come to their senses? Perhaps when the coming recession is viewed in hind-sight. Alan Greenspan says smart things and does really stupid things.

 

Am I correct to assume that, despite these manufacturing statistics, you think that these figures are not enough to offset our trade imbalance and growing service economy? Do you think that the levels of inflation that are not reflected in government statistics have in effect inflated these manufacturing numbers in terms of actual value?

Am I correct to assume that, despite these manufacturing statistics, you think that these figures are not enough to offset our trade imbalance and growing service economy? Do you think that the levels of inflation that are not reflected in government statistics have in effect inflated these manufacturing numbers in terms of actual value?

 

I don't think that trade is unbalanced--in an ideal world, we could get $100 worth of imports for just $1 worth of exports (a pipe-dream, I know). Nor do I think that a growing service economy is bad either. More engineers designing robots and fewer people working like robots is a good thing--for workers and the economy both.

 

The last issue is an interesting one that I haven't given much thought. The problem is how to measure inflation that doesn't show up in government statistics. However that's done, it's hard to see why the manufacturing sector in particular should be reporting inflated earnings. Shouldn't hidden inflation boost everyone's nominal bottom line?

Am I correct to assume that, despite these manufacturing statistics, you think that these figures are not enough to offset our trade imbalance and growing service economy? Do you think that the levels of inflation that are not reflected in government statistics have in effect inflated these manufacturing numbers in terms of actual value?

 

I don't think that trade is unbalanced--in an ideal world, we could get $100 worth of imports for just $1 worth of exports (a pipe-dream, I know). Nor do I think that a growing service economy is bad either. More engineers designing robots and fewer people working like robots is a good thing--for workers and the economy both.

 

The last issue is an interesting one that I haven't given much thought. The problem is how to measure inflation that doesn't show up in government statistics. However that's done, it's hard to see why the manufacturing sector in particular should be reporting inflated earnings. Shouldn't hidden inflation boost everyone's nominal bottom line?

 

The dollar is currently sinking against commodities and other currencies. If this continues and especially if China unpegs its currency from the dollar, all of the manufactured stuff that we import and consume is going to get expensive. No matter which way I look at it, I can't rationally expect the dollar not to continue dropping in value, especially when the Fed is dropping rates. This is going to bring out the real imbalance, because we will desperately need the ability to not only manufacture our own goods to replace the ones we currently import, but make enough to export so that the US can still have a functioning economy.

 

However, we currently don't have the up-to-date industrial infrastructure to do this (except maybe in places like Michigan), and it will require a lot of capital to create. Where do we get that capital? We are in debt, individually and as a nation, up to our eyeballs. Few people are really saving money, and those that are probably have their savings and investments in US dollars. We've already been using incredible amounts of capital from China and Japan and Saudi Arabia. What happens when they realize that they made bad investments? What happens when the dollar is no longer used as reserve currency and all that money comes back to the US?

 

Much of the recent manufacturing growth was related to the growth of the housing bubble. There were an incredible amount of houses built where I live in the past couple of years (the view out my window is covered by cookie cutter houses almost to the horizon, the values of which are steadily dropping) and lots of people pulled equity out of their homes based on unrealistically high values in order to make home improvements (or in some cases just to consume things they didn't want to save for). Americans have a lot of personal debt, and even though the cost of that debt will become cheaper with inflation, savings and investments will also drop in value and people will have to be able to be able to pay for the increased cost of the basic living essentials like energy and food and a lot of stuff made in China.

 

The recent GDP numbers released by the Department of Commerce are based on 0.8% annualized inflation (first line in Table 4), instead of the typical and understated ~2-3%. Yet, the dollar is near record lows against other currencies and commodity prices in dollars are near record highs. The Fed has lowered interest rates. I can't see that inflation is even as low as 3%, so what does that do to GDP growth numbers? What does that do to every other statistic that the government prints? If its hard to see why the manufacturing sector should be reporting inflated figures, is it also hard to see why inflated GDP figures should be reported when 'consumer confidence' is touted as such an important factor? After all, consumer spending constitutes about 70% of the GDP.

If domestic inflation were responsible for record profits in US manufacturing, how to explain record profits from exports? Is the idea that the weakened dollar increases demands for US goods that are cheaper abroad? If so, that should continue only until those exports drive up the value of the dollar.