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Thanks for the chart; that does give one a feeling of optimism. I agree that ideally Congress will be deadlocked and unable to pass any major initiatives; that way new spending and new taxes can be avoided.

Why is Peter Schiff Wrong? couldn't get an answer at Cafe Hayek.

http://www.theviewfromthepeak.net/newsblog/2007/03/crash-proof-peter-schiff.html

Steve-

This story continues to be invisible in the major news outlets.

Novice, wrong about what? His hypothetical shows a anti US, US is what is wrong with the world, bias.

As far as the hypothetical's view why not discuss the issue through the players' eyes? Viewing through the eyes of a biased third person negates its value.

As far as the real world, Asia/China gets something from purchasing our IOUs. Secure investment of excess funds.

As far as letting our dollar drop, that is NOT in Asia/China's best interest as it makes us more competitive.

What I WAS expecting was the Asians fattening the American so they could eat him. Short term and long term gain, yes. And, that is the reality. Taking over our position in the world is what is at stake.

Novice:
from Schiff's article: "The castaways all know that the IOUs can never be collected since the American not only produces no food to back them up, but also lacks the means and the intention of ever providing any."

Schiff apparently does not understand at least two things: (1) ALL money is equivalent to "IOUs", including gold coins; and (2) his conjured story implies that the American comes from an economy that produces nothing and has no intention of producing anything -- so how does he reconcile that with the irrefutable fact that the US economy is the largest in the world today, the largest in the entire history of civilization, growing robustly, and more than willing to sell more goods and services to anyone that has dollars (excuse me, "IOUs") to buy them?

I predict you won't get an answer from him, no matter how many times you ask.

I was just thinking about that the US is the largest economy in the world. When i was the US a handyman fixed a light bulb. By doing that he added I think $ 50,- to the GDP. Yesterday (now i live in asia) a handyman fixed a light bulb for the equivalent of 25 cents. This country has a gdp of around 2.5 trillion dollars. So my thinking is, has this country a potential in the near future to grow this GDP 200x times its current potential with some good management and investment?

John, your handyman (Chinese I must presume) is demonstrating the concept or Purchasing Power Parity -- stuff is cheaper in China and so are wages, so a person can live on $2000 a year there and not starve, as they would in New York.

But no, that does not mean China can increase its economy in size by 200x by just raising prices by 200x. Stuff is cheap ultimately because the labor is cheap, and the labor is cheap because it is not valued highly in the world economy; it is not truly productive (with productivity based on value to other people).

If the labor were more highly valued and better paid, China would begin to lose its only real advantage as a producer, and that would stifle the very exports that are so important to its economic growth. The Chinese will become more productive and better paid, but it's a slow, drawn-out process that'll take generations.

Steve,

Couple of problem with your analogy is - 1) All empires at its height have probably been the biggest economy of their time.
2) GDP is not a true measure of wealth. GDP in simple terms measures all transactions( goods and services and in our case mostly services than goods). Wealth is what is left when all trades are settled.

A household that earns 100,000 and spends 200,000 every year has a higher GDP than one that earns 100,000 and spends only 50,000. But the one that saved 50,000 will have more savings and more capital to invest in future production.

As far as gold, it does not yield to political pressure, you can't produce infinite amount of gold out of nothing. So in that sense Gold is honest money. Now any other commodity with value can act the same way. But what makes gold unique is its resistance to corrosion. Gold mined 2000 years ago, pretty much retains much of its content even today.

The Bible is clear on three legal principles: (1) monetary debasement is wrong (Isaiah 1:22); (2) multiple indebtedness, which is the basis of fractional reserve banking, must not be allowed (Exodus 22:26) ; (3) weights and measures must not be tampered with (Lev. 19:36). All three are violated by modern economic policy.

I found that Peter Schiff interview more interesting than the analogy.

A dollar collapse would make us competitive is wishful thinking. All it will do is make Americans poor. Cost of things we import ( which is mostly anything that is made ) will shoot through the roof. Chinese factory worker would start earning double or triple of his 30c and hour salary. How is that going to make us competitive?

Manufacturing is almost completely gone from this country. It ain't coming back, overnite.

Currency is getting trashed in Zimbabwe for many years. I don't see no prosperity there.

Dr. Ron, I never said let the dollar collapse. I said: "As far as letting our dollar drop,..." Big difference.

Counter,

In the analogy I mentioned above, the family that spends more than they earn will have a much better outward appearances of prosperity than the one that is saving $50,000. Day of reckoning is coming to the over indulgent family, isn't it?

In the global wage arbitrage, a mild fall in dollar against yuan will not provide a decisive competitive advantage. Also the nature of globalization is such that, capital always seeks places that will give it the best return. Let us assume that 20 years from now, wages in China are equal to those in USA, chances are capital will seek a third world place rather than make a come back to USA.

It could go to Vietnam, may be Burma, Cambodia, Africa. Who knows where!

Dr. Ron, I am not predicitng a "decisive" competitive advantage. just a small to moderate advantage to make our products more attractive to other markets when compared to China et.al.

More over, capital does not "always seeks places that will give it the best return." It seeks places that give it the best return with acceptable risk. Stability, stable growth and security are the factors that drive risk.

Some time in the future that may be some other part of the world, but not during this generation.

Dr. Ron,

First, are you the Congressman from Texas? In either case, thanks for visiting my weblog.

Second:
GDP is imperfect, but is the best measure we have so far for annual economic activity (...I think we agree on that point).

More importantly:
(a) Money is NOT wealth; wealth is the stuff money BUYS. Money is a time shifting mechanism between my production of goods/sevices and my consumption of goods/services. In a dark alley at night, I'd rather have a $20 flashlight than a $20 bill or a gold coin worth $20. I presume you agree.

(b) If the amount of money grows faster than the amount of real goods & services, inflation is the result. But wealth creation requires money creation; if the amount of money doesn't grow as fast as the amount of goods & services *could* grow, wealth creation is stifled, opportunities are missed, and deflationary depression could even be the result.

(c) Gold is just an old fashioned form of money. (As a friend of mine said, using gold to back up paper money is like using old poker chips to back up new ones.) In the gold-standard days, whenever the gold mine owners couldn't produce enough gold to keep up with the demand for money, deflation and recession/depression resulted. In the future, if a creative gold-miner figured out how to produce gold from seawater very, very cheaply, hyperinflation would be the result (under a gold standard).

Lastly, because a large plurality of the world's gold is produced in Russia and South Africa, abolishing the Fed and switching to a gold standard would imply that we trust Russian and South African gold mine owners--more than we trust the Fed board of governors--to increase the US gold supply at just the right rate to avoid stifling real economic growth without creating inflation. Don't know about you, but I have an intense dislike of that scenario.

I agree that monetary debasement is wrong. I also assert that stifling real growth is wrong. Both of those conditions can be brought about when those responsible for a nation's "money" mismanage the rate of money creation, regardless of what form "money" takes in that nation: gold coins, cowry shells, wampum, or Federal Reserve Notes.

I happen to think the Fed is doing a decent job -- and in any case, I trust the Fed more than I trust gold mine owners.

Hi Steve,

A pleasure being here. Trying to learn a few titbits. I am just a Ron Paul Fan. At least there is one principled politician left in the country.

GDP is imperfect and in my opinion, it is a good measure of total economic activity, but it by itself is not a good indicator of the over all health of the economy.

A) If the power grid gets attacked by the terrorists, I would rather own the factory that makes the flashlights.

B)Agree. Look what going off gold standard has done to the inflation
http://mwhodges.home.att.net/cpi-1800.gif
A general trend of declining consumer prices and strong economic growth prevailed during the years of Gold standard.

"if the amount of money doesn't grow as fast as the amount of goods & services *could* grow, wealth creation is stifled, opportunities are missed, and deflationary depression could even be the result."

That's hogwash. Inflation/Deflation is a monetary phenomenon. Money supply not growing is not deflation. Instead money supply shrinking is deflation. Every recession during the gold standard was caused not by a lack of growth in gold supply, but bank runs and fractional reserve lending. I am sure you will agree that the U.S as a nation was ready to take over the leadership of the world at the dawn of 20th century - due to fast economic growth and industrialization during the 19th century ( under a gold standard, I might add)

C)Gold is old fashioned, I agree. It is so old fashioned that its monetary history goes back to the dawn of civilization. Yet it refuses to go away in our modern world. It is always lurking there in the background. It doesn't believe in any isms, it doesn't yield to political pressure, it doesn't rot, corrode or rust. Those are exactly its attractions.

"In the future, if a creative gold-miner figured out how to produce gold from seawater very, very cheaply, hyperinflation would be the result (under a gold standard)."

That is a little far fetched don't you think? When we have fox (politicians a.k.a big government ) guarding the hen house (paper money ). Does it really take a future technology inventions for politicians to print more? Monetary history is littered with painful stories of new fashion paper money attaining it's intrinsic value. History is also littered with stories of Alchemists who failed to concoct gold in their bath tub. What makes you think making Gold from Sea water will be any less energy intensive or any less expensive than mining it ? You think gold defies laws of physics and chemistry?

Gold miners, Gold smiths, Bankers they are all different titles for people performing essentially the same roles at different points in monetary history. You can chose to trust certain titles over others. BTW, South African gold production hit an 82 year low recently. If my information is correct, Australia is the second biggest producer of gold.

You might prefer to trust the communist china with their dollar reserves and I find it equally absurd

Interesting discussio Steve. Gold keeps people honest.

Here is a puzzle for you. If we could cryogenically freeze you for 100 years and bring you back to life in 2107, and you could either take either 15 benjamins or 2 ounces of gold with you into the future with you, which one do you chose ?

Ron Paul Fan:

I see our basic disagreement: you think if the money supply grows at 4% we get 4% inflation; if it shrinks at 3% we get % deflation; if it stays level, we get no inflation or deflation.

I completely disagree with that false assertion, and so did Milton Friedman. You probably remember his equation MV=PT(?): at constant velocity (V) and constant price level (P), money supply (M) must grow at the same pace as the real economy (T, transactions); if it doesn't, deflation or inflation is the result. Friedman had that turned into a license plate for his car.

If we can't agree that the money supply must grow at the same pace as the real economy, in order to avoid inflation or deflation, then we'll have to just agree to disagree. Five thousand years of history has born it out, regardless of what any given culture accepted as "money" at any given time.

Regarding your quiz, I'll follow your lead. I'd choose neither, because there's a good chance neither gold nor $100 bills will be worth squat a century from now. Instead, I'd take $1500 worth of real wealth with me: you know, things like flashlights, warm clothes, food, water, sunscreen, family picture albums, a laptop computer that might bring a fortune in e-credits because of its value as a rare antique, and a backup copy of this entire weblog because I'm a nostalgia buff.

Remember: money isn't wealth; the stuff money buys is wealth.

"I completely disagree with that false assertion, and so did Milton Friedman. You probably remember his equation MV=PT(?): at constant velocity (V) and constant price level (P), money supply (M) must grow at the same pace as the real economy (T, transactions); if it doesn't, deflation or inflation is the result. Friedman had that turned into a license plate for his car. "

Let us agree to disagree. I am happy as long as you don't refute the fact that U.S economy grew at a healthy clip under the gold standard. That should be proof enough that Money supply don't need to grow that speed. Murray Rothbard and Ludwig Von Mises would disagree with Milton. The whole idea that an artificially manipulated money supply can do better than market forces, in my opinion ( humble, yet accurate - just kidding ) goes against the princples of free markets.

"I'd choose neither, because there's a good chance neither gold nor $100 bills will be worth squat a century from now. Instead, I'd take $1500 worth of real wealth with me: you know, things like flashlights, warm clothes, food, water, sunscreen, family picture albums, a laptop computer that might bring a fortune in e-credits because of its value as a rare antique, and a backup copy of this entire weblog because I'm a nostalgia buff."

That puzzle was about choosing between two possible choices. But I like your thinking. You may need enough batteries for you laptop to last more than 3 hours.

I can't refute that the economy grew rapidly at times under the gold standard -- just as you can't refute that we experienced rapid inflations under the gold standard.

The gold supply grew rapidly on several occasions in the last two centuries. The result: inflation, each time. The reason: the "money" (gold) supply grew more rapidly than the rapidly-growing real economy you mentioned.

The California gold rush is a good example.

I almost forgot: I get a good chuckle out of charts that claim to show more than a few decades' worth of "price inflation" as Michael Hodges graph is attempting. Reason: Changes in the *quality* of goods and services are nearly impossible to measure across more than a few years.

For an entirely different perspective, showing the deflationary effect of productivity over many years, read a little of the following link -- especially the table titled "Time Needed for an Average Worker to Earn the Purchase Price of Various Commodities" a few screens down, and the famous Nordhaus graph just below that, titled "The Price of Light: Hours of Work per 1000 Lumen-hours". Here's the link:
http://www.uri.edu/artsci/ecn/mead/INT1/Mac/Measure/Out/out.om1.html

One last point about "choosing between two possible alternatives": You didn't pick either the $20 flashlight OR the $20 bill; you picked ownership of the factory. As I said, I was just following your lead.

http://mwhodges.home.att.net/cpi-1800.gif

Look at that chart again Steve. Now, Bible calls that kind of behaviour

"Thou hypocrite, first cast out the beam out of thine own eye; and then shalt thou see clearly to cast out the mote out of thy brother's eye."

There were 2 major inflationary periods during the 1800s - War of 1812 and civil war. On both those occassions United States went off gold standard. So, I confidently refute that there was any major inflation during Gold standard.

Now to the chart. Yes the data came from your trusted Federal reserve of Minneapolis. Data prior to 1913 is considered estimates.

Are you confidently asserting that the California gold rush did not cause inflation?

Oh, oh Senate Dems are on to the growth ?issue? Dr. Ron, if you're not the Congressman, are you one of these or a staffer? (Just kidding, it really wouldn't matter.) Anyway, bazck to the point.

In today's WaPo: "Despite the additional spending, Sen. Kent Conrad (D-N.D.), chairman of the Senate Budget Committee, said the proposal would virtually erase the federal deficit within four years without raising taxes and produce a surplus of $132 billion by 2012."
http://www.washingtonpost.com/wp-dyn/content/article/2007/03/13/AR2007031301763.html

Four years of expanded spending! When we know that it could be next year. Right, Steve!

Oh, and BTW, they are proposing extending the tax credits. But, why would they do that if they thought they were not needed?

Democrat's 08 deficit issue preserved. Thank God! They will be able to take credit for balancing the budget and paying down the debt.

I read that WaPo story and was confused. The Dems want to spend quite a bit more but want to offset new spending by getting rid of other spending. And yet, mirabile dictu, they will not have to raise taxes.

What happens if Steve's projection is realized, and the budget is in balance? Will the Dems declare tax increases (i.e., no extension of the current tax rates) unnecessary?

Never, ever underestimate the skill of politicians to claim credit for positive events they had nothing to do with, and to deflect blame for negative events they precipitated.

Steve, I am waiting for the response over at Angry Bear.
http://angrybear.blogspot.com/2007/03/democrat-dishonesty-regarding-deficit.html
Should be interesting.

I used to visit Angry Bear every week or so, but it didn't take long to get tired of it. "PGL" (at AB) has an annoying habit of employing name-calling as his primary method of "critical thinking." It thrills his beehive of like-minded commenters, but it's a total waste of my time.

I will archive that particular post of his, though. It might come in handy in sixteen months or so.

Steve, I know what you mean about PGL and AB. The would rather attack the messenger than the facts, and that's usually because they don't have the fact. Only talking points.

BDS is rampant over there. if they could get by that it might be a reasonable site for discussion.

"Are you confidently asserting that the California gold rush did not cause inflation?"

Yep!! I am categorically denying any effects of any inflation in 1849.

Steve:

I think I remember you offering PGL the same bet you have with the other guy. Did he take you up on it? (BTW, I don't think either of those two people understand what they are looking at on your chart, based on their comments about it. Not sure why a rolling-12 chart should be so confusing, but it apparently is.)

Homer,

I offered the bet to PGL twice at his AB website, when I read his bluster about how stupid my chart was (is). But I never heard from him man-to-man.

Draw your own conclusions. I've already drawn mine.

to Fan of Ron Paul:

Regarding the CA gold rush… I looked it up (in The Power of Gold, by Peter L. Bernstein), and realized I had it backwards: The gold supply increases of the *1500s* caused inflation, while those of the *1800s* unleashed rapid, non-inflationary industrial expansion. Both experiences support Friedman’s MV=PT. In the 1500s, the money (gold) supply increased far more rapidly than the supply of real goods and services, and the result was inflation. In the 1800s, the increase in the money (gold) supply satisfied pent-up demand for money, and unleashed one of the most significant economic expansions in history. The former illustrates that too much money causes inflation, while the latter illustrates that not enough money stifles real growth. MV=PT; Friedman’s license plate.

You’ve made it clear you disagree, so let’s just agree to disagree on the gold standard topic. I’d rather spend my limited time on subjects relevant to the 20th and 21st centuries than on outdated 19th century economics.

For posterity, here’s a summary.
• You favor a gold standard because you think it makes inflation impossible, and insulates the economy and the populace from government incompetence and scheming.
• I oppose a gold standard because it has caused not only depressions, recessions, and deflations, but has also held real, noninflationary growth below its potential—thereby causing poverty, or slowing society’s escape from poverty.
• You don’t trust the Fed with our money supply decisions; you trust the so-called free market, starting with the gold producers.
• I trust the US citizens appointed to the Fed Board of Governors far more than I trust foreign gold producers with our money supply decisions.
• You don’t think the supply of money should grow with the demand for money, but I do.

Gold is very pretty, don’t get me wrong; that’s why I own a few gold coins. But what really baffles me is how effectively gold’s undeniably mesmerizing effects can lock some people into a 19th century mindset, with no hope of escape.

Anyone interested in how the gold standard was a major cause of the Great Depression should follow this link to Dr. James Hamilton’s blog:
http://www.econbrowser.com/archives/2005/12/the_gold_standa.html
There’s also some good commentary on Hamilton’s article at this link:
http://www.janegalt.net/blog/archives/005621.html

what happens is it justs seems so insincere. of course, i guess preconceived ideas are sometimes followed in all directions. but could sincere internet dialog be an oxymoron, except in communication of friends. so that means if you follow no cohesive direction could come in this context. of course it is a revelation to me. im this simple as detailed in reserve content m.o. but it is a tragic fright because if it gets addressed it must be censored as an assumption at least not releasable. but it might be in timely deploy. this is the rhetoric of understanding nothing more.

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