Wikinvest Wire

Another WSJ hard-money editorial

Thursday, February 12, 2009

What is it about that back page of the op-ed section of the Wall Street Journal that continues to have all sorts of interesting, far from the mainstream, opinions?

Here's another one in today's paper from Judy Shelton, economist (?) and the author of "Money Meltdown: Restoring Order to the Global Currency System":

Capitalism Needs a Sound-Money Foundation
Let's give the Fed some competition. Abolish legal tender laws and see whose money people trust.

Let's go back to the gold standard.

If the very idea seems at odds with what is currently happening in our country -- with Congress preparing to pass a massive economic stimulus bill that will push the fiscal deficit to triple the size of last year's record budget gap -- it's because a gold standard stands in the way of runaway government spending.

Under a gold standard, if people think the paper money printed by government is losing value, they have the right to switch to gold. Fiat money -- i.e., currency with no intrinsic worth that government has decreed legal tender -- loses its value when government creates more than can be absorbed by the productive real economy. Too much fiat money results in inflation -- which pools in certain sectors at first, such as housing or financial assets, but ultimately raises prices in general.
But wasn't all this "pooling" of money supposed to be the very foundation of an advanced, modern-day economy?

I mean, making asset prices go higher, much higher if possible, is the whole point of what we've been doing for the last 25 years, isn't it?

Apparently not.
Inflation is the enemy of capitalism, chiseling away at the foundation of free markets and the laws of supply and demand. It distorts price signals, making retailers look like profiteers and deceiving workers into thinking their wages have gone up. It pushes families into higher income tax brackets without increasing their real consumption opportunities.

In short, inflation undermines capitalism by destroying the rationale for dedicating a portion of today's earnings to savings. Accumulated savings provide the capital that finances projects that generate higher future returns; it's how an economy grows, how a society reaches higher levels of prosperity. But inflation makes suckers out of savers.

If capitalism is to be preserved, it can't be through the con game of diluting the value of money. People see through such tactics; they recognize the signs of impending inflation. When we see Congress getting ready to pay for 40% of 2009 federal budget expenditures with money created from thin air, there's no getting around it. Our money will lose its capacity to serve as an honest measure, a meaningful unit of account. Our paper currency cannot provide a reliable store of value.
There's much more - well worth a look.

7 comments:

pebird@pacbell.net said...

I guess the gold standard might work for circulation - driving prices down as more products chase the same amount of money, but how does debt work?

So I borrow $10,000 which = x% of the gold asset. I produce more stuff, so productivity goes up, but I still have to pay back the same amount x% of the gold asset, which commands more stuff than when I borrowed it.

Common sense would dictate that if I borrow 500 units of stuff (products) represented by $10,000, I should repay with 500 units of stuff (plus some interest). But if productivity has gone up, I have repaid with cheaper goods, which is the same as inflated currency.

I bet the WSJ really wants the circulatory economy (called the "real" economy) to be on a fixed standard, while the financial economy stays on an inflated, fiat standard. Hey, that's just what's happening!

dearieme said...

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
J M Keynes

MoneyAsWealth said...

Two things on the gold standard:

1. All the gold EVER mined in the entire world would give each household in America less than $45,000. Now pay off your house, car, student loan, credit cards - how much money do you have left? Who would then have the gold? The banks? The banks would just loan it back to you and you would be in the same situation in no time. If you did find that much gold (all of it, ever) how would you get it? Would you buy it? With what? Would you borrow the money to buy the gold? If you did, you would have to pay all of the gold back - plus interest!

2. At our current trade deficit of around $40 Billion per month, it would take less than 5 years for all of our gold to go overseas.

While there is not enough gold to service our debt or make a good general medium of exchange, we can - and should - use the same principles that made gold work: wealth.
Wealth = Innovation + Raw Resources + Labor.

For some answers: Money As Wealth, Read Bottom to Top

MoneyAsWealth said...

dearieme,

You said it!

Anonymous said...

I'm not so sure the quoted statement "In short, inflation undermines capitalism by destroying the rationale for dedicating a portion of today's earnings to savings" is entirely well-considered.

Sure, it doesn't make sense to hold onto hard cash in long-term inflationary conditions but a long-term inflationary environment will encourage allocating saving toward growing investments, whether it be savings accounts, CD's, bonds, money market accounts, etc., or riskier investments involving insurance, stocks, or whatever exotic programs and vehicles might exist, and then it acts as a positive feedback for growth. The important part of the equation is preventing unsustainable growth, and that is where our economy and its leaders have failed in the past 10-20 years.

staghounds said...

I like reading editorials about returning to the gold standard. Is there one beside it about flying pink unicorns?

Seriously, the idea of money competition is interesting. There's nothing to prevent sellers from pricing their services or goods in non dollar terms, and there are substantial tax advantages for both parties to those transactions.

If I were in any kind of business, I'd definitely make it known that barter was just fine with me.

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