Economics Questions

Re: What is the value of Gold when not used as a medium of exchange?

K.C. Farmer — Fri, 12 Aug 2011 15:18:53 GMT

if the goods that you were buying for $1,000 became $2,000, why wouldn't the cost of your employer to "buy" your employment go up by the same amount? Is it just a matter of time lag? I understand your points about inflation being a punishment on savings and causing individuals to make artificial decisions about spending immediately and not saving. But i'm asking if the reason your salary does not go up by 100% is simply because of a time lag or are there other factors.

Wages are a factor of consumer demand for products and the supply of labor. Under inflationary periods, people have less purchasing power to buy the products that they had bought before. The net effect is that fewer goods and services are bought. So, you have a bit of a crunch on the demand side and on real savings, which goes into the production of goods. Wages generally lags even in good times, but these other factors also help to hold down wages.

One of the real threats on wages is unemployment. If the businessman finds there's more profit in speculating than producing goods, then factories close and employees lose their jobs. This means there will tend to be an oversupply of labor compared to demand. That tends to push wages down, not up. You also see some products disappear from the market (those with low profit margins) or become scare (those with price controls). During hard times under inflation, governments tend to go to price controls - a failed policy that always leads to shortages.

Labor wages are also one of the scapegoats of government monetary policy that leads to inflation. When times get hard and prices rise, wages are among the first to get attacked. During the Great Depression, the government instituted a wage maximum. Just another form of price control that leads to scarcity - this time employment.

As for the Businessman, here's what Rothbard had to say on profits with respect to inflation:

…the inflationary process inherently yields a purchasing-power profit to the businessman, since he purchases factors and sells them at a later time when all prices are higher. The businessman may thus keep abreast of the price increases (we are exempting from variations in price increases the terms-of-trade component), neither losing nor gaining from the inflation. But business accounting is traditionally geared to a world where the value of the monetary unit is stable. Capital goods purchased are entered in the asset column "at cost," i.e., at the price paid for them. When the firm later sells the product, the extra inflationary gain is not really a gain at all; for it must be absorbed in purchasing the replaced capital good at a higher price. Inflation leads him to believe that he has gained extra profits when he is just able to replace capital. Hence, he will undoubtedly be tempted to consume out of these profits and thereby unwittingly consume capital as well. Thus, inflation tends at once to repress saving-investment and to cause consumption of capital.

Here's a good little article: Surviving Hyperinflation that reviews a book that goes into research on what a business needs to do to get through hyperinflation (and could also be applicable to inflation in general).

Re: What is the value of Gold when not used as a medium of exchange?

Clayton — Wed, 10 Aug 2011 23:13:10 GMT

does the Fed receive zero tax funding? Who pays Ben Bernanke's salary?

The Fed pays its bills from its "profits" (US gov't interest payments on the debt). This includes Bernanke's paycheck. However, most of its "profits" are returned to the Treasury.

Clayton -

Re: What is the value of Gold when not used as a medium of exchange?

JH2011 — Wed, 10 Aug 2011 22:36:58 GMT

So, without taxes and without the legal power to print money (without fear of being sued for fraud), the Fed would have to make a profit the old-fashioned way... by selling something that consumers actually demand. That would be a very short act.

Agreed. As you say, the "without taxes" does not really apply to the Fed as it does to public education or public roads. In those cases, the forced funding via taxes needs to be removed before private education or roads can succeed.

I know it's a small point but does the Fed receive zero tax funding? Who pays Ben Bernanke's salary?

Re: What is the value of Gold when not used as a medium of exchange?

Clayton — Wed, 10 Aug 2011 22:29:14 GMT

No, the Fed does not need to be abolished. It just needs to be subjected to the same laws regarding fraud and counterfeit that everyone else is subject to. The Fed receives zero tax funding (a fact they proudly proclaim whenever they get the chance). That's because they don't need taxes, they can simply print money. So, without taxes and without the legal power to print money (without fear of being sued for fraud), the Fed would have to make a profit the old-fashioned way... by selling something that consumers actually demand. That would be a very short act.

Clayton -

Re: What is the value of Gold when not used as a medium of exchange?

JH2011 — Wed, 10 Aug 2011 19:28:43 GMT

What to do with the existing public roads is a problem all unto itself.

...

Once exposed to market competition, the Federal Reserve would quickly wither and die. Its "business model" cannot exist in a free market.

I think the issue of the existing public roads is the issue that must be addressed. It is directly related to how privately provided roads will succeed or fail.

There is something we haven't mentioned... Let's take public school as an example. I could start my own private school tomorrow and it could "compete" with any public school. But the residents of that surrounding school district are forced via taxation to fund that public school. ALL residents, not just the ones whose kids will go to the public school. This is not "education existing in a free market." How is a private school expected to compete with the public schools that have forced funding from all residents of a school district? It will play out exactly how it is playing out today. In New York, where i grew up, the average private school teacher's salary is lower than the average public school teacher's salary. Public schools drain the resources that could be used in private schools, and residents are forced to pay more and more as the cost goes up for public education and the quality and range of selection go down. But there is no law barring individuals from creating and running private schools.

So to say that public education's business model cannot exist in a free market is true, but a "free market" does not exist unless you remove the forced funding of the public education. The the same will hold true for roads. The public is forced to fund public roads and it will make it near impossible for private roads to exist, even if they are allowed to be built.

But does this same public funding issue apply in the same way to the Fed? I think the Fed must "somehow" be abolished (along with the laws that grant them and their paper currency special privledges) before a free market commodity currency can exist. The "somehow" is my question. Is it just a matter of shutting them down overnight, or is there a better way to end their power?

Re: What is the value of Gold when not used as a medium of exchange?

Clayton — Wed, 10 Aug 2011 17:00:47 GMT

No, it's more like the government doesn't stop people from building their own private roads. What to do with the existing public roads is a problem all unto itself. The most feasible solution to this problem is unlimited political secession. Roads and other "public" resources would be owned by smaller and smaller political units. In the process, hopefully, the "right" people would end up with control of these public resources. Even if the government auctions off its roads, we wouldn't necessarily be any better off if they continue regulating roads and granting sweetheart favors to its political buddies in the private sector.

Similarly, we are asking for the government to simply stop prohibiting private money production and private banking that is not part of the Federal Reserve regulatory system. The Fed can go on printing its funny money but people should be free to choose to produce and use other monies without fear of retaliation from the government. Once exposed to market competition, the Federal Reserve would quickly wither and die. Its "business model" cannot exist in a free market.

Clayton -

Re: What is the value of Gold when not used as a medium of exchange?

JH2011 — Wed, 10 Aug 2011 16:48:26 GMT

"We" don't need a plan or a series of steps to get from here to there. Money and banking de-monopolization is not a policy, it's an anti-policy. All that is needed is for the government to exit the business and stop controlling who may produce money and banking services.

Ok, i'm starting to follow. Let's take roads as an example. The government would not just walk away from the roads and let whoever first claims them have ownership. They would auction off pieces of road to private investors (unless you think they'd do something else?). But this auction process is key. It is the transfer of ownership from public to private.

Is there a parallel to the monetary monopoly that the Fed has? Do Ben Bernanke and the Fed employees simply pack up their bags? And law-makers (even if they are still government monopolist law makers) repeal laws that call US paper dollars legal tender? I don't have any logical thoughts as to why this is a problem, but I'm skeptical if it's really as simple as this.

Re: What is the value of Gold when not used as a medium of exchange?

Clayton — Wed, 10 Aug 2011 16:33:13 GMT

How would we transition from the current fiat system to one where the free market decides what money is, i.e. most likely gold and silver.

I don't know. No one knows the "how". The market (producers - capitalists and entrepreneurs - and consumers) would decide this. Your question can be asked for any form of privatization. "How would we transition from the current government road system to one where the free market provides road services?" I also don't know the answer to this. But I don't need to know because people will figure it out for the same reason they figure out how to transport fresh raspberries from wherever the hell they grow to my local grocery store in the dead of winter. Lew Rockwell says it best:

Just imagine what would happen if legal tender laws were repealed and the government stopped intervention in the market for money. Virtually overnight, we would see the appearance of hundreds if not thousands of new payment systems and alternative monies online. Merchants would be free to accept any means of payment. There would be intense competition among them. Some would be foreign currencies like the Euro. Some would be new currencies based on existing commodities such as gold and silver. I'm certain that we would see a period of wild experimentation take place before the market settled back down again into a standard system that was famed for its reliability and stability and honesty.

Would we be able to endure the process of discovery? Certainly. We do this every day with our shopping online, or searches for good providers of services and products in the physical world, and our habits on how to invest our money. The market is a process of trial and error, one that never stops innovating and changing. We see everyday on the World Wide Web how this process of creation and change create the right balance between chaos and order, experimentation and standardization. This would happen in the field of money too. [Emphasis added]

"We" don't need a plan or a series of steps to get from here to there. Money and banking de-monopolization is not a policy, it's an anti-policy. All that is needed is for the government to exit the business and stop controlling who may produce money and banking services.

Clayton -

Re: What is the value of Gold when not used as a medium of exchange?

JH2011 — Wed, 10 Aug 2011 16:13:10 GMT

Ok, i hear you. Let me rephrase my question: let's say that everyone in the US, including Ben Bernanke and Paul Krugman, agreed that fiat money and interventionist monetary policies make no sense, and that letting the free market decide what will be used as money is the morally justified and economically efficient way to operate. How would we transition from the current fiat system to one where the free market decides what money is, i.e. most likely gold and silver.

Also, a question about your example...

Inflation comes along and the cost of goods you were buying for $1,000 suddenly becomes $2,000. This means your purchasing power in comparison to what you started with is one half, $500. You have less stuff. You are poorer than you were before.

if the goods that you were buying for $1,000 became $2,000, why wouldn't the cost of your employer to "buy" your employment go up by the same amount? Is it just a matter of time lag? I understand your points about inflation being a punishment on savings and causing individuals to make artificial decisions about spending immediately and not saving. But i'm asking if the reason your salary does not go up by 100% is simply because of a time lag or are there other factors.

Re: What is the value of Gold when not used as a medium of exchange?

K.C. Farmer — Wed, 10 Aug 2011 15:48:42 GMT

Let me put it in simple terms.

If you make $1,000 as your income, and this doesn't increase, then you have $1,000 of purchasing power.

Inflation comes along and the cost of goods you were buying for $1,000 suddenly becomes $2,000. This means your purchasing power in comparison to what you started with is one half, $500. You have less stuff. You are poorer than you were before.

If the trend continues where what you used to buy for $1,000 is now $10,000, then you have one-tenth the purchasing power or $100. Continue this to the point where the goods you have are worth more than the dollars you can get for it, and you begin to want to trade your stuff rather than trade in dollars.

What's also in play with inflation is that the dollars you earn now are worth less at a later time. This causes you to spend as much as you make as soon as you make it. Savings doesn't occur, which compounds the issues with the economy. This becomes a viscious cycle.

When you get to the point where one million dollars doesn't buy a loaf of bread, the dollar is pretty much worthless. If by the time they print new money the denomination is obsolete, then the dollar is pretty much worthless. People then turn to other means to obtain the goods and services they desire or else they starve and die. That includes other commodities or force. Too many times these situations lead to totalitarian governments where people become slaves or are killed off by the millions all for the "good of the people". People literally become a medium of exchange.

Re: What is the value of Gold when not used as a medium of exchange?

K.C. Farmer — Wed, 10 Aug 2011 15:30:18 GMT

Some would say the price of gold is inversely proportional to the value of the dollar. As the dollar decreases in value, the price of gold rises. So is the trend in the increasing price of gold an indicator of value of gold or the decrease in the faith and value of the dollar? I think there's a mix of motivations and subjective value that causes people to pay more for gold. People tend to buy gold when there is uncertainty or the threat of a disaster. There's a ton of speculation on gold right now, so assumptions that gold will stay high indefinitely are pretty naive.

The value of the dollar is based on what people can get for it. Fed policy is driving toward an inflation of the dollar (whether that's hyper-inflation is not really the point). Inflation of the dollar means more dollars in the economy, lowering the value of the dollar and frequently leading to goods and services costing more dollars to purchase and wages relative to purshasing power being lower. In essence, inflation is a hidden tax paid by all. Everyone gets poorer.

The U.S. dollar has had one thing going in it's favor. It has been and still is the world's reserve currency. That is expected to change pretty soon. When it does, the value of the dollar when compared to commodities like gold, oil, silver, etc. will go down (meaning the price in dollars of these commodities will go up). We've been seeing a decline in the dollar for at least a few years. Losing the reserve currency status, however, will make recent events look like paradise.

What's most likely to happen is a push to impose a new international reserve currency. This will most likely be modeled after the Fed and IMF. It will be a fiat system, although there might be the potential of attaching one or many commodities to it to get countries to buy into it (like China). Until this takes place, however, the picture in the U.S. could be pretty bleak. People may very well have to turn to temporary commodities as money (cigarettes, oil, food, etc.).

Re: What is the value of Gold when not used as a medium of exchange?

JH2011 — Wed, 10 Aug 2011 15:01:52 GMT

After seeing some of the responses here, the questions i have are different than the question i posed in the opening post.

My questions now are:

What would have to happen for commodity, precious metal money to become a medium of exchange again?

Is it that as the value of the US dollar declines, and the Fed continues to print more paper, and more and more people choose to not hold dollars, they will choose to hold gold? And slowly people will begin to transact in things other than paper dollars? And as this trend continues, the Fed may relinquish its power to print money and control interest rates?

And is the following a legitimate question/train of thought?... Today, an ounce of gold can buy $1,700 worth of goods (e.g. a mac laptop, a month's rent in New York City). If the Fed loses power to print paper money, and people begin transacting in gold/other commodities, would we expect an ounce of gold to be able to buy the same, more, or less? Are there too many other variables at play to determine the reasons behind gold's new buying power?

Re: What is the value of Gold when not used as a medium of exchange?

K.C. Farmer — Wed, 10 Aug 2011 14:41:00 GMT

When someone says the U.S. government has a gold supply, how sure are they of this statement? Requests to perform an audit of the gold supply have been rejected over and over. Some are saying that this supply has been transferred to international interests. One theory was that gold collected early in the 20th century went to fund the wars in Europe (i.e., US gold funded Nazi build up for war). Not to be an alarmist, but I remain skeptical of what the Treasury or Fed claims they have as assets. They seem to manufacture facts out of thin air. So I question whether or not the amount of gold they have on their ledgers are real. You'd think the accountability of one of the largest gold supplies in the world would a matter of public record backed by physical audits by independent sources.

But then if the dollar is no longer backed by gold it would not surprise me if there is no gold.

Re: What is the value of Gold when not used as a medium of exchange?

K.C. Farmer — Wed, 10 Aug 2011 14:21:39 GMT

Gold isn't a medium of exchange in the U.S. right now, so check the price of gold and you have the most current answer.

The market (sum of all individual voluntary transactions) determines what is money. Government intervention in this process creates the situations of boom-bust cycles and economic collapse. Intervention via private or quasi-private entities is really no better.

Gold is a commodity and has many uses. What is the value of pork bellies when not used as a medium of exchange? Gold as a medium of exchange depends upon people placing such value upon it. It has a long tradition of serving as money. No amount of Fed propaganda changes that fact.

I'm not a proponent of gold as the medium of exchange. It's easier to dominate gold. Silver is a metal that would be more suitable, and also has a long history as a medium of exchange. Used to be kings owned gold and commoners owned silver. So in my opinion, opting for a gold standard would increase the likelihood of some group or government to dominate the overall supply of gold (which they already do now). But it's more about a monopoly of money that I most oppose. If gold has competition from other commodities as money, then you have more liberty and the forces who would manipulate money would be thwarted.

Oh, and just because people would prefer some metal or other commodity as money does not mean you're forced to carry sacks of it around. Similar checking and credit systems can be utilized provided there is no fractional reserve banking involved. Most of the ruin of financial systems throughout history involved a monopoly of money (force) and/or fractional reserve banking (fraud). Fiat money is the most extreme in that it involves 100% force and 100% fraud.

Re: What is the value of Gold when not used as a medium of exchange?

JH2011 — Wed, 10 Aug 2011 13:50:07 GMT

I'm still having trouble understanding. Based on my understanding of what you are saying, the issues of "scarcity" and "monetary collapse" are only triggered due to magnitude issues. But what is the point when gold becomes "too scarce." Why can't an ounce of gold buy a house? It seems too arbitrary to say that it's ok for an ounce of gold to buy a used car, but not a house.

And that's where I begin to understand your point about gold becoming a medium of exchange, but only when an economy is being built up from scratch. But that's why I ask you: what is a "monetary collapse" that would lead to the economy being built up from scratch.

The Fed is printing money, and we all know that. This is going to increase the amount of dollars it takes to buy a stick of bubble gum than it otherwise would have, either immediately or with a time lag. But what I don't understand is why would $1,000,000,000 constitute a "monetary collapse" but say, $1,000 for a stick of gum not be a "monetary collapse."

Are you saying that the prices of things would have to become so high that humans wouldn't allow the Fed/central bankers to have any power anymore? Is the "monetary collapse" simply the point when the Fed has to relinquish power over printing paper money?