Economics Questions

Re: Gold standard

Malachi — Mon, 25 Mar 2013 21:23:20 GMT

"conquering" would suggest that the gold was stolen rather than earned or given. perhaps thats why the effects resemble other cases of massive involuntary wealth transfer.

Re: Gold standard

Meistro — Mon, 25 Mar 2013 07:02:42 GMT

One can observe historically the impact of a large influx of gold on an economy, specifically with regards to Spain during their period of conquering south america etc. It created a false prosperity, high inflation and an eventual bust. Resources were malinvested near the coastal town where all this gold was coming in. Rothbard discusses this in austrian perspective of economic thought.

Re: Gold standard

Malachi — Mon, 25 Mar 2013 04:54:06 GMT

please dont concern yourself with my state of excitement or the like. the only thing that is relevant is your (and others) understanding of the effect of an increase in the commodity money suply vis a vis an increase in the fiat money supply. is there anything you are unclear on?

Re: Gold standard

Blargg — Mon, 25 Mar 2013 03:49:07 GMT

Sorry to have agitated you; I retract everything I said in this thread. Please carry on.

Re: Gold standard

Malachi — Sun, 24 Mar 2013 23:23:18 GMT

What if a large hunk of gold fell from the sky into someone's large lot, unbeknownst to anyone else, and this person spent it? On a really basic level, it would have similar effects on prices to a lot of fiat currency being printed.

I guess that depends on what you mean by "similar effects." its hard for me to see what is similar about someone spending real money and the government inventing more fake money, when the two exchanges actually dont resemble each other in the least. its like comparing someone trading an apple for an orange to someone trading a threat for an assassination. on a really basic level theres a similarity in that exchange is occurring. but everything else is different.

There would be more gold, so it would end up having less value

refer to my earlier posts, this summation is inaccurate. value is subjective in any case. the inverse of supply is demand. supply/demand relations are dynamic, not static as you conceive them to be.

pushing prices up.

prices of what? injection of fiats does not push prices up across the board, why would injection of commodity money? the second part of your misapprehension rears its head: private spending is qualitatively different than "public" spending.

Are the objections to the implication that therefore gold is no better than fiat currencies?

the objections are to your insistence on oversimplifying the situation under discussion. your explications are false, no need to address their concomitant false implications.

History shows the inevitability of fiat inflation until destruction, and lack of gold falling from the sky or being transmuted from lead.

that is an empirical argument and has no place in this dicussion. people hold cash as a store of value precisely because the future is uncertain.

Re: Gold standard

ToxicAssets — Sun, 24 Mar 2013 22:28:04 GMT

Terrill:

Toxic: Good point about not being able to assume contradictory things at the same time. I was (in making the assumption of 100% reserve banking and no government interference) trying to limit the question to that of an expansion of the gold supply, but maybe that won't work, not in free economy anyway!

Well, to think in terms of the fractional reserve in banks is only a complication.

The introduction of large amounts of gold in an economy makes the price of gold to fall, at least locally, as now there is more gold chasing the same goods as before.

There are very many examples of these things happening in a local level throughout history, specially in port cities and piracy outposts, subjected to large fluctuations of their balance between circulating gold and other goods.

However, in modern market economies the price of gold is relatively stable globally, since arbitrageurs can operate fast on geographical differentials by buying gold in one market and selling it on another simultaneously through eletronic communications.

Re: Gold standard

Vanitas Nomen — Sun, 24 Mar 2013 22:15:27 GMT

Mainly as a bit of an after thought but, because I haven't read the book by Goodwin I wonder how the author might be able to come to the conclusions he may have come to.

Here is the link to the book, any one of us could read it for free online, I just don't have the time right now.

http://www.jstor.org/discover/10.2307/3886971?uid=3739560&uid=2129&uid=2&uid=70&uid=4&uid=3739256&sid=21101919493511

Re: Gold standard

shackleford — Sun, 24 Mar 2013 21:58:26 GMT

Vanitas Nomen,

Why do you ask if the author is economically literate?

Re: Gold standard

Vanitas Nomen — Sun, 24 Mar 2013 21:47:34 GMT

I can only think of the great theft of gold from the Aztecs or Incas to Spain as being examples.

I read that in 1324-25 in Cairo, Egypt the value of gold 'crashed' due to Mansa I of Mali dumping off tons of the shiny stuff. As a part of his Hajj to Mecca he stopped in at cities and gave gold freely to the poor, and traded it for souvenirs...or so it is said.

"Musa's generous actions, however, inadvertently devastated the economy of the region. In the cities of Cairo, Medina and Mecca, the sudden influx of gold devalued the metal for the next decade. Prices on goods and wares super inflated in an attempt to adjust to the newfound wealth that was spreading throughout local populations. To rectify the gold market, Musa borrowed all the gold he could carry from money-lenders in Cairo, at high interest. This is the only time recorded in history that one man directly controlled the price of gold in the Mediterranean."

I wonder if this guy AJH Goodwin, who's book this info is sourced from says the Wikipage, was economically literate.

Re: Gold standard

Terrill — Sun, 24 Mar 2013 20:30:03 GMT

Toxic: Good point about not being able to assume contradictory things at the same time. I was (in making the assumption of 100% reserve banking and no government interference) trying to limit the question to that of an expansion of the gold supply, but maybe that won't work, not in free economy anyway!

Re: Gold standard

ToxicAssets — Sun, 24 Mar 2013 15:48:02 GMT

As for the effects of large mineral deposits of gold, that would probably make the price of gold to drop, and consequentially, the price in gold of everything else to increase.

But there are a few differences from printing a bunch of money.

First, it is a hard task to estimate the deposits of a gold mine, even with modern technology.

It's actually a very complicated task of data analysis, and some modern mining companies even offer prizes to people who can find ways to figure their data for them.

And even if the owner of such a huge deposit knew for sure how much gold is in there, he would not necessarily have the incentive to publish this information, or to start dumping gold on the market too eagerly.

He would probably evaluate the market impact of his extraction strategy, and use his private information so to generate an optimal stream of profits on the long run.

He could also overestimate his gold possessions. If for instance he had a vested interest in making his companies shares spike, and them dump them, or if he's trying to get acquired.

This would be a short term strategy, but could backfire if later on he revised his estimates, or even if he was prosecuted for fraud.

Recently, in 2011, a brazilian tycoon named Batista got himself a position among the ten richest men in the world at the time mainly by overstating the oil and gas findings in the plots acquired by his companies.

Later on, these statements were revised and the stock price of his holding fell considerably, and during 2012 his fortune drop from around $30 bi to something like $10 bi.

Still, some will say the whole move netted him significant profits, since he IPOed and followed-on during the boom.

Re: Gold standard

ToxicAssets — Sun, 24 Mar 2013 14:44:31 GMT

Assume a 100% gold standard with no fractional-reserve banking. Also assume a government committed to no interference with a free-market.

You cannot assume both at the same time.

If there's no government intervention there's nothing impeding me of running a fractional reserve bank.

Fractional reserve banks are not stipulated by governments, they are something that happens naturally once people start accepting checking account transfers and other as cash substitutes.

So you either have a 100% gold standard with no fractional-reserve banking activity, which in itself is a very substantial intervention in a free-market, or you accept free banking activity, with the degree of liquidity risks involved when running on fractional reserve.

You cannot have the cake and eat it too.

Some Austrians rely on von Mises argument that in a free market fractional reserve banks would collapse in a bank run eventually, and so the system would come back to full reserve.

That argument is entirely speculative and does not seem to explain the history of banking.

The incentive for running fractional reserve is not created by government intervention or by central banking systems, but by profit motives of bankers themselves.

And this is not "a problem". It's a tradeoff between the benefits of having more non-cash liquid assets available and the risks of being caught in a bank run whenever people runaway from these assets and go back to cash.

All business have their sources of risk, and that's the nature of risk in the banking business.

Re: Gold standard

Blargg — Sun, 24 Mar 2013 05:05:36 GMT

What if a large hunk of gold fell from the sky into someone's large lot, unbeknownst to anyone else, and this person spent it? On a really basic level, it would have similar effects on prices to a lot of fiat currency being printed. There would be more gold, so it would end up having less value, pushing prices up. Are the objections to the implication that therefore gold is no better than fiat currencies? History shows the inevitability of fiat inflation until destruction, and lack of gold falling from the sky or being transmuted from lead.

Re: Gold standard

Malachi — Sun, 24 Mar 2013 04:26:09 GMT

Wouldn't that have the same effect on the economy that the a government has when it prints paper money and is the first to use it (before prices go up) and it begins its "step-by-step" movement through the economic system (as Mises says that inflation does not effect everyone at the same time or to the same degree)?

how could it? for some reason you own mineral deposits. lets assume that you didnt acquire them through aggression. in that case you are either lucky or good at business. in order to introduce this gold to market you have to hire people to do useful things. this is different than paying people to do anti-useful things (govt). as this money filters into the economy it is spent by producers on things they deem valuable. these are different things than anti-productive would value and spend non-existent money on. as the real money filters into the market it will affect prices. but its hardly "the same effect."

Re: Gold standard

Terrill — Sun, 24 Mar 2013 00:55:25 GMT

That's what I thought -- in the short run. But in the longer run, I would have put something into the economy that is (at least) more valued than paper money., somethng that adds real value to the economy and does not depreciate like paper money. I think the next post by "Bogart" is a good explanation.