"Do not use dishonest standards..." Leviticus 19:35
In 1933 President Franklin D. Roosevelt confiscated all convertible gold owned by Americans. He forced citizens to sell him their gold for $8/oz, then turned around and declared gold to be worth $35/oz. He wasn't after a measly 400% return-on-theft, however...his desire was to inflate his way out of the Great Depression without the discipline of citizens demanding their dollar's worth of gold. This kind of "temporary suspension of specie payments" had happened before—but only during times of war. And this one was not temporary.
But the U.S. also quietly maintained a "differing measure" (Proverbs 20:10) by continuing to allow gold redemptions from two privileged classes of claimant: 1) foreign governments, and 2) central banks. The U.S. had not declared bankruptcy to win WWI, as most of Europe had, and so was able to coerce foreign countries into turning a blind eye to runaway American dollar inflation. But this was always doomed to fail, because with ever more U.S. dollars in circulation, there wasn't enough gold on the planet to redeem all that paper. The rest of the world got fed up abetting America's expensive fraud.
So how much inflation did the American government do? Well, when Richard Nixon finally pulled out the $35 peg and tried to stuff it back in at $38 the world refused to go along, and gold quickly zoomed to $215. The U.S. dollar had been devalued by 2,600% over 40 years. Under Jimmy Carter gold rose to $800, and today in Obamaville it's worth over $1,400. From 1933 to 1973 dollar inflation had run at 14% per year compounded and since 1973 it's been only slightly less flagrant at 5% per year compounded. And you wonder why you can't get ahead?
There is no worse steward of our money (or our currency) than governments. Within living memory, gold was money. Our grandparents had a legal right to demand gold in exchange for their dollars. Governments hate the gold standard because it denies them the ability to inflate-at-will...forcing them to either raise taxes or borrow.
The Bible is filled with stories of the arrogant follies of Kings and Princes. But they were pikers compared to Presidents and Central Bankers. Fiat money (ie: government paper not backed by a commodity) is, quite literally make-believe money. When citizens and other nations stop believing in the currency, the game is over. Paper money "is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.” Thomas Jefferson, 1813
When Bernanke runs his printing presses so American politicians can continue to spend-for-votes, he and they are perpetrating a Dishonest Standard. So while our current Nabobs dither and print and spend with impunity, the world is slowly but surely moving away from the U.S. dollar as its reserve currency. I do not own even a fraction of an ounce, but it does not surprise me in the least to see a resurgence of that most honest and reliable standard of all: gold.
Would you show the math on your inflation calculations?
ReplyDeleteFrom $8 to $215 is 26-fold increase. Spread over 40 years, using a compound-interest calculator, that's 14% per annum. Then from $215 to $1421 is not quite a 7-fold increase over 37 years, or roughly 5% annually compounded. Do I have the math wrong?
ReplyDeleteI realize this isn't "price" inflation.
Right, what's the $8? An ounce of gold? CPI gives a very different number.
ReplyDelete$8 was what FDR paid Americans for their convertible gold in 1933.
ReplyDeleteGold, which is probably in a pretty good bubble right now, is probably not much of a measure of inflation. Core CPI is much better (and http://data.bls.gov/cgi-bin/cpicalc.pl can make your CPI inflation calculations quickly). I mean, if you want to just compare relative value of a couple of assets (gold and the US Dollar), try gold and BRK.a. In that case, gold has plummeted in value over the last 40 years.
ReplyDeleteA well managed fiat currency does have actual value: it’s a claim check on the future output of the economy issuing it.
Sure, Core CPI is a familiar and useful measure of price-inflation within the USA. I'm not hawking gold as an investment, just saying it is more reliable than politicians. Its 40-year graph would look a whole lot different if America were still on the gold standard.
ReplyDeleteBut gold and the US dollar aren't just any two assets plucked out of thin air—they had a long and useful relationship which soured when government wanted to avoid paying the piper for inflating at will.
I don't think the U.S. currency has been well-managed at all. The extent to which it has succeeded is mostly due to the world having agreed to make it the reserve currency of record (plus our willingness to win the Cold War for them). But now that consensus is coming undone as nations and investors lose confidence in future U.S. ability to repay.
More and more people on earth believe the U.S. is susceptible to some sort of "collapse". In living memory, countries have defaulted on debt, re-valued their currency, merged with other nations, split apart, ceased to exist, adopted new currencies and many other things harmful to the value of their citizens' money.
Only a believer in American Exceptionalism could remain hopeful that our spending/borrowing/taxing binges will not sink the U.S. to the level of "all the other nations". :-)
The US10Y yield close today was 3.2916%. Clearly bond buyers are far from believing the US is susceptible to a collapse, at least within the next decade.
ReplyDeletePoliticians don’t make adjustments to the money supply. The Fed does that and, in my view, they’ve done a pretty terrific job over the years. (I can’t imagine anyone would want the M3 set by politicians.)
A low-grade inflation is definitely desirable. When consumers see that things they want cost less now and more in the future, they have a small incentive to spend now. When we have no inflation, no such incentive exists. When we have deflation, consumers are right to hang on to every penny for as long as possible, because those pennies will buy more in the future than they do right now. That causes demand to plummet. Less demand means fewer goods moved. Fewer goods moved means less production needed. Less production needed means fewer employees needed. Ergo, if you want to reduce unemployment, a low-grade inflation is desirable.
Yes, inflation will make homes, and commodities and stocks and labor and everything else, cost more – nominally. In “real” terms (that’s economist for inflation adjusted) the costs don’t change. If you were acquiring houses in trade for boats instead of dollars, their cost wouldn’t change. Supply and demand can change real cost, but inflation does not.
Yes, lingering deflation is worse than lingering inflation. But a brief deflation in a like housing helps buyers and sellers keep score...it happens sometimes in a dynamic economy. What the Fed has done is institutionalize inflation as a national characteristic.
ReplyDeleteI think the power of freedom and reward that drives the American economy has made the Fed look good more than vice-versa. My main beef is that whether chicken or egg, the Central Banking system gives Congress cover to habitually overspend, to the detriment of the currency.
Time will tell about the wisdom of current bond-buyers.
George Will had a good post touching on this topic:
http://www.washingtonpost.com/wp-dyn/content/article/2010/11/17/AR2010111705316.html
We’re getting *major* deflation in housing and even the Fed can’t stop that. It’s fine, that happens all the time with economic bubbles. Individual assets still move freely. A low-grade inflation drives an economy forward like few other things. And I’ve seen no evidence that a lack of inflation would make Congress spend less.
ReplyDeleteI’d agree that capitalism has a remarkable regenerative effect on an economy gone-off-the-rails and to a larger extent than the Fed’s ever used its powers, including now. But a five-year downturn beats a twenty-year downturn and we used to get twenty-year downturns in the US when we were on the gold standard. Furthermore, if we were pegged to the value of gold, the value of our currency would have ascended quite dramatically over the last year, eliminating our ability to compete economically in the world. Our rate of unemployment would likely be around 30%, as you would have killed nearly all businesses that rely on export.
If you have no spare dollars, inflation doesn’t hurt you. Your wage goes up along with your expenses. One tenth of an hour of work still buys you a Coke-a-Cola. If you have some net worth and you are trying to store it over a long period of time, you would be foolish to try to store it in dollars (or nearly any other currency). You very likely wouldn’t want to store it in precious metals or stones either as they are notoriously volatile.
But you have many options for storing your financial resources. You can easily trade your dollars for Reals, Yen, pork belly futures, live cattle, shares of any number of companies, rare furniture, baseball cards, or nearly any other asset you can imagine. For my money, a good business with pricing power is probably your safest bet for storing value, but of course that requires either you or someone you trust has the skills to read a set of balance sheets.
Consider two islands, with a hundred castaways on each. One has a currency that is inflexible in value and nearly always has five-percent unemployment; on occasion it has ten-percent unemployment. The other has a flexible currency, enough that nearly 100% employment is the norm. Come back in a hundred years and that slow leak of productivity will leave our island with the inflexible currency far behind in its development compared to the island with the flexible currency.
A currency is just a means. The goal is the maximum possible productivity.
Amen to "a good business with pricing power"!
ReplyDelete