Economics

[nanningbob]

I saw this debate between gold and paper money and it was a nice summary so I posted it.

Your central premise is both correct and incorrect. Money by itself is indeed worthless. We currently trade goods and services for green pieces of paper with painted on numbers. However, the worthiness of that is no different than using gold as a trading instrument. Gold by itself also has no value. You can’t eat it, plant it, cover yourself in it to keep you warm, or build with it. The value of it lies in what others are
willing to trade you for it. In that sense rocks or animal pelts could be used, and have been used, to the same effect as gold and our current greenbacks.
The same problems that arise in the current banking system arose in the gold standard regarding inflation and the devaluing of currency. Fractional banking is what allows economies to grow. This is why most developed countries operate under this system. If I deposit $100 into Bank A, I retain $100 worth of purchasing power. If you take out a $100 loan from Bank A, now you have $100 worth of purchasing power. Simplistically, our economy just grew by $100. Now, your argument should be “what if I can’t pay back the $100 loan and you need your $100.” Well, that is why we have multiple banks and multiple banking customers. I concede that if the run is large enough some people would not be able to withdrawal their money. However, I pose that overarching public good served by a growing economy is worth that small risk. Wouldn't you agree?

Hallo Bob,

My humble opinion in response to the summary:


1. True that money / value is what people say it is ( whether paper money, cowrie shells, tally sticks, etc )

2. Gold can be more easily controlled and manipulated, especially when amassed by relatively few people (artificial scarcity), thus making it very easy to trigger inflation/deflation when a currency is 'backed' by gold

3. The 'greenbacks' in current circulation are not the same as Lincoln's greenbacks. Lincoln's greenbacks were printed DEBT FREE for the good of the Union. Today's dollars are printed of Government-issued debt bonds purchased by the Federal Reserve. No comparison

4. Fractional banking is what is KILLING economies. Why should Banks be allowed to lend out money they DON'T HAVE? [ upto x10 in some countries ]. Yet another way to cause periods of boom and bust.

Summary: If the Government can issue a bond, it can issue a dollar [ the quantity of which can be controlled to match the monetary needs of the society ]. Gold is just an excuse to put global wealth in the hands of a few. If not, why is silver coinage banned (e.g in the US)? [ Ans: because it is debt-free currency ]

Cheers

First, thank you for responding. When I opened this thread this is what I had in mind, a reasoned discussion about economics. So I would like to add some thoughts to what you said.

1 and 2 we agree so no need to continue that part. You mentioned silver later on but I see the same problems for it as gold. At some point there would not be enough to cover population and economic growth. Another reason would be if your a country cant mine silver you are screwed. You do not have the ability to increase your money supply unless you do it the old fashion way of: A. going to war and taking it from someone else OR B. having a colonial empire where you take/trade it back to your country. Both of them we supposedly abhor today.

3. Yes I agree the Lincoln greenback was different than today's money but it did not solve the debt problem. We still ran up over 100% debt to GDP ratio that was covered by the industrial revolution and westward expansion. In other words a growing economy and population solved the problem. At least for the USA, sorry dont know about other countries.

To me the real issue is not the banking system but government funding. Mankind has had a history of not living within their means. No matter what government has existed in history they all have spent more than what they take in thereby creating a point of collapse. If our government, USA or any other govt., spent money at the same rate it took money in we would not be facing the issues we face today. No one is forcing Congress to deficit spend year after year. They are not fulfilling their responsibility or preparing budgets that are balanced. They either refuse to increase taxes to cover expenses or they refuse to cut govt. spending to match income. As long as we have that problem, and it is a problem that has faced every form of govt., we will continue to face the issues we are facing. Whether we use Lincoln's money and run deficits thereby creating unsustainable inflation long term, or debt funding of new money (we do this to control inflation) both systems will fail long term because the real issue is deficit spending. Gold, silver, copper, salt, animal pellets, sheep, (whatever form of money you with to use) have all faced this economic problem of deficit spending, bubbles, recessions, depressions, etc.throughout history.

[nanningbob]

4. My answer is above, the problem is deeper than fractional banking and getting rid of it will not solve the fundamental problem of deficit spending by govt. However, fractional banking does solve 3 problems:

A, You can prevent politicians/govt. from just printing money and paying bills. You may ask but that is what they are doing but a certain portion is repaid back in interest thereby controlling inflation or keeping inflation within a certain rate. In other words there is a price to printing money. There is a counterweight.

B. You can have economic growth by making sure the money supply is also on a constant rate or growth. In other words inflation (or the supposed devaluation of money) is planned into the system. I do not look at inflation as evil or wrong but a necessary component of a growing economy. You have to have an inflating currency to keep economies growing. (However just increasing the money supply, which we are doing now, does not equate to economic growth. A serious fallacy of what is going on today.)

C. It allows almost anyone to borrow money, even those without proper assets, so they can have a chance to move up. The poor remain permanently poor if they cant borrow money, because they don't have the assets. They cant get assets because they are just trying to survive financially getting the basics. The best modern example of growth from fractional banking is China. They had no money or assets and were permanently poor. They allowed investment (borrowing) in and dropped the cash only economic system. The govt. began printing money and entering it into the system and the rest is history. Now they are beginning to face the same problems other countries face with debt. If you ask the average Chinese person would they want to remain poor and debt free or have debt and move up, they would choose debt and move up.

But what is an alternative?

[nanningbob]

I wasnt sure where to put this so I put it here. Sept. 11 A day in history for the USA. Live tweets from someone who was with the president.

http://www.businessinsider.com/ari-flei ... eet-2014-9

[yosarian0]

Ho Bob,
This is an interesting article from the folks at Mauldin Economics. I belive if what the authors say is true to some degree then it has real significance to the FX world in the coming years/months. I've pasted the lead into the article below. Full article is at link below. I'd like to know what you think. Some time ago you had posted about the 'real situation in China' on one of the boards here. I think this relates to some of the things you mentioned. [Regstration may be required to get the full article.]

http://d21uq3hx4esec9.cloudfront.net/up ... _TFTF2.pdf
http://www.mauldineconomics.com/frontli ... ng-markets

Regards,
Yosarian0

[aclyeh]

\

The problems we face economically are more than just Conservative vs. Liberal, Socialism vs. Capitalism, etc. The problem is much more fundamental than those viewpoints. A truly great read in economics.

In a forthcoming book Thomas Piketty, an economist at the Paris School of Economics, argues along similar lines that America may be pioneering a hyper-unequal economic model in which a top 1% of capital-owners and "supermanagers" grab a growing share of national income and accumulate an increasing concentration of national wealth. The rise of the middle-class--a 20th-century innovation--was a hugely important political and social development across the world. The squeezing out of that class could generate a more antagonistic, unstable and potentially dangerous politics.
(The underlined part by me is clearly showing up in our Congress and political institutions.)

I came across this post from more than 2.5 years ago, and after the results of the Brexit vote and US elections, I think nanningbob's original post points out one of the current trend with increasing relevance: "The rise of the middle-class--a 20th-century innovation--was a hugely important political and social development across the world. The squeezing out of that class could generate a more antagonistic, unstable and potentially dangerous politics."

Some people are delighted by the US vote and Brexit referendum results, and others are left shell-shocked, but all sides now must see that this squeezed middle-class has an equality-weight vote.

The big question is whether Trump's intended policy of tax cuts, increased government spending, and trade and border controls will solve the economic problems he talked about in his campaign.

This thread by nanningbob I think may be worth reviving!

[nanningbob]

So which Trump will we have?
1. The Hoover Trump--Isolation--anti-immigrant--trade war--tariffs
2. Republican--cut taxes--increase spending--depreciate the dollar massively--blow the budget
3. Pragmatic--business--invest in Infrastructure--have a budget--long term view
Or
???????????

[aclyeh]

So which Trump will we have?
1. The Hoover Trump--Isolation--anti-immigrant--trade war--tariffs
2. Republican--cut taxes--increase spending--depreciate the dollar massively--blow the budget
3. Pragmatic--business--invest in Infrastructure--have a budget--long term view
Or
???????????

A very similar question to which Brexit will we have?
1. Backtrack in the unlikely case that parliament can and does say no
2. follow the 4 principles and maintain single-market access
.
.
.
N. clear-cut exit

[nanningbob]

I find it interesting that the world seems to change direction at the same time. Seems odd.

[nanningbob]

With the USA ready to repeat the economics of 2001 we should expect the same results. Mainly long term dollar depreciation resulting in hold and add strategies for USD crosses. See chart for previous history and prediction of the future. In other words look to sell the dollar as a long term strategy and watch your buys so you don't get buried. This is a monthly chart of Eur/USD from 2002 to present.

[nanningbob]

This assumes the tax cut plan is passed in USA.

This chart is the Euro/USD exchange rates. Exchange rates should remain stable and range between a high and a low. That means both economies are doing well in relationship with each other. When they go outside those ranges you can expect trouble.

Bottom line you can't flood the market with money that should be paying the Govt. Bills and also flood the market with debt dollars being printed up to pay bills you should be using tax dollars for. The results are 100% predictable what will happen. If you know how to make money with this information, most rich people do, then you are jumping up and down with glee because you know exactly what to do. That's how the game works.Anyway sell the dollar against the Australian, New Zealand, British Pound, and Euro. In other words buy those currencies. When it reaches the top of the chart sell those currencies and buy dollars or gold and silver, if there is anything left to the dollar.

If you can't afford to trade get out of debt and stay out of debt. If your debt free at the collapse you then can buy things cheap like other rich people and build your asset wealth. Good luck.