The Economic recover: anyone willing to make a prediction?

[Buffy]

This is where its value lies: it avoids the ruination of currency with hyper inflation.

Well, sort of, but its one of the worst ways to go about it! Talk about cutting off your nose to spite your face!

 

You're missing the point that no matter what you use as "currency" whether it's paper or Pieces of Eight supply and demand rules the markets, and artificial pegging of your currency will exacerbate fluctuations in that supply and demand.

 

It's true that pegging your currency to a specific exchange rate on a rare commodity can rein in foolish Monetary Chiefs, but the benefits of prudent floating of currencies to smooth out economic cycles far outweigh the benefits of assuming that those Chiefs are fools and making their jobs automatic.

 

The thing that the power to print money--the key factor in causing any level of inflation along with shortages that even a gold standard does not protect against--does is that it allows spending by the government to fill in when consumers and businesses cannot during economic contractions. If this spending is in the form of loans to be paid back later (that's what those bailouts are), or in the form of infrastructure projects or investments in new technology that provide both short term work opportunities as well as--and more importantly--providing jump-starts for new business as the expansion starts, such printing of money is simply in advance of the growth to come.

 

This sort of advantage from government spending is never possible according to extremists on the Right, and it would be better to go back to the pre-Civil War sitution of every man for himself, and if companies want railroads or highways or airports to improve trade, well, they just have to build them themselves. The fact that Obama is suggesting this sort of spending of course is a harbinger for Imminent Doom as far as these folks are concerned, no matter what the last century and a half of US history has shown.

 

So:

We are heading for hyperinflation also and I think we are in for a taste of it when we come out of this very expensive recession.

Why do you think so? With the recent drop in oil prices there are no inflationary pressures at all, and the Trillions of dollars of government spending that are currently being put in place are not only essential to avoiding the implosion of the economy a la 1930-32, but are spit in the ocean compared to the size of the US economy, and assuming even a slow turnaround, can easily be absorbed by new business activity--and rapid growth thereafter if we become leaders in green tech because of all the investment that's going to be included.

 

You may be disappointed if you fail, but you are doomed if you don't try, :)

Buffy

[charles brough]

Buffy, that is a very eloquent response and I agree with much of it. It is just that I put myself in historical perspective and see that when civilzations abandon the precious metals, they get roaring inflation and that it accompanies the decline of the civilization. I recognize that the gold standard is not going to be re-imposed here in the short to intermediate term. I am thinking thinking ahaid to the next civilization in a "what would be best" sense . . .

[charles brough]

LaurieAG:

 

. . . a good presentation of the gold standard . . . But I think you are no poet!!! :)

 

 

I once owned a few gold ingots in Jakarta but had to sell them because I could not take them out of the country. They fascianted me. There is nothing like gold. In Singapore, the jewelry shops only carried gold jewelry and usually 18 to 24 carrot. You could see the gleam from inside of the stores on the side walk outside. Now, I own gold stocks.

[Buffy]

It is just that I put myself in historical perspective and see that when civilzations abandon the precious metals, they get roaring inflation and that it accompanies the decline of the civilization. ... I am thinking thinking ahaid to the next civilization in a "what would be best" sense . . .

Yes, "next civilization" is the relevant caveat. Using the historical perspective on this though is somewhat akin to saying "whenever societies persecute Jews for being Kosher, it causes outbreaks of the Black Plague." Somewhat correlated in the historical realm, but totally irrelevant now that we have modern medical and public health practices in place....

 

Nothing will prevent nutcases like Mugabe from creating hyperinflation despite the existence of modern monetary policy, but outside of absolute dictatorships, societies do not tolerate even "high" inflation for very long any more, and even go along with the horrible tasting medicine to avoid it.

 

In ev'ry job that must be done there is an element of fun, you find the fun and snap! The job's a game, :)

Buffy

[charles brough]

Yes, "next civilization" is the relevant caveat. Using the historical perspective on this though is somewhat akin to saying "whenever societies persecute Jews for being Kosher, it causes outbreaks of the Black Plague." Somewhat correlated in the historical realm, but totally irrelevant now that we have modern medical and public health practices in place....Buffy

 

I am not sure I understand this. It seems you are saying we have the ultimate economic, political, etc. system now.

[Buffy]

I am not sure I understand this. It seems you are saying we have the ultimate economic, political, etc. system now.

Not at all! In fact quite the opposite!

 

You see by arguing we need a gold standard, we're saying, "people will never ever make the right decisions, and we can't trust them, therefore we have to instill rigid rules that will cause major disruptions in our economy."

 

Our current system is open to an evolution of knowledge and increasing amounts of data whereby the government--always under the review and approval of the electorate--can make intelligent decisions about tightening or loosening the money supply or other levers of monetary policy in order to smooth over the economic cycles which cause so much pain.

 

Social Darwinists will not agree with this approach, but that's just because they see no downside to destroying millions of livelihoods if things might ultimately be better (for whom?).

 

The whole idea behind interventionist monetary policy is that it is open to new ideas and new approaches, and is certainly better than the alternative.

 

Imagine medicine as it used to be practiced, with "doctors" using Bloodletting and Trepanation simply because the books prescribed what you were supposed to do and no "creativity" was allowed in treating patients. Certainly the upside is that everyone would get the same treatment and there'd be no opportunities for medical malpractice-chasing attorneys. But on the other hand, no risks would ever be taken on new techniques that relied on a doctor's *judgment* because, well, we can't trust *anyone*...

 

Arguing against the gold standard is not an argument that the current system is perfect, just that the gold standard is an ancient, harmful, and fully discredited idea that serves no useful purpose in modern society.

 

I should wish to see a world in which education aimed at mental freedom rather than imprisoning the minds of the young in a rigid armor of dogma calculated to protect them though life against the shafts of impartial evidence,

Buffy

[LaurieAG]

Arguing against the gold standard is not an argument that the current system is perfect, just that the gold standard is an ancient, harmful, and fully discredited idea that serves no useful purpose in modern society.

 

Hi Buffy,

 

The gold standard was never really discredited, the US just stopped buying enough gold reserves to cover the money they were printing in the early 1970's. The original idea, and what was supposed to happen after the Bretton Woods agreement, was that a gold standard gives traders an absolute translation rate for different currencies regardless of where they were actually trading.

 

Soory Buffy, you are getting the difference between free trade and fair trade mixed up again.

 

A gold standard is fair trade for all traders where no standard leads us into the free for all mess we are in today.

[Buffy]

No, you're confusing it with the more modern economic concept of Purchasing Power Parity which is what is used by economists to more accurately measure differences in exchange rates based on "the price of a basket of identical traded goods and services."

 

Currencies are traded based on perceived disequilibriums that occur in individual economies, and this arbitrage actually forces people to keep their currencies in line.

 

My favorite basket is of course The Economist's Big Mac Index which although originally created as a joke, has proven remarkably accurate in exposing these disequilibriums.

 

Some countries actually peg their currencies to others (e.g. the Chinese peg the Yuan to the US Dollar), but that results in numerous potential problems and can only be sustained in unusual circumstances (China can do it because of the incredible imbalance of trade it maintains with the rest of the world, especially the US).

 

But there are no serious efforts to reinstate the gold standard except among some far right wing nativists in a few places around the world. If you'd like to cite any, please do and we can discuss their rationales--or lack thereof.

 

You'll have to explain a bit more why anything I've posted in this thread has anything to do with free or fair trade: I understand the difference between the two but they have nothing to do with anything I've said here. Each can have an impact on currency valuations, but are irrelevant to the overarching topic at hand.

 

Sacred cows make the best hamburgers, :)

Buffy

[LaurieAG]

You'll have to explain a bit more why anything I've posted in this thread has anything to do with free or fair trade: I understand the difference between the two but they have nothing to do with anything I've said here. Each can have an impact on currency valuations, but are irrelevant to the overarching topic at hand.

 

It's just the difference between 'absolute' and 'relative'. In fact a Gold Standard is probably most like the 'relatively absolute' system that is the holy grail of physicists today, a universal link to all entities with directly translatable values that are not self referencing.

[charles brough]

the gold standard is an ancient, harmful, and fully discredited idea that serves no useful purpose in modern society.

Buffy

 

I can well imagine the Romans saying the same thing when inflation was out of control and Diacletian was bureauracrizing government and people were reverting to barter....or Confusian Scholars when paper money hyper-inflation was ruining the Chinese economy. Looking for a magical new way to create more money and pile up debt without suffering the consequences is like the knights riding off in search of the Holy Grail!

[questor]

If trade among countries is to occur, what should be the measure of value? The trade item itself can

have a value depending upon what someone will pay for it, but what is the value of the medium of exchange itself? What sets the value of the Romanian leu for instance? Would you sell your property for this currency? The dollar has been serving the purpose of currency of last resort, but now this is changing. What will become the standard, or store of value that the dozens of world currencies will all accept?

[Moontanman]

If trade among countries is to occur, what should be the measure of value? The trade item itself can

have a value depending upon what someone will pay for it, but what is the value of the medium of exchange itself? What sets the value of the Romanian leu for instance? Would you sell your property for this currency? The dollar has been serving the purpose of currency of last resort, but now this is changing. What will become the standard, or store of value that the dozens of world currencies will all accept?

 

Ok questor I'll bite on this one, since I am almost certainly the most ignorant one here on this subject I'm going to assume you know what you are talking about. What would you suggest? For that matter what do any of you suggest? So far all I read is what not to do, how about a what to do instead? I can see some real problems with the gold standard that have nothing to do with economics, not the least which is the limited supply of gold. At some point the cost of extracting gold from our environment will exceed the value of any gold extracted. What would be better than gold? Wouldn't the rarity of gold cause runaway inflation as the amount became fixed but the value of the world products keep climbing? School me in this. I have a suggestion, probably millions of reason why this would work but how about a standard value of man hours? Say one man hour is worth a certain amount, how many man hours it takes to produce a product would determine it's value and a man hour would be fixed at a certain amount just like an ounce of gold is now. As i said i am ignorant in this subject.

[LaurieAG]

I can well imagine the Romans saying the same thing when inflation was out of control and Diacletian was bureauracrizing government and people were reverting to barter....or Confusian Scholars when paper money hyper-inflation was ruining the Chinese economy. Looking for a magical new way to create more money and pile up debt without suffering the consequences is like the knights riding off in search of the Holy Grail!

 

Hi Charles,

 

Cicero said that 'the sinews of war are infinite money', obviously after they ditched the gold standard.

[charles brough]

If trade among countries is to occur, what should be the measure of value? The trade item itself can

have a value depending upon what someone will pay for it, but what is the value of the medium of exchange itself? What sets the value of the Romanian leu for instance? Would you sell your property for this currency? The dollar has been serving the purpose of currency of last resort, but now this is changing. What will become the standard, or store of value that the dozens of world currencies will all accept?

 

Yes, a good question! The current stimulus packages and bailouts are not over and the amount could easily come to enough to supplant the collapse of credit, then we will have a recovery in which we have credit again but all that new money as well. This means hyper-inflation and serious questions about what will happen to the value of the dollar and the world economy.

[Buffy]

I think we need to get some Econ 101 straight here. There's a just enough knowledge running around in this thread to make it seriously lacking in any relationship to reality....

 

First of all let's talk about Inflation: by definition, Inflation is "too many dollars chasing too few goods." In a recession/depression, by definition you have too few dollars to support the economy. When markets see a downturn in sales, first prices *decline* and then suppliers exit the market eventually reaching an equilibrium, thus the biggest problem in a recession/depression is actually *deflation*. This is exactly what we're seeing pretty much across the board with the exception of food, for which demand is pretty much constant.

 

The primary recent exception to this was the period in the late 70's where we experienced something that has since been called "stagflation" where the rate of inflation stayed high while the economy contracted, however this was caused primarily by the combination of the Arab oil embargo and Nixon's price controls followed by the Ford and Carter administration's going overboard in increasing the money supply (by lowering interest rates) that caused a huge incentive to make money by abitraging the spread in market vs. Governmental interest rates that lowered investment and allowed structural inflationary expectations to increase (technically, what's known as an "upward shift in the Phillips Curve").

 

For those of you who are Peak Oil fans, what we've seen in the last few months is a bit depressing because it does show that the Saudi's were right, the "natural" price of oil right now should probably be $70/bbl, and the run up to twice that was really the bubble caused by the self-reinforcing flight of money from business investments into oil and other commodities. Because this was a market bubble and not a real supply restriction, when demand dropped dramatically, the price dropped incredibly, currently now down almost 60% in just 6 months. This is not to say we don't have long-term problems here, but just to show that the *primary* inflationary pressure in the current recession fixed itself exactly the way it's supposed to and *if* monetary policy is truly rational, we will not end up with stagflation in the short-term.

 

Hyperinflation though is like Rod McKuen's quote about the nature of his birth: "No one is born a bastard, you have to work at it." Under Keynesian Economics, utilizing Monetary Policy and Government spending, the Government can and should "prime the pump" by spending ahead of growth cycles, but if the government is not careful to predict inflationary pressure and increase interest rates, tax rates and rein in spending once it speeds up, you will get at least some inflation. If you just keep pumping, then the market will notice that there's nothing backing those bucks from taxes to pay for the spending or higher interest rates to slow things down--something that is indeed painful, and some politicians want to avoid like the plague--then you enter a vicious upward cycle that feeds on itself turning into hyperinflation.

 

Now this is where the Gold Standard comes in. The theory is that if the money supply is pegged to a specific quantity of gold, then there's no way for the government to ever allow the money supply to grow, and therefore by definition at least, you'll never have any inflation let alone hyperinflation. The problem is that that results in virtually every downturn in the economy to become a vicious *downward* cycle, meaning that they all turn into depressions! That's *exactly* the bee in William Jennings Bryan's bonnet in his Cross of Gold Speech that I referenced elsewhere: the lowest rungs of the economic ladder literally starve while the idiots who caused the situation get to hang on to everything they have and whine that "their hands are tied" by the "prudent" economic policy of the Gold Standard.

 

Great way to start a revolution actually!

 

But then again, so is runaway Hyperinflation: as I said, you need to be a real bastard to let it happen, and that's why it's almost *always* seen in countries with failed governments like Mugabe's Zimbabwe and Wiemar Germany. You basically need to have a total lack of responsibility and no organized opposition to end up with that sort of situation, and if you check, you'll see that Hyperinflation is *always* limited to a single country because it is all about that single currency.

 

Hyperinflation has everything to do with a complete failure in the ability of the currency to have any real "value." Hyperinflationary episodes are indeed quite often solved by enforcing a link to a generally accepted (trusted) asset, and thus, something like a Gold Standard can be a *cure* for Hyperinflation.

 

However using it as a *prophylactic against* hyperinflation is incredibly short-sighted. Justifying it basically means saying that you have no faith in your fellow man. I understand that, but it's not the way you want to go if you want to have better upsides and easier downsides in your economic cycles.

 

So,

the gold standard is an ancient, harmful, and fully discredited idea that serves no useful purpose in modern society.

I can well imagine the Romans saying the same thing when inflation was out of control and Diacletian was bureauracrizing government and people were reverting to barter....or Confusian Scholars when paper money hyper-inflation was ruining the Chinese economy.

Really the problem here is you can use any excuse you want to justify actions that promote Hyperinflation, but you're still an idiot if you continue to print money. Conversely, if you argue we must use the Gold Standard as a our only monetary policy, you're really *just* as likely to be lined up against the wall and shot as they Hyperinflationary guy when the revolution comes. At best, you're lucky if you end up like Herbert Hoover.

 

If trade among countries is to occur, what should be the measure of value? The trade item itself can

have a value depending upon what someone will pay for it, but what is the value of the medium of exchange itself? What sets the value of the Romanian leu for instance? Would you sell your property for this currency? The dollar has been serving the purpose of currency of last resort, but now this is changing. What will become the standard, or store of value that the dozens of world currencies will all accept?

 

Now this *is* an interesting question, and here's a really funny answer: most *recent* cases of hyperinflation have been solved by pegging the target country's currency to......the US Dollar!

 

Now certainly its possible for us to get in a situation where the world loses faith in the dollar--I'm not dumb enough to argue that, in fact the Bush administration *very actively* talked down the value of the dollar over the last four years, resulting in about a 20% drop in its value versus most other currencies (except China which is pegged to the dollar!) in a fairly misguided attempt to increase exports while decimating the US economy through laissez-faire business practices that continued to destroy local manufacturing and off-shoring of whole industries--but it's still the *most* trusted of all currencies. The major risk--as I've noted in other threads--turns out to be if the Chinese *unpeg* the Yuan from the Dollar and stop buying our government bonds, something that is actually becoming *less* likely because their economy is falling in tandem with ours (safety in numbers ya' know).

 

So, back to questor's question: "What will become the standard, or store of value that the dozens of world currencies will all accept?" The answer is that it is going to continue to be the currency that is *strongest* no matter how *weak* it is. There has been much speculation about movement to the Euro as the standard for denominating Oil, but this issue is rather overstated. The fact of the matter is that Oil is one of the few commodities that is really traded predominantly in a single currency--mostly due to inertia and reduced transaction costs for a commodity that is more widely transported than just about any other--and what really matters are *currency markets*. Currencies have become probably the most heavily traded commodity, and because the "transport" costs are virtually zero the relative value of currencies is arbitraged to death. It is *constantly* measured not only by governmental measures of local purchasing power, but by international banks and traders as well as pundits in the press (see the Big Mac Index).

 

If the dollar were to fall precipitously in value--that is, hyperinflation--then the markets would discount its value immediately and it would cease to be standard currency for trading *other* goods and services. If it does, it'll be our *own* fault though, and the rest of the world would punish us severely until we got our act together.

 

But the main thing to remember is that its the *dollar* that will get whacked, and the rest of the world--while suffering from the loss of trade as the US economy deteriorated--who would use....intelligent monetary policy to become the economic leaders of the world.

 

So,

The current stimulus packages and bailouts are not over and the amount could easily come to enough to supplant the collapse of credit, then we will have a recovery in which we have credit again but all that new money as well. This means hyper-inflation and serious questions about what will happen to the value of the dollar and the world economy.

Yah, we could be bonehead stoopid and let it get out of control, but yes, given the openness of our society--this ain't Zimbabwe pal, especially now that Cheney and the neo-cons are gone--its unlikely that any US government would be allowed to do so.

 

But note, it would be a self imposed one, it would take quite a bit of effort to make it happen because this is a darned big economy, and until the money expansion actually causes an increase in demand with which to push any inflationary movement *at all*.

 

In other words, like being a bastard, if we're going to have hyperinflation, we're really going to have to work at it.

 

Having no faith in anyone at all to do the right thing may be "safe" but you're going to really miss out on that green boom that's coming! :)

 

Good luck on your survival wagon!

 

There will always be dissident voices heard in the land expresing opposition without alternatives, finding fault but never favor, perceiving gloom on every side, and seeking influence without responsibility, :)

Buffy

[Dutchdivco]

I saw a news show, last week. They were trying to convey the world wide nature of the current financial crises, in 5 min. or less. So, they jumped quickly from reporter to reporter, in Capitals around the world;New York, Paris, London, Berlin, Moscow, etc. All of them had the same story, doom and gloom......Except ! You'll never guess.....BAGDAG!! Seems no one buys a house on credit, in Iraq. (Would you extend credit to someone who might get blown up tomorrow? My speculation, not the reporters.) When someone wants to buy a house, or other large ticket item, they meet at the buyers bank, and transfer the funds there. Reporter also said the Iraq stock exchange had increased in value, 30% over the last 3 mos. (Going from memory here).Seems to me an addiction to credit is the problem, (especially 'easy credit') and NO ONE wants to go thru 'Cold Turkey", Credit is a way of 'creating' additional dollars. Might call them 'future' dollars.Artificially, if I can use that word, stimulates economic activity. Kind of like, "Gee, when I take these little pills, I am SOOO much more productive."If I take MORE pills, I'll be even MORE productive!!" Soon, you are running around, (Speeding your A** off!) and not really producing ANYTHING! But, your doing it very fast. The analogy breaks down, as all do. My point is that Gov'ts at all levels, businesses and individuals got addicted to credit.Stimulas packages are attempts to get credit moving again are like the drug addict who's supply dried up, scrambling to find a new supplier, instead of kicking the habit.For me, "Niether a borrower nor a lender be". is my motto, and while I may at some point, I've looked hard, and haven't found any way, yet, in which the economic crises has effected me or mine. Jim

[Dutchdivco]

Oh, and on the initial question, I see Dow below 4000 w/in 2 years, unemployment and underemployment (i.e. counting those who stop looking, and those who accept part time) going to +25%, same time frame. Cold turkey is VERY unpleasant, thats why people do anything they can to avoid it.It takes a real crises to bring about change. Jim