What is the Objectivist alternative to the Federal Reserve?

[BaalChatzaf]

The US economy and the world's is built off the central banking model and they will not suffer radical revision without a deflationary-depressionary implosion even if done "right." The additional problem of no one knowing how to do it "right" would only make things worse. Central banks and their countries will never give up their monetary power. The immediate problem is the euro which should never have come into being. The euro is only the old German currency benefiting Germany at the others' expense. All the other euro currency countries have given up their monetary-economic autonomy. Each country should have its own currency and issue debt or acquire debt only in its own currency. When the relative value of one currency gets out of whack relative to the others that country would have to adjust the loseness or tightness of it or suffer in its trade. All currencies are "fiat." That does not mean they are valueless. They are all valued by somebody. Gold is not a currency for it is not used in trade nor can it be rationally priced as a currency even if one big and rich country tried to go on a gold standard via the central banking model. The gold would be either sucked in or sucked out. The debt model of economic functioning would collapse and international trade an unsolvable mess. There is not enough gold in the world considering population and general level of wealth for it to go world-wide as an intrinsic assert. Other commodities and assets would need to be put into a "basket." Etc., even if myriad countries had any to do that--most don't. Gold is insurance, that's all. (Let it be priced in multiples of cost of production and you'll have an environmental mining catastrophe.)

--Brant

Finally!!! Someone has said there is not enough gold to be used as a high velocity trade medium.

Ba'al Chatzaf

[Wolf DeVoon]

Finally!!! Someone has said there is not enough gold to be used as  a high velocity trade medium.

 

Bzzzt - fail. There's a huge difference between base money and credit.

 

Compare gold production (blue) and base money (blue line in second chart)

Strip out the "hockey stick" QE ballooning of Fed balance sheet in 2009 and

you see that cumulative gold production is identical to long term base money.

Now look at the ratio between base money (little tan sliver) and total credit market:

Sometimes I despair at ignorance. The spread between credit and base money is inflation.

The dip after 2009 is marginal deflation and stagnation of bank lending. Why lend when the

Federal Reserve is handing out costless, riskless liquidity? ($3 trillion from 2009 to date)

[moralist]

Finally!!! Someone has said there is not enough gold to be used as a high velocity trade medium.

Ba'al Chatzaf

There's plenty of gold to support trade. It's simply a matter of scale. What's wrong with working for a dollar an hour and buying a car for $300 or a home for $3,000?

Greg

[Brant Gaede]

Finally!!! Someone has said there is not enough gold to be used as a high velocity trade medium.

Ba'al Chatzaf

There's plenty of gold to support trade. It's simply a matter of scale. What's wrong with working for a dollar an hour and buying a car for $300 or a home for $3,000?

Greg

I'm pretty sure the country and its minions would not know how to either do it or tolerate a vast amount of disruptive economic pain. I think it would be a switch from debt or credit to savings then consumptive and capital spending. It's true what's going on today destroys capital by upsetting the consumption/capital ratio for capital never arrives from the federal government's expansionary monetary policies. That's only for eats, shelter, clothes and iPhones. The USA is living on its seed corn. All debt is a mortgage on the future. Some is both tolerable and desirable. Not what's going on today. For instance, the US is buying pretty stuff from China with its capital stock. Many of those dollars are coming back buying industries and real estate. Relatively soon our youngsters will be houseboys to energetic Chinese communists capitalists who work like hell and pay less well.

--Brant

[Wolf DeVoon]

Germans are trying to repatriate their gold from FRBNY. They were offered 5 tonnes a year. It'll take, oh, 120 years.

[deanwins]

The US economy and the world's is built off the central banking model and they will not suffer radical revision without a deflationary-depressionary implosion even if done "right." The additional problem of no one knowing how to do it "right" would only make things worse.

Option A: The most honest way

1. Stop deficit spending, revert the federal government to only defending US soil and evident retaliation (no social security, war on drugs, policemen of the world, etc).

2. Pay off the debt by taxes

3. Buy some amount of gold, and regularly have independent audits of the amount stored.

4. Restore convertability of dollars to gold, redefine the dollar as number of dollars Federal Reserve has created / kilograms of gold stored. This might end up being something like one US dollar IS 1mg of gold.

5. Allow private banks to issue their own deposit receipts for "dollars" (dollars are now an amount of gold)

If #1 and #2 are performed incrementally over 20 to 30 years, it would be the least shocking to the economy. If the Federal Reserve reduced its "dollars issued" back to pre-2008 levels (800 billion instead of current 4100 billion) when restoring convertability (#4), that would be even more honest.

Option B: The less honest and more shocking way

1. Resume permitting banks to transact, loan, etc in gold backed accounts, where the the currency unit is something like "milligrams (mg) of gold". At today's gold prices, a mg of gold is worth about $0.04. Allow the banks to store their own gold in their own vaults, issue their own electronic digital ledger/currency (and paper redeemable notes if they want). This would be permitted in parallel with the current "dollar", so we'd have two currencies at the same time. Allow international trade of the gold too.

2. Over a few years, smart & big money will move to the gold, once banks are established and working and busineses begin transacting in the new gold currency. Given that people are holding fewer Federal Reserve (Fed) notes (current dollar = FRN), the FRN would lose market purchasing power, making it easy for the US Gov to repay its FRN debt, but at the same forcing the US Gov to balance its budget, since few would want to buy FRN bonds, and since gold bonds would ask a much higher interest rate.

We couldn't predict how quickly people would switch over to using the gold currency, nor how fast the FRN would lose value, hence nor how fast the US Gov would have to balance its budget. Hence its more "shocking". Its less honest because its basically a final default on the US's old 1913 dollar debt... the crime was already mostly done back in 1933 (Executive Order 6102: domestic gold theft) and 1973 (Nixon shock: international gold theft).

Central banks and their countries will never give up their monetary power. The immediate problem is the euro which should never have come into being. All currencies are "fiat." That does not mean they are valueless. They are all valued by somebody.

I agree that central banks don't want to give up their monopoly power over issuence of money. They like to be able to give themselves money that the sheep are forced to transact in (and hence work for and save with, giving the fiat market purchasing power). I agree that "fiat" doesn't mean valueless. Fiat means "by government decree", basically, by government decree if you try to create a bank that issues checks, notes, or credit with anything other than US FRN (dollars), then you will be thrown in jail and your bank assets will be confinscated. Fiat has value due to the increased productivity of individuals due to specializatin and trade, combined with that the fiat is an enforced monopoly on money, that people must transact and save in that currency in order to benefit from specialization and trade. Given a certain supply (monetary base) of fiat units, and that the fiat is an enforced monopoly, and some ratio of benefit to specialization and trade rather than doing everything oneself... The number of units of fiat people want to save and work for each day is the final component of the determination of the market purchasing power of the fiat.

The euro is only the old German currency benefiting Germany at the others' expense. All the other euro currency countries have given up their monetary-economic autonomy. Each country should have its own currency and issue debt or acquire debt only in its own currency. When the relative value of one currency gets out of whack relative to the others that country would have to adjust the loseness or tightness of it or suffer in its trade.

Agreed, although I wouldn't say Germany has benefitted much yet: If Greece, Spain, etc just default instead of paying their euro debts, then Germany basically just financed them for no gain. But if Germany forces them to pay back their euro dept (without inflating it away), then yea, Germany benefits.

Gold is not a currency for it is not used in trade nor can it be rationally priced as a currency even if one big and rich country tried to go on a gold standard via the central banking model. The gold would be either sucked in or sucked out. The debt model of economic functioning would collapse and international trade an unsolvable mess. There is not enough gold in the world considering population and general level of wealth for it to go world-wide as an intrinsic assert. Other commodities and assets would need to be put into a "basket." Etc., even if myriad countries had any to do that--most don't. Gold is insurance, that's all. (Let it be priced in multiples of cost of production and you'll have an environmental mining catastrophe.)

Gold is not a currency because the powers that be (controllers of Federal Reserve, JP Morgan, Goldman Sachs, etc) will influence the US Gov to confinscate the gold from anyone who tries to use it as a currency, whether foreign or demestic. "Gold standard via the central banking model" -> thats a contradiction. Gold is essentially a decentrallized money. A la Austrian economics: if gold is "sucked in", that would mean that foreign countries would almost run out of gold, and then a trade balance would be established; If gold is "sucked out", that would mean that domestically gold would almost run out, and then a trade balance would be established. "There is not enough gold in the world": well yes, not at gold current market valuation in the context where the Fed's friends will confinscate... but in a context where instead governments didn't steal from gold backed banks, the value of gold would scale to market supply/demand market value. "Other commodities and assets would need to be put into a "basket."" No, not need, but surely the gov could permit silver and other assets to be banked, and also allow baskets... whatever the free market decides to use.

"Even if myriad countries had any [gold] to [switch to gold backed banking]--most don't." Having an existing store of gold is not necessary. Gold can be accuired through trade. New currencies can be established over time (Option A) or in parallel (Option B).

"Let it be priced in multiples of cost of production and you'll have an environmental mining catastrophe." I'm not sure what you mean. "Let it be priced" -> indicates some government forced/ensured peg. "multiples of cost of production" -> so you are saying that 1kg of newly mined gold should be "priced" to be equal to say 2x, 2kg of previously minted gold? That could potentially result in an environmental catastrophe, or more likely, the government that was supplying all of the gold to the mining companies for this transaction would go bankrupt. This is a strawman attacking a nonsensical non-Austrian policy. I'm not suggesting a peg. I'm suggesting switching to transacting in units of gold.

[Wolf DeVoon]

Fun and games at the Fed today. Really a jaw dropping must-read. http://www.zerohedge.com/news/2014-09-30/what-just-happened-todays-crazy-and-biggest-ever-window-dressing-reverse-repo

Dean, gold payments already defacto b/w China, Russia, Iran, Turkey, Venezuela. Coming soon to a neighborhood near you.

[deanwins]

More on this offtopic:

Central banks and their countries will never give up their monetary power.

I agree. This is an important point. But it is besides the point when asking the question of "What is the free market (Objectivist) system of money and banking?"

Here's my thoughts on this subject...

Gold stored in private banks is simply too vulnerable to theft by governments. Military power versus centralized store of wealth is simply too great given our current technological situation. I disagree that human nature is "good". Human nature is only "good" to the extent that people _benefit_ from specialization and trade, which is not God given nor a universal law of physics. Evolution -> "benefit" means increase attainment of the goal of successful reproduction. Hence elite manipulators and complacent welfare queens.

Hence given our current technology/context, I don't think we'd go back to using gold for money. The elite manipulators and welfare queens are too powerful. Gold can still be used as a long term store of wealth.

[Brant Gaede]

What's "long term"? Do you want to "store" a million dollars in gold (where?) or own a million dollars worth of a low cost mutual fund that's invested in the S&P 500 for the next 100 years?

--Brant

you take the gold way and I'll take the fund way and I'll be richer than ye when I'm 170yo!

[Jules Troy]

I have a gold tooth.

[deanwins]

Brant,

Long term is yea, over a person's lifetime, say 20 to 100 years.

If I had a million dollars in gold I'd probably also have a good amount of property to bury it in. Definately not store the gold in a bank nor GLD fund etc... because owning the gold is for the expressed purpose of minimizing counterparty risk.

S&P 500 is worthwhile diversificaiton asset. S&P does have risks though... its embedded in the unstable financial system of today, where you own it through a bank rather than having direct stock certificates. I wouldn't suggest diversifying into bonds right now though.

Its not all or nothing when it comes to investment choices. Diversification is a good idea. I wouldn't like to have to choose one or the other.

[deanwins]

Wolf DeVoon,

Not sure what the Reverse Repo is exactly, nor what is going on here. My guess is that some people are doing some financial shinanigans at the end of each quarter in order to make their books look better during some mandatory audit. Do you have a link to a better explanation?

[Wolf DeVoon]

Brant,

Long term is yea, over a person's lifetime, say 20 to 100 years.

If I had a million dollars in gold I'd probably also have a good amount of property to bury it in. Definately not store the gold in a bank nor GLD fund etc... because owning the gold is for the expressed purpose of minimizing counterparty risk.

The SPG police are going to pull you over. WRT gold, it's customary to speak in ounces, kilos, banker bars, and tonnes (not dollars).

Folks who have significant counterparty risk buy monoline insurance or credit default swaps. You're probably not in that league.

Gold is like real estate, oil, platinum, rhenium -- a finite resource in short supply.

Like peak oil, peak metal is a geological fact. There will be less "trash" in the future, more recycling, and severe reduction of whatever nations and individual consumers once thought they could afford. Certainly, there will be investment opportunities going forward. The Japanese Rare Metals Task Force, US Geological Survey, Netherlands TNO, and US Academy of Science have issued excellent reports discussing which elements are critical, which are "frugal" to be husbanded carefully, and others dubbed "elements of hope" that might be used in substitution. The critical list is well known: platinum group, rare earths, indium, manganese, nibbium, silver, cadmium, titanium, chromium, palladium, scandium, gallium, and neodymium.

"Critical Elements About To Become More Critical," Alrroya Aleqtissadiya (Dubai), March 22, 2013

[Wolf DeVoon]

Wolf DeVoon,

Not sure what the Reverse Repo is exactly, nor what is going on here. My guess is that some people are doing some financial shinanigans at the end of each quarter in order to make their books look better during some mandatory audit. Do you have a link to a better explanation?

Repurchase Agreement ("repo") http://en.wikipedia.org/wiki/Repurchase_agreement

Shortage of 10-year Treasurys http://www.bloomberg.com/news/2014-06-10/treasury-10-year-shortage-risks-trading-fails-rise-nomura-says.html

Rehypothecation leverage http://www.zerohedge.com/news/shadow-rehypothecation-infinte-leverage-and-why-breaking-tyrrany-ignorance-only-solution

When you get through all that, give me a shout and we'll discuss FRBNY and FOMC.

[Brant Gaede]

Brant,

Long term is yea, over a person's lifetime, say 20 to 100 years.

If I had a million dollars in gold I'd probably also have a good amount of property to bury it in. Definately not store the gold in a bank nor GLD fund etc... because owning the gold is for the expressed purpose of minimizing counterparty risk.

S&P 500 is worthwhile diversificaiton asset. S&P does have risks though... its embedded in the unstable financial system of today, where you own it through a bank rather than having direct stock certificates. I wouldn't suggest diversifying into bonds right now though.

Its not all or nothing when it comes to investment choices. Diversification is a good idea. I wouldn't like to have to choose one or the other.

I was only comparing two asset classes, actually. One preserves your wealth over time and the other increases and preserves it. Both have their uses and liabilities. As an addendum, I made no investment recommendations.

Brant

I hope

[deanwins]

Wolf DeVoon,

FRBNY Federal Reserve Bank of New York. FOMC Federal Open Market Committee... what did you want to say about them?

[Derek McGowan]

1. Resume permitting banks to transact, loan, etc in gold backed accounts,

I appreciate your comprehensive responses but this is where my question is really based.

My question is really asking what do you really think will happen if the Fed were abolished. My elaborations after are my assumptions that nothing different would happen. You really believe that the banks of today (not of the past or a future ideal) are just itching to get back into backing their accounts with gold? These are the same banks who constantly push for further and further fractional systems. That doesn't mean that I don't think there would be some banks who did follow that gold path, after all my bank, BB&T, didn't follow everyone else into the sub prime mortgage debacle, BUT if the big banks decided they werent going with gold backed but they would collaborate to simply create their own greenback (just without the word federal on it) I'm going to have to assume that the vast majority of people would still remain with paper currency even if for sheer convenience.

[Derek McGowan]

See E-Gold and NORFED. If you try to compete then you will be prosecuted for money laundering and/or "counterfieting" and get all of your gold/silver taken from you.

See B-notes, see Bitcoin, see Sand dollars, see time dollars, see disney dollars, see berkshares, see Bay Area Bucks, see....

[deanwins]

Derek,

If the Feds didn't enforce a monopoly on Federal Reserve Notes (FRNs), new banks would open that would offer gold as money. Then consumers would chose to hold gold money rather than FRNs in their bank accounts, hence they'd switch to the new gold banks. So basically the system would change due to consumer demand and competition. Right now there isn't competition: the FRN is fiat, a government enforced monopoly.

=================

BNotes: http://baltimoregreencurrency.org/faq%C2'> BNotes are a dollar backed. There is no banking infrastructure around BNotes: you can't deposit them in a bank, write checks, take out a loan, deposit in a money market account etc.

Disney Dollars, berkshares, bay area bucks: Just like BNotes: dollar backed, with no banking deposit & loan infrastructure.

Sand dollars: You mean like the sea creatures?

Time dollars: looks like some marxist non-existant currency that beleives that hours worked digging and refilling holes is equivalent to hours worked manufacturing consumer goods... as if effort = market value.

Bitcoin: New distributed digital ledger. Banks not needed for transactions. Currency is still to young/unstable for there to be a loan market. Since no banks are required, and its distributed, the Feds can't really shut it down or use the excuse of "protecting depositors" in order to shut down the non-extant banks. The big banks with close ties to the Feds (essentially controlling the Federal Reserve infact, revolving door) refuse to do business with bitcoin related business. No bitcoin exchange (where you can post buy and sell orders at your own chosen price) have been allowed to come into existence in the US. Bitcoin is different... its not gold backed... its just a distributed ledger.

[Wolf DeVoon]

Wolf DeVoon,

 

FRBNY Federal Reserve Bank of New York.  FOMC Federal Open Market Committee...  what did you want to say about them?

 

In fiscal year 2013, redemptions of U.S. Treasury securities totaled $7,546,726,000,000 and new debt totaling $8,323,949,000,000 was issued.  The final numbers for fiscal year 2014 are likely to be significantly higher than that. http://www.zerohedge.com/news/2014-09-30/if-something-rattles-ponzi-scheme-life-america-will-change-overnight

 

 

[moralist]

1. Resume permitting banks to transact, loan, etc in gold backed accounts,

I appreciate your comprehensive responses but this is where my question is really based.

My question is really asking what do you really think will happen if the Fed were abolished.

Perhaps an even better question to ask is:

How can you live so that it doesn't matter?

Every one here is utterly powerless to control the Federal Reserve and the international banking system. So to talk about it as if they could is just a fantasy that powerless people indulge in to ~feel~ like they are powerful.

The only control that really matters is over our own personal finances.

Greg

[Wolf DeVoon]

Every one here is utterly powerless to control the Federal Reserve and the international banking system.

That's not the problem. The problem is that the Fed is powerless to control the Fed. They're stuck on ZIRP (0% interest rates)

[Brant Gaede]

1. Resume permitting banks to transact, loan, etc in gold backed accounts,

I appreciate your comprehensive responses but this is where my question is really based.

My question is really asking what do you really think will happen if the Fed were abolished.

Perhaps an even better question to ask is:

How can you live so that it doesn't matter?

Every one here is utterly powerless to control the Federal Reserve and the international banking system. So to talk about it as if they could is just a fantasy that powerless people indulge in to ~feel~ like they are powerful.

The only control that really matters is over our own personal finances.

Greg

That's not true.

--Alan Greenspan (my true identity)

[Francisco Ferrer]

Every one here is utterly powerless to control the Federal Reserve and the international banking system. So to talk about it as if they could is just a fantasy that powerless people indulge in to ~feel~ like they are powerful.

A man is powerless right on up to the moment when he stops being powerless. For example, early Christians had no control over Roman authorities or the pagan masses. Yet by the end of the fourth century, Christianity was the dominant cultural influence in the empire.

There is no basis for the suggestion that the Federal Reserve is forever invulnerable to political, cultural and economic forces.

[moralist]

Every one here is utterly powerless to control the Federal Reserve and the international banking system. So to talk about it as if they could is just a fantasy that powerless people indulge in to ~feel~ like they are powerful.

A man is powerless right on up to the moment when he stops being powerless. For example, early Christians had no control over Roman authorities or the pagan masses. Yet by the end of the fourth century, Christianity was the dominant cultural influence in the empire.

There is no basis for the suggestion that the Federal Reserve is forever invulnerable to political, cultural and economic forces.

When you exercise power over your own finances there's no need to wait for the tide of history to change. My approach is to learn how to live so that it doesn't matter what the Federal Reserve does. The economic quality of my own life is completely unaffected by the Federal Reserve or the Banks...

...because I have no participation, investments, or financial entanglements in the debt/credit system.

Greg