Ron Paul's situation similar to Churchill's before WW2

[sjw]

I say: You buy gold from the government.

You say: When when you buy gold, the government prints money...

and I ask: Where is the connection between [gold:out and dollars:in] and [the government printing money]?

And you reply: ...

I don't see any "joke" and I did answer you but it evidently went over your head. The connection I pointed out was: gold out -> government printing money -> less gold to use in trade (28% of inflation rate from printing).

Keep your money in the bank as cash -> government prints money -> you lose value.

Keep your money in gold in a safe -> government prints money -> you lose value.

And that's not mentioning the loss of value in time from having to keep track of what price you bought a particular piece of gold at and what you sold it at, and telling that all that to the IRS.

So you see, you're completely ignorant, and it's not a very funny joke.

Shayne

[Brant Gaede]

Being on a gold standard means the Federal Government, Dept. of the Treasury, would pay on demand x amount of gold for one dollar. If it decreases the amount of gold that would be a devaluation of the currency. Paper money would be a receipt for physical gold. More receipts than gold would be a fraud, equivalent to clipping coins. Because human productivity and population in this country would likely increase faster than the supply of gold, prices and wages would tend to fall over time. I've read it would currently take a price of $41,000/ounce to meet this standard in US dollars. The value of our paper money is maintained by legal tender laws--forget about gold clauses in contracts; they were abrogated by FDR--and debt. One needs dollars to pay down debts. Also: wishful thinking--that is, that the US isn't going to turn into Zimbabwe. However, the government is using inflation to cut down its indebitness even as it increases the amount of dollars in circulation. Medicare/Medicaid and Social Security plus retiring baby-boomers means you can count on Americans getting poorer and poorer over time. One trick the government is doing right now is officially understating inflation to mitigate cost of living adjustments in Social Security and other programs.

The US is not on any kind of gold standard. It used to be on a weak, wishy-washy one--between governments--until Nixon slammed shut the gold window in 1971.

Government monoply of the currency is a separate question.

--Brant

[Wolf DeVoon]

Check the Fed's balance sheet. First item on their list of assets: gold. Ditto Europe, BoE, BoJ.

W.

[syrakusos]

I don't see any "joke" and ... you're completely ignorant, and it's not a very funny joke.

Well, once you have to explain a joke, it sort of loses its edge. But here goes.

When the government accepts dollars for gold, it decreases the number of dollars in circulation, thus making each dollar worth more. See, that's the joke. Now, the build up was the part you keep saying you answered, but never have. You do not connect the acceptance of paper dollars at the gold window with an order to print more paper dollars. There is no such connection. That was the first laugh, the set-up. I think the audience saw it coming.

After the banana peel thing, it is true that as the government has sold gold, there is less gold backing the paper in circulation, but again, the sale withdrew circulating paper. As I said, once you have to explain it, it is not so funny.

(Wolf, thanks.)

Edited March 13, 2008 by Michael E. Marotta

[Aggrad02]

I don't see any "joke" and ... you're completely ignorant, and it's not a very funny joke.

Well, once you have to explain a joke, it sort of loses its edge. But here goes.

When the government accepts dollars for gold, it decreases the number of dollars in circulation, thus making each dollar worth more. See, that's the joke. Now, the build up was the part you keep saying you answered, but never have. You do not connect the acceptance of paper dollars at the gold window with an order to print more paper dollars. There is no such connection. That was the first laugh, the set-up. I think the audience saw it coming.

After the banana peel thing, it is true that as the government has sold gold, there is less gold backing the paper in circulation, but again, the sale withdrew circulating paper. As I said, once you have to explain it, it is not so funny.

(Wolf, thanks.)

Mike,

I am sorry but your story only works if the Govt. burns that fiat money (or deletes it off a computer). Instead they go out purchase with it, so there is no decrease in the amount of dollars in circulation.

--Dustan

[sjw]

Check the Fed's balance sheet. First item on their list of assets: gold. Ditto Europe, BoE, BoJ.

W.

So?

S.

[sjw]

Well, once you have to explain a joke, it sort of loses its edge. But here goes.

When the government accepts dollars for gold, it decreases the number of dollars in circulation

I can't believe you didn't even address the issue of where the paper dollars are coming from. Clearly if the source of the dollars is creating arbitrarily large amounts of them, then your whole theory is out the window. Nevermind, I guess I do see why you didn't address that issue. You're astoundingly dishonest.

S.

[Wolf DeVoon]

Check the Fed's balance sheet. First item on their list of assets: gold. Ditto Europe, BoE, BoJ.

W.

So?

S.

The point is that gold still plays an important role backing fiat currencies, however much they try to hush it up. Certainly there's no one-to-one gold reserve backing each dollar in circulation. It's a tiny fraction of central bank and IMF assets, a much larger fraction in the Persian Gulf, Switzerland, and Russia. If gold vanishes as a reserve asset, fiat currencies are nothing but paper claims to future taxes.

Funny headline on a financial blog yesterday: Central bank threatens world forests -- printing so much more paper.

W.

[Michael Stuart Kelly]

Shayne,

There is a component missing in the standard "government prints money" argument. The USA government does not print money as a monetary instrument belonging to the government, but instead as a printing press would in providing service to banks (the Fed, which is owned by banks). The monetary instruments the government prints in its own name are called Treasury Bonds—in other words, IOU's to be paid off by future taxes on assets owned by individuals and legal entities. The government receives—not creates—dollars for the bonds.

Part of the smoke-and-mirrors is that the government acknowledges dollars as legal tender, meaning dollares can be used to settle debts to discharge cases being litigated in court. To state this simply, if I give you dollars to settle an agreement between us, you cannot sue me—and win—to receive some of my physical property instead. You cannot refuse to take dollars as settlement and still have a case the courts will try.

In addition to loans (Treasury Bonds), the government's means of getting money is through taxes, not through printing dollars. There is a lot of smoke-and-mirrors, but that is the essence.

I read somewhere that Greenspan, when asked point blank, was unable to state (or even guess at) how many dollars there were in circulation. This is partly because it is not his business to know (in addition to, of course, the typical whole lot of monkey-business going on with central banks). It is the market needs of the banks that creates the amount of dollars in circulation. If so many loans in the world, including credit cards and things like that, stopped, the dollars in circulation would drastically dry up.

If an accurate view is being sought, all this needs to be taken into account in the "government prints more money so the value of the dollar erodes" inflation argument that is popular among libertarians and Objectivists. The government actually messes with pegs when causing inflation (which are numbers representing value, hopefully to pay off government spending through smoke-and-mirrors), not physical paper or commodities like gold and silver. For bail-outs to banks, the government does not print more money, but instead, prints more IOU's, and it forks over received taxes in its virtual vault.

Michael

[Aggrad02]

Shayne,

There is a component missing in the standard "government prints money" argument. The USA government does not print money as a monetary instrument belonging to the government, but instead as a printing press would in providing service to banks (the Fed, which is owned by banks). The monetary instruments the government prints in its own name are called Treasury Bonds—in other words, IOU's to be paid off by future taxes on assets owned by individuals and legal entities. The government receives—not creates—dollars for the bonds.

Part of the smoke-and-mirrors is that the government acknowledges dollars as legal tender, meaning dollares can be used to settle debts to discharge cases being litigated in court. To state this simply, if I give you dollars to settle an agreement between us, you cannot sue me—and win—to receive some of my physical property instead. You cannot refuse to take dollars as settlement and still have a case the courts will try.

In addition to loans (Treasury Bonds), the government's means of getting money is through taxes, not through printing dollars. There is a lot of smoke-and-mirrors, but that is the essence.

I read somewhere that Greenspan, when asked point blank, was unable to state (or even guess at) how many dollars there were in circulation. This is partly because it is not his business to know (in addition to, of course, the typical whole lot of monkey-business going on with central banks). It is the market needs of the banks that creates the amount of dollars in circulation. If so many loans in the world, including credit cards and things like that, stopped, the dollars in circulation would drastically dry up.

If an accurate view is being sought, all this needs to be taken into account in the "government prints more money so the value of the dollar erodes" inflation argument that is popular among libertarians and Objectivists. The government actually messes with pegs when causing inflation (which are numbers representing value, hopefully to pay off government spending through smoke-and-mirrors), not physical paper or commodities like gold and silver. For bail-outs to banks, the government does not print more money, but instead, prints more IOU's, and it forks over received taxes in its virtual vault.

Michael

Michael,

Doesn't the Fed buy up a large amount of the treasury bonds? And the money that they buy them with is created by the Fed. correct?

--Dustan

[Michael Stuart Kelly]

Dustan,

The Fed is basically a conglomerate of banks in a monopoly contract with the USA government, formally sanctioned by specific federal legal provisions. The Fed is the USA government's largest loaner as it buys most of the Treasury Bonds. (China has been doing a lot of that, too, in the last few years, so get ready for one hell of a ride in the not-to-distant future.) In return, the Fed gets some pretty amazing monopoly powers, and it gets to order dollars printed by the USA mint when it needs them. The mint sells them cheap, too, but you got to be the Fed to be a customer.

Money is actually created (in the most part nowadays) by banks using loan contracts as collateral to create new loans (which are used as collateral to create more new loans—which are used as collateral to create even more new loans—and so it goes). So the Fed does not create money arbitrarily. It just creates money out of thin air, so to speak.

I am not a super-expert in all this and I have only scratched the surface in my own reading. But that much is clear in my mind.

I have a thread here on OL with some great videos and links to monetary information that goes into all this in some depth.

Money and Politics - The Money Masters

There is a movement to hand over printing money to the government that provides some top-quality information about what is, despite these people promoting such a dangerous boneheaded notion—what they want to do. This movement is where I got most of this stuff. I especially recommend the animated video: Money as Debt.

Just remember, take these people's information about what is, and discard what they want to do.

Their economic theories and history of what is are based mostly on the work of Edwin Clarence Riegel and G. Edward Griffin. You will find appropriate links and plenty to read in the thread I linked.

Frankly, I need to see all those videos again. I have seen Money as Debt 4 or 5 times now and each new time I see it, I see something I missed or some new insight falls into place when I look at the world around me.

Michael

[sjw]

Michael, thanks for the detailed explanation, but it's just a more detailed elaboration to the "government prints money" rather than a contradiction. The government is the first receiver and user of this printed money, so they get it while it has its original value, as it uses the money it causes inflation. I.e., in principle it's as if the government was printing the money and using it itself.

Shayne

[Michael Stuart Kelly]

Shayne,

I wish that were the case, but it isn't. If you got the impression that the government is "the first receiver and user of this printed money," I did not state it clearly. The government is only the receiver of this printed money when it is used to buy Treasury Bonds. The Fed can issue any amount of dollars it wants to according to its own criteria, although there are some pretty strict rules in place on what that criteria is. Sometimes banks are the first receivers and users.

If government spending were the case as a sole cause, it would be easy to cure. But it is vastly more complicated by debt backed by taxes. Inflation is caused by both (considering fractional reserves as the basis of debt backed by taxes), and here is why.

Let's do a thought experiment and I will oversimplify for clarity. You have a bank. In a perfect fractional reserves world, if you—bank—put, say, $1,000 in a special Fed account that has to stay there and you cannot mess with it, the government allows you to loan out, say, $9,000 using that as a guarantee. The government promises to pay the rest if there is a run on the bank.

(These are not the actual numbers, including the continuation below, but they are easy to follow and the principle is the same throughout.)

Voila! Now you have $8,000 created out of thin air, since $1,000 only actually exists to back up $1,000 outstanding, but at least there is a government promise to stand good for the rest. Let's not forget that the government can tax people and take their stuff, so that's a pretty good promise (if the government keeps its promise ).

Once you loan out the $9,000 to your client, and he uses, say a house as collateral to get it, you can also use his loan contract in your vault as collateral to issue 90% of that amount in loans to other people.

Voila! Now you have $8,010 created out of thin air, but at least there is a house on account, too, for the 9 k and presumably some cars or something on account for this last amount.

Your client is going to pay someone for the stuff he is financing. That person is going to receive the money and put it in a different bank. That bank is now allowed use his deposits as collateral (and a very strange kind of collateral at that, since the bank doesn't own it) to issue 90% of that amount in loans.

Voila! Now you have $7,290 created out of thin air, backed by someone else's money.

And the spiral goes on. This means that $1,000 of actual money turns into about $100,000 on the market.

And all the other banks are doing it. They are all doing it.

All this would be well and good since there is the government promise to back it up if people go South and all. Anyway, there is all that stuff they pledged. So, in our perfect fractional reserves world, if everybody paid all their loans off, the amount of money created out of thin air should go down to zero, with the original $1,000 you have at the Fed being the only real money left over. And the borrowers should be able to keep their stuff. Everybody should be happy.

But there is interest.

If everybody paid all their loans off, there is a ton of interest out there that does not zero out. It was also created out of thin air and it did not enter into the initial computation. There is only one way to get the money for it: make more loans and create more artificial money.

The problem with that is that this creates interest, also, which does not zero in the end. There is only one way to get the money for that: make more loans and create more artificial money.

And so it goes.

This causes inflation just as much as government spending does.

So the problem is not the government printing money to cover its own spending. There aren't enough trees on earth to make the paper to print all the money out there on account in bank computers (backed by the government, of course). It is that the government has used future taxes on your and my property as the collateral to back up a promise to cover banks if things go haywire. The government has used its force to allow them to engage in a practice you and I would be prohibited to do in our own lives.

For instance, I doubt you would be able to demand full immediate payment of a year's wages after working only a month, then the power to outsource your work and get even more money from your employer to cover that, just so long as you promise to get the unworked work done somehow and sometime in the future. Then a magic get out of jail write-off card if you can't do the work (or decide not to).

That's the power banks have extracted from the government.

They get filthy stinking rich off of private debt backed by government taxes. Well, there is the matter of the borrower's stuff, but that stuff is actually incidental since banks don't do all that well at auctions for repos. The high-level monkey-business is where the real game is at. It goes on and on with some really creative accounting and the government spending gets taken care of in the middle of it. It doesn't necessarily get paid off, but it gets taken care of. That's how the government hides its spending and that's why the government allows the banks to have this special power.

If the government printed more money to cover its debts, that would almost be honest compared to what is actually going on.

There are two villains here, not one: the government and the banks who are in bed with the government.

There is one victim: the producer.

A future slice of what he produces taken by force is what backs all this up.

One day, when a limit is reached, all this is going to go KABOOM, or there is going to be some kind of massive default to buy time and some specific fat targets are going to be sacrificed for the common good. (Why do I think they might be giant pension funds as a starter, and not, say, banks or governments?... )

There is no other way. Reality will not be denied.

Michael

[sjw]

Michael exellent post but I still don't see why it's not something to boil down to: the government prints money. Who it gives the money to (itself and bankers) is beside the point.

You're right to add that there's a built-in instability with the interest and that this can't go on forever. Except that it can. They just eliminate lower denominations over time. They'll get rid of the penny, then the nickle, etc. to keep it going. Unless I'm missing something they can just keep doing this forever, bleeding just enough off of the productive to keep things politically OK.

Ron Paul and others say that this can't go on forever, but I don't see why not. On the other hand, all this central planning leads to distortions that cause big failures, people can starve and governments can collapse. I don't know whether it's inevitable, but it may be hard to predict. It's definitely dangerous to have this central planning, it's like flying blind. But sometimes you might be able to fly blind and not get killed, maybe...

Shayne

[Michael Stuart Kelly]

While I am at it, I want to say how much I enjoy and appreciate Michael Marotta's posts. They are always full of information most people don't know and they are usually challenging.

I am an outside-the-box kind of thinker and Michael M practically lives outside the box. Many times I do not agree with him, but I always come away richer when I read him. You can't ask anything better from a poster.

Coming at standard issues from a totally unexpected angle derails some people and makes them uncomfortable, but I find it refreshing. It is like listening to a bird chirp about how wonderfully varied this universe is. That might sound hokey, but that's exactly what I feel inside.

Intellectually, Michael reminds me of Babe Ruth, who blasted 714 home runs out of the park during his professional life. What many people don't know is that he struck out 1,330 times.

Babe Ruth put everything he had into each swing. All of it. Now do the math. You need three swings to strike out. A home run only takes one. He missed far more than he ever hit.

But the times he hit made history.

Michael, there's one reader who sees you as I think you want to be seen.

I do.

I think you rock.

Michael