If we use logic, it will save us all
Fed Watch: FOMC Statement: Second Reaction
12 minutes ago
Weisenthal: The gold standard ends up linking everyone's currencies.Actually, being that inter-lnked means all economies rise and fall together, preventing one economy from taking a different approach to a problem and helping to prevent an economic free fall from occurring. For example, during the last recession both China and Germany engaged in stimulus spending, which essentially saved both economies and helped to avert disaster for the world as a whole. Had we all been inter-linked, that couldn't have happened. I should also add that this level of currency inter-linking is a big problem in Europe right now -- a situation which Mish has written about extensively.
Mish: So what? Look what happened after Nixon closed the gold window. We have had nothing but problems, temporarily masked over by printing more money until things blew sky high, culminating in bank bailouts at taxpayer expense, and those on fixed income crucified in the wake.
Weisenthal: [A gold standard] creates deflation, as William Jennings Bryan noted. The meaning of the "cross of gold" speech: Because farmers had debts fixed in gold, loss of pricing power in commodities killed them.Deflation does not mean just lower prices; it also means unemployment, caused by a deflationary spiral that goes like this: demand drops, leading to lower production, leading to lay-offs, leading to lower demand ... you get the idea. The Great Depression is the classic example of this phenomena.
Mish: Hello Joe. Please tell me how many in this country would not like to see lower prices at the gas pump, lower prices on food, lower rent prices, lower prices on clothes? The fact of the matter is price deflation is a good thing. The only reason why it seems otherwise is debt in deflation is harder to pay back. That is not a problem with deflation, that is a problem of banks foolishly lending more money than can possibly be paid back. Fractional reserve lending is the culprit.
Weisenthal: The economy was far more volatile under the gold standard (all the depressions and recessions back in the pre-Fed days).Actually, Mish, on this planet. An inquiring mind would seek out a book such as A Brief History of Panics, which shows that in the 1800s there was nearly a panic every 10 years. As professor James Hamilton pointed out:
Mish: Really? On what planet? Did the collapse in the housing bubble affect your ability to reason? Except for cases like Weimar, Mississippi Bubble, and for that matter all bubbles, gold provided stability. The bubbles (and the subsequent collapses) were caused by fractional reserve lending, not the gold standard.
The graph below records the behavior of short-term interest rates over 1857 to 1937. Over much of this period, the U.S. maintained a fixed dollar price for an ounce of gold, and prior to 1913 (indicated by a vertical line on the graph) there was no Federal Reserve System. The pre-Fed era was characterized by frequent episodes such as the Panic of 1857, Panic of 1873, Panic of 1893, Panic of 1896, and Panic of 1907 in which even the safest borrowers would suddenly find themselves needing to pay a very high rate of interest. Those events were associated with significant financial failures and business contraction. After establishment of the Federal Reserve, the U.S. short-term interest rate became much more stable and exhibited none of the sudden spiking behavior that used to be so commonHere is the accompanying chart:
The pre-Fed financial panics were also accompanied by long contractions in overall economic activity, as indicated by the NBER dates for economic recessions noted in the graph below. Although of course we still had recessions after the Federal Reserve was established in 1913, they tended to be less frequent and shorter in duration.
I think it is fair enough to argue that increased expenditures paid for by new taxes and fees are the equivalent of deficit increases. ...See, when you pay cash for something at the store, all you're really doing is fast-forwarding your credit card bill.
The primary critique of budget deficits is that they create debt obligations that will have to be paid for by tax increases on future generations. But the ACA creates new government obligations and pays for them (in part) with tax increases immediately. That is just debt in fast-forward. It inflicts immediately the very harm—higher taxes—that deficit-spending supposedly inflicts in the future.