Michael asked me whether it's a good idea to tie our currency to something whose value could fluctuate independently of economic activity. He wondered if a new industrial process might be developed that consumes gold and would cause the gold price to rise rapidly. I think this is highly unlikely for multiple reasons.
First, gold is extremely valuable (it's money). At almost $900/oz as of today, it it too expensive to be used for almost anything. It's hard to come up with a profitable process that would consume gold. The only thing I can even think of that is even close is platinum in catalytic converters and other chemical processes. But the amounts are so tiny and the value of it is so high that market pressure results in the platinum being recycled. Or consider silver which is used in photography. Silver is far more abundant than gold so there's less pressure to avoid consuming it. Still, silver is valuable enough that much of the silver used in the photography process is recycled. And it makes the process expensive which is one of the reason digital photography is far cheaper. The recycling and substitution pressures for gold would be orders of magnitude more powerful. Nobody can afford to consume something that is so valuable at any scale.
History bears this out -- almost all the gold that has ever been mined is still in existence and has an owner. Gold has very little intrinsic value. It isn't needed for any economic process. It's a good conductor of electricity and heat, but so is silver and it's much cheaper. It doesn't pay a dividend. It doesn't go bad. Gold plated plugs and contacts in electronics use so little gold that they are nearly negligible. The value of gold doesn't fluctuate according to economic activity at all. Rather, the price of fiat dollars fluctuate in terms of how much gold they are worth.
The supply side could be more of a problem. What if somebody discovered an enormous amount of gold? Geologists believe most of the gold that exists has already been mined. Gold is becoming harder and harder to find. There aren't very many unexplored parts of the planet at this point. I suppose there could be some in the ocean floor but I am not a geologist. At any rate, what I am pretty sure of is that gold is very expensive to mine. This fundamentally puts a limit on how much can be produced which is a very good thing. It guarantees a very small rate of monetary inflation. On the other hand, with a fiat currency, "printing" it is virtually free because it just is a change of a field in a database at the New York Federal Reserve Bank. Short of somebody achieving low cost alchemy, I think we're pretty safe. On the other hand, if the ice caps melt and we discover that Antarctica is a big block of gold, I agree we would need to find something else to use as money.
Gold makes a lot of sense as money. It's been considered money for most of human history. In many parts of the world such as China, India, and Arab nations, gold is viewed as the ultimate form of savings. It's rarity is nearly guaranteed. On the other hand, since the dollar peg to gold was changed by FDR in the 1930's, the dollar has lost 95% of its purchasing power.
Thursday, January 10, 2008
China
Michael made a good point to me in email. If some guy on a blog can figure out M3, the Chinese government should have no problem figuring out what it is. This sounds right to me. So I take back my comment that this was to hide our money supply growth from our foreign bankers. But if the Fed still tracks all the components of M3, what was the point of no longer publishing it? For them, it's a formula in an Excel spreadsheet for which they already have all the inputs. I have to believe then the answer is that they don't want the public to be aware of the money supply growth. I can't think of any other reason to no longer publish it.
At any rate, how does all this money supply growth affect China which is our largest creditor? My friend Steve used to say that China doesn't care about the balance sheet. When he told me this, I didn't know enough about how the world economy worked to know what it meant. Now I know more and I think he is correct.
China has higher priorities than how much we owe them and what the value of that debt really is. China views the last several years as an investment in its economy. By providing low cost labor and financing our extravagance, we has outsourced most of our industry to China. We helped them build factories and infrastructure. We trained their workers, fixed their banking system, and assisted them with the transition from a centralized economy to one based on capitalism and entrepreneurship. The problem for us is that China will not keep financing our consumption indefinitely. Their economy is maturing and in the future they won't need us anymore to stimulate demand and provide them with technical knowhow. We already are becoming a smaller and smaller part of their economy as their domestic demand has grown and other countries import more and more of their goods.
So if the value of America's debt were to drop by half or even become worthless, I don't think China would lose too much sleep over it. They would write it off as a $500 billion or $1 trillion investment in their economy. Heck, we spent about that much on the war in Iraq. Just think about that for a moment. For $1 trillion, we bought the deaths of thousands of American soldiers, tens of thousands of causalities, hundreds of thousands of Iraqi deaths, and a destabilization of a critical region. We planted the seeds for more radical Islamic terrorism, committed ourselves to an unending war, and dramatically lowered the standing of the United States in the eyes of the world. For about the same amount, China made an enormous investment in its economy to help bring a billion people out of poverty. And, that's assuming the debt becomes worthless. China now has a sovereign wealth fund that is buying assets left and right.
Now this upsets many Democrats in Congress. They want to label China a currency manipulator. Well, if they are a currency manipulator, what's the mechanism by which they manipulate their currency? Up until a few years ago, they pegged the value of Renminbi to the value of the dollar. Was this manipulation? Dozens of countries peg their currencies to the dollar. It just effectively means they are using the dollar as their currency (with the option to decouple in the future). Up until recently, Saudi Arabia, Kuwait, and the UAE did the same thing. I never heard any talk about labeling them manipulators. Recently, China moved to using a floating peg where the currency is allowed to float within a window. This may have been due to enormous pressure from the USA to switch to a floating currency. Or it may have been because China knows that in the long term the inflation America is exporting to China is too much for their economy to handle. At any rate, this is no more manipulation than the fixed peg.
So is China to blame for allowing the US to outsource all of its industry and industrial jobs? On one hand, it's natural that this should happen. Chinese workers are willing to work for less than American workers. But this couldn't happen to such a large extent in a truly free market. What really allows this to happen is that America borrows so much money from foreigners to finance our military empire, welfare state, and consumerism.
Is this a big problem? I think it is. This situation is similar to the situation in Africa. America and Europe give Africa billions of dollars in foreign aid. Because of American and European subsidies and tariffs on agricultural products such as cotton and corn, African farmers can't compete in the world market. All the foreign aid given to Africa is used to buy food from America and Europe. So the money we give to Africa is more or less an additional corporate handout to our agriculture companies. Meanwhile, African countries become completely dependent on this foreign aid. They can't build up their own production. They need our money to buy food. American tax payers effectively buy food from American companies to feed Africans. There's an old adage about giving a man a fish versus teaching him to fish.
This is a common unintended side effect of any welfare program. The people who "benefit" from it become dependent on it and the real benefactors are the companies that sell them goods. Want to keep poor people in a state of perpetual poverty? Easy. Give them money for doing nothing. They will never develop any useful skills so they can become productive members of the economy. This is the state we've kept the Africans in. We also have done this from time to time and in different levels to people in our own country.
How does this relate to the Chinese? China "helps" us the way we "help" Africa. China provides America with foreign aid by loaning us money to buy their goods. And now we have become dependent on it. I blame America and Europe for the situation with Africa, but I don't blame the Chinese for their situation. With Africa, we are the ones creating the subsidies, tariffs, and foreign aid that cause the problem. African farmers would have no problem competing if the playing field were level. With respect to China, their workers are willing to work for less than our people are willing to. It would be immoral to blame millions of Chinese workers living in poverty that they can't have low paying jobs that provide them with just enough to feed their families so that thousands of Americans can buy LCD televisions, drive SUVs, and eat themselves into obesity. And then we make the problem much worse with all the borrowing.
At any rate, how does all this money supply growth affect China which is our largest creditor? My friend Steve used to say that China doesn't care about the balance sheet. When he told me this, I didn't know enough about how the world economy worked to know what it meant. Now I know more and I think he is correct.
China has higher priorities than how much we owe them and what the value of that debt really is. China views the last several years as an investment in its economy. By providing low cost labor and financing our extravagance, we has outsourced most of our industry to China. We helped them build factories and infrastructure. We trained their workers, fixed their banking system, and assisted them with the transition from a centralized economy to one based on capitalism and entrepreneurship. The problem for us is that China will not keep financing our consumption indefinitely. Their economy is maturing and in the future they won't need us anymore to stimulate demand and provide them with technical knowhow. We already are becoming a smaller and smaller part of their economy as their domestic demand has grown and other countries import more and more of their goods.
So if the value of America's debt were to drop by half or even become worthless, I don't think China would lose too much sleep over it. They would write it off as a $500 billion or $1 trillion investment in their economy. Heck, we spent about that much on the war in Iraq. Just think about that for a moment. For $1 trillion, we bought the deaths of thousands of American soldiers, tens of thousands of causalities, hundreds of thousands of Iraqi deaths, and a destabilization of a critical region. We planted the seeds for more radical Islamic terrorism, committed ourselves to an unending war, and dramatically lowered the standing of the United States in the eyes of the world. For about the same amount, China made an enormous investment in its economy to help bring a billion people out of poverty. And, that's assuming the debt becomes worthless. China now has a sovereign wealth fund that is buying assets left and right.
Now this upsets many Democrats in Congress. They want to label China a currency manipulator. Well, if they are a currency manipulator, what's the mechanism by which they manipulate their currency? Up until a few years ago, they pegged the value of Renminbi to the value of the dollar. Was this manipulation? Dozens of countries peg their currencies to the dollar. It just effectively means they are using the dollar as their currency (with the option to decouple in the future). Up until recently, Saudi Arabia, Kuwait, and the UAE did the same thing. I never heard any talk about labeling them manipulators. Recently, China moved to using a floating peg where the currency is allowed to float within a window. This may have been due to enormous pressure from the USA to switch to a floating currency. Or it may have been because China knows that in the long term the inflation America is exporting to China is too much for their economy to handle. At any rate, this is no more manipulation than the fixed peg.
So is China to blame for allowing the US to outsource all of its industry and industrial jobs? On one hand, it's natural that this should happen. Chinese workers are willing to work for less than American workers. But this couldn't happen to such a large extent in a truly free market. What really allows this to happen is that America borrows so much money from foreigners to finance our military empire, welfare state, and consumerism.
Is this a big problem? I think it is. This situation is similar to the situation in Africa. America and Europe give Africa billions of dollars in foreign aid. Because of American and European subsidies and tariffs on agricultural products such as cotton and corn, African farmers can't compete in the world market. All the foreign aid given to Africa is used to buy food from America and Europe. So the money we give to Africa is more or less an additional corporate handout to our agriculture companies. Meanwhile, African countries become completely dependent on this foreign aid. They can't build up their own production. They need our money to buy food. American tax payers effectively buy food from American companies to feed Africans. There's an old adage about giving a man a fish versus teaching him to fish.
This is a common unintended side effect of any welfare program. The people who "benefit" from it become dependent on it and the real benefactors are the companies that sell them goods. Want to keep poor people in a state of perpetual poverty? Easy. Give them money for doing nothing. They will never develop any useful skills so they can become productive members of the economy. This is the state we've kept the Africans in. We also have done this from time to time and in different levels to people in our own country.
How does this relate to the Chinese? China "helps" us the way we "help" Africa. China provides America with foreign aid by loaning us money to buy their goods. And now we have become dependent on it. I blame America and Europe for the situation with Africa, but I don't blame the Chinese for their situation. With Africa, we are the ones creating the subsidies, tariffs, and foreign aid that cause the problem. African farmers would have no problem competing if the playing field were level. With respect to China, their workers are willing to work for less than our people are willing to. It would be immoral to blame millions of Chinese workers living in poverty that they can't have low paying jobs that provide them with just enough to feed their families so that thousands of Americans can buy LCD televisions, drive SUVs, and eat themselves into obesity. And then we make the problem much worse with all the borrowing.
Wednesday, January 9, 2008
Ron Paul is not a bigot
There was an article in the New Republic bringing up allegations that Ron Paul is a racist, bigot, and anti-semite. These are old allegations based on writings that appeared in a newsletter using Dr. Paul's name. He did not write them nor edit them. Even the author of these allegations agrees that Ron Paul has never said anything that would appear to be racist.
These newsletters were written in the years when Dr. Paul was out of Congress and busy delivering babies for people who didn't have enough money to pay themselves (he refused payments from the government). He took "moral responsibility" for not paying closer attention to these newsletters several times over the past decade. The timing of this smear attack, the night before the New Hampshire primary, was intended to attack his credibility without leaving time for him to counter it. Clearly, the New Republic did not learn of this story the day before the election. It had been known for over a decade.
I do not believe for a moment that Dr. Paul is a bigot. I have been following him for two years after learning about his views on monetary policy when I started becoming interested in Austrian Economics. I have read dozens of his essays and speeches and not once did I ever see a hint of bigotry. Since I am Jewish, this is especially important to me.
I am disappointed that Dr. Paul would even be associated with bigots, but I can see how this could happen. I have had friends utter racist comments before and this was in New York City which is very diverse. Unfortunately, in less diverse parts of the country, this may be more common. I once visited the family of a girlfriend in a mid-western city and one of her relatives uttered an anti-semitic comment. This was disappointing but I didn't draw the conclusion that my girlfriend was anti-semitic nor that her relative was a bad person, just ignorant. It is the job for all of us to stamp our bigotry wherever it exists.
I am only writing this entry because I know people will ask me about this anyway,
The statement from the campaign:
These newsletters were written in the years when Dr. Paul was out of Congress and busy delivering babies for people who didn't have enough money to pay themselves (he refused payments from the government). He took "moral responsibility" for not paying closer attention to these newsletters several times over the past decade. The timing of this smear attack, the night before the New Hampshire primary, was intended to attack his credibility without leaving time for him to counter it. Clearly, the New Republic did not learn of this story the day before the election. It had been known for over a decade.
I do not believe for a moment that Dr. Paul is a bigot. I have been following him for two years after learning about his views on monetary policy when I started becoming interested in Austrian Economics. I have read dozens of his essays and speeches and not once did I ever see a hint of bigotry. Since I am Jewish, this is especially important to me.
I am disappointed that Dr. Paul would even be associated with bigots, but I can see how this could happen. I have had friends utter racist comments before and this was in New York City which is very diverse. Unfortunately, in less diverse parts of the country, this may be more common. I once visited the family of a girlfriend in a mid-western city and one of her relatives uttered an anti-semitic comment. This was disappointing but I didn't draw the conclusion that my girlfriend was anti-semitic nor that her relative was a bad person, just ignorant. It is the job for all of us to stamp our bigotry wherever it exists.
I am only writing this entry because I know people will ask me about this anyway,
The statement from the campaign:
UPDATE (1/10/2008) Ron Paul responds to allegations on CNNARLINGTON, Va.--(Business Wire)--In response to an article published by The New Republic, Ron Paul
issued the following statement:
"The quotations in The New Republic article are not mine and do
not represent what I believe or have ever believed. I have never
uttered such words and denounce such small-minded thoughts.
"In fact, I have always agreed with Martin Luther King, Jr. that
we should only be concerned with the content of a person's character,
not the color of their skin. As I stated on the floor of the U.S.
House on April 20, 1999: 'I rise in great respect for the courage and
high ideals of Rosa Parks who stood steadfastly for the rights of
individuals against unjust laws and oppressive governmental policies.'
"This story is old news and has been rehashed for over a decade.
It's once again being resurrected for obvious political reasons on the
day of the New Hampshire primary.
"When I was out of Congress and practicing medicine full-time, a
newsletter was published under my name that I did not edit. Several
writers contributed to the product. For over a decade, I have
publically taken moral responsibility for not paying closer attention
to what went out under my name."
Ron Paul 2008 Presidential Campaign Committee
Jesse Benton, 703-248-9115
Financial Times: "Gold is the new Global Currency"
Part of Ron Paul's platform has been to change the tax laws to allow for competing currencies. He is often made fun of for saying the dollar should be backed by something real, like gold, as it was before 1971. I guess some people are starting to agree. The Financial Times has been anti-gold for years. But a recent editorial in the Financial Times titled Gold is the new Global Currency states "In today's uncertain world, the yellow metal is back in fashion....A better way to think of gold may be as central bankers used to before America dropped the gold standard: not as a commodity, but as another currency. As long as the dollar stays weak, gold's bull run will last."
The pundits said Ron Paul was crazy kook for supporting gold-backed currencies. I guess the editors of the Financial Times must be crazy kooks as well.
The pundits said Ron Paul was crazy kook for supporting gold-backed currencies. I guess the editors of the Financial Times must be crazy kooks as well.
Vermin Supreme
One of the highlights of my trip to New Hampshire was running into Vermin Supreme. It only costs $1000 in NH to get on the ballot. This guy did it. His campaign slogan was something to the effect of Vermin Supreme for Dictator -- it's the last decision you'll ever have to make. The guy has a good sense of humor and injected some laughter into the election.
UPDATE: Diana told me that the actual slogan was "Let him run your life, because he knows what's best for you. The decision to vote for Vermin Supreme is the last decision you'll ever have to make."
UPDATE: Diana told me that the actual slogan was "Let him run your life, because he knows what's best for you. The decision to vote for Vermin Supreme is the last decision you'll ever have to make."
Another high for gold
Gold hit another all time high at $890/oz.
Silver also hit recent highs
The important thing to remember is that the value of gold doesn't change. A gold coin today will be the same gold coin tomorrow and will be the same gold coin 10 years from now. Gold is not consumed, it doesn't have a shelf life, and nearly all the gold ever mined is still in existence today in someone's possession. Gold is valuable because it is scarce and because it has been used as money for thousands of years of human history. It's only a recent phenomenon that gold is no longer used as money (1971 when Nixon took the US off the gold standard).
When the dollar price of gold keeps rising, it doesn't indicate any change in the value of gold. It indicates a change in the value of a dollar. It isn't that gold is rising in price, but the dollars are becoming less valuable. This is happening at an alarming and accelerating rate. I don't see how this can continue much longer. If it does, we will be in the midst of a real dollar crisis. It will take serious intervention of our foreign creditors to prop the dollar back up. Otherwise, our militaristic empire and welfare state will come to an abrupt and sudden halt. Ron Paul has been repeating over and over that we need to fix our monetary system before we are forced into a painful financial crisis. We may now be witnessing it unfolding.
I recommend reading The End of Dollar Hegemony by Ron Paul.
Silver also hit recent highs
The important thing to remember is that the value of gold doesn't change. A gold coin today will be the same gold coin tomorrow and will be the same gold coin 10 years from now. Gold is not consumed, it doesn't have a shelf life, and nearly all the gold ever mined is still in existence today in someone's possession. Gold is valuable because it is scarce and because it has been used as money for thousands of years of human history. It's only a recent phenomenon that gold is no longer used as money (1971 when Nixon took the US off the gold standard).
When the dollar price of gold keeps rising, it doesn't indicate any change in the value of gold. It indicates a change in the value of a dollar. It isn't that gold is rising in price, but the dollars are becoming less valuable. This is happening at an alarming and accelerating rate. I don't see how this can continue much longer. If it does, we will be in the midst of a real dollar crisis. It will take serious intervention of our foreign creditors to prop the dollar back up. Otherwise, our militaristic empire and welfare state will come to an abrupt and sudden halt. Ron Paul has been repeating over and over that we need to fix our monetary system before we are forced into a painful financial crisis. We may now be witnessing it unfolding.
I recommend reading The End of Dollar Hegemony by Ron Paul.
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