Monetary theory

[anticausal]

All modern, mainstream economics are just spells cast to make you ignore the fact that they're still shaving off the coins.

[Subby]

I think this gold thing might be a little more complicated than it appears.

Having a fixed amount of dollars leaves your currency, and country, vulnerable to speculators who can buy large amounts of the available currency. This is how Soros "broke the bank of england" he shorted the pound, and borrowed pounds to sell for other currencies, lowering the demand for pounds. The central bank of england had to raise interest rates to try to keep demand for pounds high. All in all it wasn't actually that profitable for Soros, he made 1 billion but had to sink 10 billion to do so. If it didn't pay off he was toast.
I'm sure some people here lived through it so would have actual memories of it, and we all know how unreliable "history" is of events like this so I'm all ears as to what it was like at the time. I'm probably in the minority but I think a hard pegged currency, gold or otherwise is a bad idea as it leaves you vulnerable to attack by international bankers and financiers. And things like that tend to get art school dropouts elected.

Anthony Galli's answer to Why did Nixon take the United States off of the gold standard? - Quora

According to this the dollar supply had already exceeded the gold supply, from WW2 (what I assume was most likely war bonds) and was actually trending down slowly towards 1 - 1. It's difficult to find a chart of gold to money supply chart from prior to 1971 but this page seems to support the statements in the above link:
Gold vs. Money Supply - Vaulted

It does seem like the french, always wanting to subvert America, especially in the 70's, were just the first ones to call the US's bluff and demand their gold back causing Nixon to pick one of the 4 options.

Theoretically, Nixon had four options…

He could do nothing, but Richard Nixon wasn’t about to risk his reelection on the hope that foreign politicians and “international money-lenders” wouldn’t run on the dollar before then.

He could reduce the dollar supply by cutting spending and raising taxes, therefore, worsening an already stagnating economy that was experiencing 6.1% unemployment and 5.9% price inflation, but the Democratic House and Senate would’ve never voted for austerity.

He could just devalue the dollar relative to gold. This was after all what a congressional report had recommended just 10 days prior, but this was quickly ruled out by his advisors because it probably would’ve just precipitated a run as countries would suspect more devaluations to come.

Or he could temporarily end it.

The "international money lenders" would have preferred to do nothing of course, interestingly enough Nixon chose to work against them and was then couped by his own intelligence services. Interesting little thread but I'll leave that speculation for Mr. Anticausal.

I suspect we are about to see the same thing with the Petrodollar. We may be the equivalent of 1970, everyone knows the gold standard is a lie and a joke, we are just waiting for a country to call it. I wonder if it will be the French again?

[IlPrincipeBrutto]

This is similar to the issue with cryptocurrencies like Bitcoin. There's a fixed amount of Bitcoin, just like there is a fixed amount of gold..

Because of the limited supply (by design) I always wondered if it's possible to loan Bitcoins and charge interest. It seems that doing so requires someone somewhere to lose money, otherwise the total number of Bitcoins would increase, which is against the initial assumption (breaking into smaller bits would not be a solution).
For gold the situation is similar but not quite identical, as the supply of gold has not reached its limit yet.

IPB

[docoftheworld]

Thank you, Subby. I agree with your analysis and appreciate the valuable links you shared (I am not a bot)

I am trying to focus on a few issues. Without government regulation of fiat currency, economic growth is impossible. This is similar to how centralized societies, such as those in China and Egypt, were needed to control rivers in areas with low rainfall. Without strong government, survival would be difficult as warlords could cut off water supplies. In contrast, areas with high rainfall, like Europe and Greece, allowed for more independent, feudal societies where individuals could thrive.

Currency is analogous to those rivers. I firmly believe cryptocurrency is a Ponzi scheme that will collapse like the Dutch tulip mania, as I see no practical way to implement it without becoming another centralized, regulated fiat currency.

Regarding the petrodollar, please fact-check me: I have not found a single reliable source discussing the alleged tumultuous perturbations of Saudi Arabia withdrawing from this pact. I believe it's internet misinformation.

[tgregorio]

Given that Uncle Rip is the smartest person I know of, I would love his take on this issue; please indulge me in this and explain to me why I am wrong:
The move away from the gold standard in the 1970s was controversial, but it allowed the economy to grow without being restricted by the amount of gold available. If the currency had remained tied to gold, the economy's growth would be limited by the amount of gold that could be mined. The supply of gold would not keep pace with economic growth.

This is similar to the issue with cryptocurrencies like Bitcoin. There's a fixed amount of Bitcoin, just like there is a fixed amount of gold. If new products, services, and growth opportunities emerge, having a limited supply of currency would make it difficult for the economy to grow.

As a result, cryptocurrencies might end up being more like collectible items, similar to baseball cards or precious metals. Their value could be high, but their ability to drive economic growth would be limited due to the fixed supply and lack of regulation.

Monetary expansion is not a requirement for economic growth, regardless of whether your currency is gold, silver, pieces of paper, etc.

Ultimately, economic growth is determined by resources (land and other natural resources, labour, capital) and technology. If you have economic growth (e.g. because you have an increase in the supply of labour, new mineral discoveries, technological development, etc) without an "accommodating" increase in the supply of money, all that will happen is that the number of transactions for a given quantity of money will rise (this is called the velocity of money).

If you increase the quantity of money in an economy by 10%, absent any other economic changes, what you ultimately end up with is 10% inflation.

Think of the high inflation we are experiencing in western countries now - this was preceded by huge monetary expansions (along with destruction of supply chains and many businesses).

[Martin Shenfield]

I think Mr.T is right.

I am a very simple Australian, and I recognise that my country's bank that is weirdly privatised and separate from the government but not really and has no competition and controls our entire country's economy, wants to maintain inflation at 2-3% forever. I think that is not very good because what goes up must come down and if you continue to blow a balloon up eventually it pops. We are already in a technical recession even if our government wants to ignore it.

As far as cryptocurrency goes, my thinking is even simpler. My brother loves it, and he is a methhead scumbag currently in the slammer for burning a restaurant down. So I think it is not very good by association.

[mkm5]

Monetary expansion is not a requirement for economic growth, regardless of whether your currency is gold, silver, pieces of paper, etc.

Ultimately, economic growth is determined by resources (land and other natural resources, labour, capital) and technology. If you have economic growth (e.g. because you have an increase in the supply of labour, new mineral discoveries, technological development, etc) without an "accommodating" increase in the supply of money, all that will happen is that the number of transactions for a given quantity of money will rise (this is called the velocity of money).

If you increase the quantity of money in an economy by 10%, absent any other economic changes, what you ultimately end up with is 10% inflation.

Think of the high inflation we are experiencing in western countries now - this was preceded by huge monetary expansions (along with destruction of supply chains and many businesses).

Excellent. Some times the basic observations and explanations makes the most sense.

This is obviously a very complicated subject.

I don't know what the solution is, although I have some thoughts.

Deficit spending doesn't work very long for regular people, let alone the "government."

The current national debt is stated as $35 trillion. Other estimates include liabilities that bring this debt to over $125 trillion. At a minimum, that means every American citizen is born into $100,000 of debt. Think about that for a minute.

I'm pretty sure the current monetary system is not working well, nor will it end well (for us plebes).

I'm not recommending anything other than swap your fiat dollars for hard assets while you can. Especially, the hard assets that help you survive outside the system.

[tgregorio]

I think Mr.T is right.

I am a very simple Australian, and I recognise that my country's bank that is weirdly privatised and separate from the government but not really and has no competition and controls our entire country's economy, wants to maintain inflation at 2-3% forever. I think that is not very good because what goes up must come down and if you continue to blow a balloon up eventually it pops. We are already in a technical recession even if our government wants to ignore it.

As far as cryptocurrency goes, my thinking is even simpler. My brother loves it, and he is a methhead scumbag currently in the slammer for burning a restaurant down. So I think it is not very good by association.

The way the 2-3% target is expressed is that it should be achieved on average over the course of the business cycle (the natural ups and downs in economic activity that occur over time). So theoretically you're supposed to have times when inflation may be slightly above target and some where it is slightly below, but on average, it should fall in that target band. We've tried many different monetary systems over time, and the 2-3% target is probably the best arrangement that we've had to date, but it requires competent people at the helm.

However, we do not have competent people at the helm. The inflation that Australia is experiencing right now is a direct consequence of the monetary expansion we had during the covid years. There are people at the Reserve Bank who are supposedly extremely intelligent, have degrees from MIT and Princeton and such, yet could not foresee that hugely increasing the money supply would lead to higher inflation. And now they're perplexed as to why it isn't coming down as fast as they want. Unfortunately, most of the public are not aware that the central bank is supposed to be responsible for maintaining low inflation. So people in power get away with spouting complete bullshit like "oh well, it's Putin's fault, we would never have had this high inflation if he didn't invade Ukraine" or "it's because supermarkets have just suddenly become greedy and are price gouging people".

Make no mistake, we have higher and persistent inflation now directly because of the Reserve Bank and the federal and state govts who shut everything down over the flu. The only way you get persistent inflation is via monetary expansion.

As for recession, yes, our GDP has been propped up for a long time by mass immigration. If you look at GDP per capita, it's been fairly stagnant for some time, and I haven't checked the latest figures, but we are probably in a bona fide per capita recession.

I'll admit I don't know much about crypto, but as far it being an alternative to the current monetary system goes, it fails as a unit of account (how do you price things in fractions of a Bitcoin, what does that mean? It only has meaning in so far as it has a $US conversion) and as a medium of exchange (you can't really trade it for goods and services). It may possibly have some merit as a store of value. What I am more concerned about is central bank digital currencies, because these, if introduced, will be a key pillar of the totalitarian communist police state.

[Jenni]

Here's my question: Must economies always endlessly expand? It feels like the focus on expansion is accompanied by little regard for how it expands and little regard for who reaps the benefits of that expansion coupled with the drive for boundless expansion. Such a thing never exists in nature- at least not for long. At some point lions will have no antelope to eat. Increase the antelope and another part of the ecosystem suffers. Isn't economics just another ecosystem that requires balance? It feels like there's no balance. We talk in trillions of dollars and yet, do we really have that much more in resources than our grandparents did? It feels made up. I'm not a trusting person when it comes to money. Little strips of cotton blended paper won't keep me warm at night and they certainly won't feed me or mine. So I naturally gravitate to holdings of other kinds. But even for those into this stuff it feels like it's gotten to comical proportions.

[IlPrincipeBrutto]

Bitcoin "inflates" by being broken into smaller and smaller units of the original 21 million coins.

It seems to me that breaking a Bitcoin into smaller units does not increase the total amount of Bitcoins available, just like using quarters or cents to pay a bill instead of banknote would not change the amount of money in your pocket.


IPB