The Minimum Wage isn’t a Living Wage because the Federal Reserve devalued the Dollar

Posted by PITHOCRATES - February 1st, 2014

Week in Review

The Democrats like to talk about income inequality.  Which they say isn’t good.  So they want to raise the minimum wage.  To reduce income inequality.  Even President Obama said during the State of the Union address that he wanted to raise the minimum wage.  To $10.10.  To give them a living wage.  Because they can’t make it on the current minimum wage.  Of course, there’s a reason for this.   And it’s not because of the wage rate.  It’s about the depreciation of the dollar (see Hiking wages with worthless dollars by Seth Lipsky posted 1/29/2014 on the New York Post).

The most startling thing about President Obama’s State of the Union message is what he failed to say about the minimum wage. “Today the federal minimum wage is worth about 20 percent less than it was when Ronald Reagan first stood here,” he declared Tuesday night.

But wait, wasn’t the minimum wage $3.35 an hour throughout Reagan’s two terms? Isn’t it now $7.25 an hour? How does that add up to a drop in value by 20 percent? The president glided right past that point. Maybe he thought nobody would notice.

It strikes me that the president owed the country more of an explanation. After all, he spoke exactly on the 100th anniversary of the start of the Federal Reserve System. The central bank is about to begin its second century. Obama made no reference to any of that history.

Yet a century ago Congress refused to agree to a Federal Reserve until there was a promise about the value of the dollar: It insisted on having the Federal Reserve Act state that it would not lead to an end of the convertibility of the dollar into gold.

That legislative promise came to an end in a series of defaults that started in the Great Depression and ended under President Richard Nixon. By the mid-1970s, America had moved to a fiat currency, meaning a dollar that is not redeemable by law in anything of value. Only what one critic calls “irredeemable electronic paper ticket money.”

The minimum-wage crisis is a sign that fiat money is not working. It’s not, after all, that the nominal minimum wage has failed to go up (it’s been raised seven times since Reagan). It’s that the value of the dollar has collapsed. Today it has a value of only a 1,250th of an ounce of gold, a staggering plunge from an 853rd of an ounce on the day Obama took office.

Back in 1907 some people tried to manipulate the stock price of a copper company and long story short the Knickerbocker Trust Company collapsed and caused a panic in the banking system.  Enter the Federal Reserve System (the Fed).  A central bank that can inject liquidity during a banking crisis.  And forever eliminate these banking crises.  Or so went the theory.  But central banks have a nasty habit of devaluing their currency.  Because they can print money.  Fiat currency.  Well, the deal with the Fed was that they would not succumb to the central bank disease.  But, alas, they did.  Which is why minimum wage workers have less purchasing power today than they did during the Reagan administration.  Even though they are paid more dollars.


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The Price of Gold falls as Responsible Monetary Policy appears Imminent

Posted by PITHOCRATES - December 14th, 2013

Week in Review

You can print paper dollars.  And create dollars electronically.  Which is why governments love fiat money.  Money that has no intrinsic value.  Just the government saying ‘let it have value’ gives it value.  Which is why they love it.  Because they can print it to spend when they have no further room to raise taxes.

But printing money creates inflation.  And devalues the dollar.  Which is why some like to buy gold.  Because you can’t print gold.  Or create it electronically.  So it holds its value.  Especially when the dollar doesn’t.  And the price of gold has been on the rise all during the Federal Reserve’s quantitative easing (i.e., ‘printing’ money).  The more the Fed ‘prints’ money the more they devalue the dollar.  And inflate the price of gold.  But once it looks like the Fed is going to taper back on their ‘printing of dollars’ gold investors stop buying gold (see Gold suffers biggest one-day loss since October by Myra P. Saefong and Sara Sjolin posted 12/12/2013 on Market Watch).

Gold futures took a hit on Thursday as concerns that the Federal Reserve could scale back its stimulus next week pulled prices down by more than $30 an ounce for their biggest one-day loss since October.

Investors stopped buying gold not because gold has lost value.  But because they think the dollar will stop losing its value.  For if the Fed stops their quantitative easing the devaluation of the dollar will halt.  As will the rise in the price of gold priced in dollars.  So it will no longer take more dollars to buy the same amount of gold that it once bought.  Like it did under the Fed’s quantitative easing.  And those who bet on a further irresponsible monetary policy that devalued the dollar want to unload some of their higher-priced gold before responsible monetary policy takes effect.


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Bretton Woods, Nixon Shock, OPEC, Yom Kippur War, Oil Embargo, Stagflation, Paul Volcker, Ronald Reagan and Morning in America

Posted by PITHOCRATES - October 1st, 2013

History 101

(Originally published September 18th, 2012)

Under the Bretton Woods System the Americans promised to Exchange their Gold for Dollars at $35 per Ounce

Wars are expensive.  All kinds.  The military kind.  As well as the social kind.  And the Sixties gave us a couple of doozies.  The Vietnam War.  And the War on Poverty.  Spending in Vietnam started in the Fifties.  But spending, as well as troop deployment, surged in the Sixties.  First under JFK.  Then under LBJ.  They added this military spending onto the Cold War spending.  Then LBJ declared a war on poverty.  And all of this spending was on top of NASA trying to put a man on the moon.  Which was yet another part of the Cold War.  To beat the Soviets to the moon after they beat us in orbit.

This was a lot of spending.  And it carried over into the Seventies.  Giving President Nixon a big problem.  As he also had a balance of payments deficit.  And a trade deficit.  Long story short Nixon was running out of money.  So they started printing it.  Which caused another problem as the US was still part of the Bretton Woods system.  A quasi gold standard.  Where the US pegged the dollar to gold at $35 per ounce.  Which meant when they started printing dollars the money supply grew greater than their gold supply.  And depreciated the dollar.  Which was a problem because under Bretton Woods the Americans promised to exchange their gold for dollars at $35 per ounce.

When other nations saw the dollar depreciate so that it would take more and more of them to buy an ounce of gold they simply preferred having the gold instead.  Something the Americans couldn’t depreciate.  Nations exchanged their dollars for gold.  And began to leave the Bretton Woods system.    Nixon had a choice to stop this gold outflow.  He could strengthen the dollar by reducing the money supply (i.e., stop printing dollars) and cut spending.  Or he could ‘close the gold window’ and decouple the dollar from gold.  Which is what he did on August 15, 1971.  And shocked the international financial markets.  Hence the name the Nixon Shock.

When the US supported Israel in the Yom Kippur War the Arab Oil Producers responded with an Oil Embargo

Without the restraint of gold preventing the printing of money the Keynesians were in hog heaven.  As they hated the gold standard.  The suspension of the convertibility of gold ushered in the heyday of Keynesian economics.  Even Nixon said, “I am now a Keynesian in economics.”  The US had crossed the Rubicon.  Inflationary Keynesian policies were now in charge of the economy.  And they expanded the money supply.  Without restraint.  For there was nothing to fear.  No consequences.  Just robust economic activity.  Of course OPEC didn’t see it that way.

Part of the Bretton Woods system was that other nations used the dollar as a reserve currency.  Because it was as good as gold.  As our trading partners could exchange $35 for an ounce of gold.  Which is why we priced international assets in dollars.  Like oil.  Which is why OPEC had a problem with the Nixon Shock.  The dollars they got for their oil were rapidly becoming worth less than they once were.  Which greatly reduced what they could buy with those dollars.  The oil exporters were losing money with the American devaluation of the dollar.  So they raised the price of oil.  A lot.  Basically pricing it at the current value of gold in US dollars.  Meaning the more they depreciated the dollar the higher the price of oil went.  As well as gas prices.

With the initial expansion of the money supply there was short-term economic gain.  The boom.  But shortly behind this inflationary gain came higher prices.  And a collapse in economic activity.  The bust.  This was the dark side of Keynesian economics.  Higher prices that pushed economies into recessions.  And to make matters worse Americans were putting more of their depreciated dollars into the gas tank.  And the Keynesians said, “No problem.  We can fix this with some inflation.”  Which they tried to by expanding the money supply further.  Meanwhile, Egypt and Syria attacked Israel on October 6, 1973, kicking off the Yom Kippur War.  And when the US supported their ally Israel the Arab oil producers responded with an oil embargo.  Reducing the amount of oil entering America, further raising prices.  And causing gas lines as gas stations ran out of gas.  (In part due to Nixon’s price controls that did not reset demand via higher prices to the reduced supply.  And a ceiling on domestic oil prices discouraged any domestic production.)  The Yom Kippur War ended about 20 days later.  Without a major change in borders.  With an Israeli agreement to pull their forces back to the east side of the Suez Canal the Arab oil producers (all but Libya) ended their oil embargo in March of 1974.

It was Morning in America thanks to the Abandonment of Keynesian Inflationary Policies

So oil flowed into the US again.  But the economy was still suffering from high unemployment.  Which the Keynesians fixed with some more inflation.  With another burst of monetary expansion starting around 1975.  To their surprise, though, unemployment did not fall.  It just raised prices.  Including oil prices.  Which increased gas prices.  The US was suffering from high unemployment and high inflation.  Which wasn’t supposed to happen in Keynesian economics.  Even their Phillips Curve had no place on its graph for this phenomenon.  The Keynesians were dumfounded.  And the American people suffered through the malaise of stagflation.  And if things weren’t bad enough the Iranians revolted and the Shah of Iran (and US ally) stepped down and left the country.  Disrupting their oil industry.  And then President Carter put a halt to Iranian oil imports.  Bringing on the 1979 oil crisis.

This crisis was similar to the previous one.  But not quite as bad.  As it was only Iranian oil being boycotted.  But there was some panic buying.  And some gas lines again.  But Carter did something else.  He began to deregulate oil prices over a period of time.  It wouldn’t help matters in 1979 but it did allow the price of crude oil to rise in the US.  Drawing the oil rigs back to the US.  Especially in Alaska.  Also, the Big Three began to make smaller, more fuel efficient cars.  These two events would combine with another event to bring down the price of oil.  And the gasoline we made from that oil.

Actually, there was something else President Carter did that would also affect the price of oil.  He appointed Paul Volcker Chairman of the Federal Reserve in August of 1979.  He was the anti-Keynesian.  He raised interest rates to contract the money supply and threw the country into a steep recession.  Which brought prices down.  Wringing out the damage of a decade’s worth of inflation.  When Ronald Reagan won the 1980 presidency he kept Volcker as Chairman.  And suffered through a horrible 2-year recession.  But when they emerged it was Morning in America.  They had brought inflation under control.  Unemployment fell.  The economy rebounded thanks to Reagan’s tax cuts.  And the price of oil plummeted.  Thanks to the abandonment of Keynesian inflationary policies.  And the abandonment of oil regulation.  As well as the reduction in demand (due to those smaller and more fuel efficient cars).  Which created a surge in oil exploration and production that resulted in an oil glut in the Eighties.  Bringing the price oil down to almost what it was before the two oil shocks.


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The Fed keeps Printing Money and People keep Leaving the Labor Force

Posted by PITHOCRATES - September 22nd, 2013

Week in Review

The Federal Reserve has failed to bring down the unemployment rate.  So the Fed will continue to devalue the dollar.  In their fervent Keynesian hope that it will actually do good.  While it continues to do a whole lot of bad (see STOCKS EXPLODE, RATES COLLAPSE AFTER FED SHOCKER: Here’s What You Need To Know by Sam Ro posted 9/18/2013 on Business Insider).

No taper. The Federal Open Market Committee (FOMC) shocked the markets by announcing that it would continue its monthly purchases of $85 billion worth of Treasury Securities and mortgage bonds. Most economists were looking for a reduction, or tapering, of around $5 to $10 billion dollars…

Markets went nuts. The Dow and S&P 500 surged to new all-time highs. Interest rates collapsed, the dollar tanked, and gold surged.

During the press conference, Bernanke said that the tightening of monetary policy (i.e. raising the Fed’s benchmark rate) may not begin until the unemployment rate is considerably below 6.5%. He also said that an inflation rate floor could be a sensible modification to its forward guidance policy.

The only thing lowering the unemployment rate is people leaving the labor force.  The labor force participation rate is at record lows.  Which means more and more people who can’t find work have just given up trying.  And because they have the labor department doesn’t count them anymore as unemployed.  Which brings down the unemployment rate.

So for the Obama economic policies to lower the unemployment rate below 6.5% will require bringing the labor force participation rate lower still.  Because the Obama economy is not growing.  Obama’s policies, especially Obamacare, are the greatest job killers to ever come down the pike.  If the unemployment rate drops below 6.5% in this jobless ‘recovery’ we’ll have Great Depression unemployment.  Tens of millions of real people out of a job despite what the official unemployment rate says.

And you know it’s bad when “interest rates collapsed, the dollar tanked, and gold surged.”  They’re printing so much money ($85 billion each month) that massive inflationary pressures are building up in the pipeline.  There’s so much money out there that there is more than people (other than Wall Street investors) want to borrow.  Hence the low interest rates.  Because they’re printing so much money each dollar is worth less and less.  Which is why the dollar tanked.  Because the Fed is going to continue to devalue it.  And when inflationary pressures are building and are just waiting to explode people want to protect their assets with gold.  So when inflation explodes and our money becomes worthless gold will hold its value.  Why?  Because you can’t print gold.  That’s why Keynesian economists hate it.  It forces governments to be responsible.  Something anathema to a Keynesian.

The economy under the Obama policies is now just a train wreck waiting to happen.  And when it does the fallout will be Great Depression bad.  Because of Keynesian economics.  The worst and most destructive theories ever to be implemented by government.  In fact, everything wrong in government finances today can be traced to Keynesian policies.  Expanding the money supply to stimulate the economy has only made recessions worse.  And increasing government spending (to replace private spending during recessions) has burdened governments so much that they are flirting with bankruptcy throughout the world.  Even a city in the United States.  The City of Detroit.  A harbinger of what is to come.


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Currencies, Exchange Rates and the Gold Standard

Posted by PITHOCRATES - June 17th, 2013

Economics 101

Money is a Temporary Storage of Value that has no Intrinsic Value

Giant container ships ply the world’s oceans bringing us a lot of neat stuff.  Big televisions.  Smartphones.  Laptop computers.  Tablet computers.  The hardware for our cable and satellite TVs.  Toasters.  Toaster ovens.  Mixers and blenders.  And everything else we have in our homes and in our lives.  Things that make our lives better.  And make it more enjoyable.  These things have value.  We give them value.  Some have more value to one than another.  But these are things that have value to us.  And because they have value to us they have value to the people that made them.  Who used their human capital to create things that other people wanted.  And would trade for them.

When we first started trading we bartered with others.  Trading things for other things.  But as the economy grew more complex it took a lot of time to find someone who had what you wanted AND you had what they wanted.  So we developed money.  A temporary storage of value.  So we could trade the valuable things we created for money.  That money held the value of what we created temporarily while we looked for something that we wanted.  Then we exchanged the money we got earlier for something someone had.  It was just like trading our thing for someone else’s thing.  Only instead of spending weeks, months even years meeting hundreds of thousands of people trying to find that perfect match we only needed to meet two people.  One that exchanges money for the thing we have that they want.  And another who has what we want that they will exchange for our money.  Then that person would do the same with the money they got from us.  As did everyone else who brought things to market.  And those who came to market with money to buy what others brought.

Money is a temporary storage of value.  Money itself doesn’t have any intrinsic value.  Consider that container ship full of those wonderful items.  Now, which would you rather have as permanent fixtures in your house?  Those wonderful things?  Or boxes of money that just sit in your house?  You’d want the wonderful things.  And if you had a box of money you would exchange it (i.e., go out shopping) for those wonderful things.  Because boxes of money aren’t any fun.  It’s what you can exchange that money for that can be a lot of fun.

Devaluing your Currency boosts Exports by making those Goods less Expensive to the Outside World

So there is a lot of value on one of those container ships.  Let’s take all of that value out of the ship and place it on a balancing scale.  Figuratively, of course.  Now the owner of that stuff wants to trade it for other stuff.  But how much value does this stuff really have?  Well, let’s assume the owner is willing to exchange it all for one metric ton of gold.  Because gold is pretty valuable, too.  People will trade other things for gold.  So if we put 1 metric ton of gold on the other side of the balancing scale (figuratively, of course) the scale will balance.  Because to the owner all of that stuff and one metric ton has the same value.  Of course moving a metric ton of gold is not easy.  And it’s very risky.  So, instead of gold what else can we put on that scale?  Well, we can move dollars electronically via computer networks.  That would be a lot easier than moving gold.  So let’s put dollars on the other side of that scale.  Figuratively, of course.  How many will we need?  Well, today gold is worth approximately $1,380/troy ounce.  So after some dimensional analysis we can convert that metric ton into 32,150 troy ounces.  And at $1,380/troy ounce that metric ton of gold comes to approximately $44.4 million.  So that container ship full of wonderful stuff will balance on a scale with $44.4 million on the other side.  Or 1 metric ton of gold.  In the eyes of the owner they all have the same value.

Moving money electronically is the easiest and quickest manner of exchanging money for ships full of goods.  These ships go to many countries.  And not all of them use American dollars.  But we can calculate what amounts of foreign currency will balance the value of that ship.  Or one metric ton of gold.  By using foreign exchange rates.  Which tell us the value of one currency in another currency.  Something that comes in pretty handy.  For when, say, an American manufacturer sells their goods they want American dollars.  Not British pounds.  Danish kroner.  Or Russian rubles.  For American manufacturers are in the United States of America.  They buy their materials in American dollars.  They pay their employees in American dollars.  Who pay their bills in American dollars.  Go shopping with American dollars.  Etc.  For everyday American transactions the British pound, for example, would be un-useable.  What these American manufacturers want, then, are American dollars.  So before a foreigner can buy these American exports they must first exchange their foreign currencies for American dollars.  We can get an idea of this by considering that container ship full of valuable stuff.  By showing what it would cost other nations.  The following table shows a sampling of foreign exchange rates and the exchanged foreign currency for that $44.4 million.

foreign currencies and exchange rates

If we take the US dollars and the Exchanged Currency for each row and place them on either side of a balancing scale the scale will balance.  Figuratively, of course.  Meaning these currencies have the same value.  And we can exchange either side of that scale for that container ship full of valuable stuff.  Or for that metric ton of gold.  Why are there such large differences in some of these exchange rates?  Primarily because of a nation’s monetary policy.  Many nations manipulate their currency for various reasons.  Some nations give their people a lot of government benefits they pay for by printing money.  Which devalues their currency.  Some nations purposely devalue their currency to boost their export sector.  As the more currency you get in exchange for your currency the more of these exports you can buy.  Most of China’s great economic growth came from their export sector.  Which they helped along by devaluing their currency.  This boosted exports by making those goods less expensive to the outside world.  But the weakened yuan made domestic goods more expensive.  Because it took more of them to buy the same things they once did.  Raising the cost of living for the ordinary Chinese.

The Gold Standard made Free Trade Fair Trade

Some economists, Keynesians, approve of printing a lot of money to lower interest rates.  And for the government to spend.  They think this will increase economic activity.  Well, keeping interest rates artificially low will encourage more people to buy homes.  But because they are devaluing the currency to keep those interest rates artificially low housing prices rise.  Because when you devalue your currency you cause price inflation.  But it’s just not house prices that rise.  Prices throughout the economy rise.  The greater the inflation rate (i.e., the rate at which you increase the money supply) the higher prices rise.  And the less your money will buy.  While the currencies at the top of this table will have exchange rates that don’t vary much those at the bottom of the table may.  Especially countries that like to print money.  Like Argentina.  Where the inflation is so bad at times that Argentineans try to exchange their currency for foreign currencies that hold their value longer.  Or try to spend their Argentine pesos as quickly as possible.  Buying things that will hold their value longer than the Argentine peso.

Because printing fiat money is easy a lot of nations print it.  A lot of it.  People living in these countries are stuck with a rapidly depreciating currency.  But international traders aren’t.  If a country prints so much money that their exchange rate changes every few minutes international traders aren’t going to want their currency.  Because a country can’t do much with a foreign currency other than buy exports with it from that country.  A sum of highly depreciated foreign currency won’t buy as much this hour as it did last hour.  Which forces an international trader to quickly spend this money before it loses too much of its value.  (Some nations will basically barter.  They will exchange their exports for another country’s exports based on the current exchange rate.  So that they don’t hold onto the devalued foreign currency at all.)  But if the currency is just too volatile they may demand another currency instead.  Like the British pound, the euro or the American dollar.  Because these stronger currencies will hold their value longer.  So they’ll buy this hour what they bought last hour.  Or yesterday.  Or last week.  There is less risk holding on to these stronger currencies because Britain, the European Central Bank and the United States aren’t printing as much of their money as these nations with highly devalued currencies are printing of theirs.

This is the advantage of gold.  Countries can’t print gold.  It takes an enormous expense to bring new gold to the world’s gold supply.  It’s not easy.  So the value of the gold is very stable.  While some nations may devalue their currencies they can’t devalue gold.  A nation printing too much money may suffer from hyperinflation.  Reducing their exchange rate close to zero.  And when you divide by a number approaching zero the resulting amount of currency required for the exchange approaches infinity.  Weimar Germany suffered hyperinflation.  It was so bad that it took so much money to buy firewood that it was easier and less expensive to burn the currency instead.  This is the danger of a government having the ability to print money at will.  But if that same country can come up with a metric ton of gold that person with the container ship full of wonderful stuff would gladly trade it for that gold.  Even though that person will not trade it for that country’s currency.  This was the basis of the gold standard in international trade.  When nations backed their currencies with gold.  And kept them exchangeable for gold.  Forcing nations to maintain stable currencies.  By maintaining an official exchange rate between their currency and gold.  If that nation devalued its currency the market exchange rate will start to move away from the official exchange rate.  For example, say the official rate was $40/troy ounce.  But because they printed so much of their currency they devalued it to where it took $80 to buy a troy ounce on the open market.  So a nation could take $80 dollars of that devalued currency and exchange it for 2 troy ounces of gold from that nation.  The official exchange rate forcing the nation to give away 2 troy ounces of gold for $80 when the real market exchange rate would only have given them 1 troy ounce.  So devaluing your currency would cause gold to flow out of your country.  And the only way to stop it would be to decrease the size of your money supply.  Undoing the previous inflation.  To bring the market exchange rate back to the official exchange rate.  Which is why the gold standard worked so well for international trade.  Nations could not manipulate their currency to get a trade advantage over another nation.  Making free trade fair trade.  Something few say today.  Thanks to currency manipulators like China.


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If the U.S. was on a Gold Standard there would NOT have been a Financial Crisis in 2007

Posted by PITHOCRATES - June 9th, 2013

Week in Review

Counterfeiting money is against the law.  We all know this.  But do we understand why?  Today’s money is just fiat money.  The Federal Reserve prints it and simply says it is money.  So why is it okay for them to print money but not for anyone else?  Because the amount of money in circulation matters.

The goods and services that make up our economy grow at a given rate.  You hear numbers like GDP of 2%, 3% or more.  In China they had GDP numbers in excess of 8%.  The goods and services in our economy are what have value.  Not the money.  It just temporarily holds the value of these goods and services as they change hands in the economy.  So the amount of money in circulation should be close to the value of goods and services in the economy.  Think of a balancing scale.  Where on the one side you have the value of all goods and services in the economy.  And on the other you have the amount of money in circulation.  If you increase the amount of money on the one side it doesn’t increase the amount of goods and services on the other side.  But it still must balance.  So as we increase the amount of money in circulation the value of each dollar must fall to keep the scale in balance.

Now when we put our money into the bank for our retirement we don’t want the value of those individual dollars grow less over time.  Because that would reduce the purchasing power of our money in the bank.  Making for an uncomfortable retirement.  This is why we want a stable dollar.  One that won’t depreciate away the value of our retirement savings, our investments or the homes we live in.  We’d prefer these to increase in value.  But we can stomach if they just hold their value.  For awhile, perhaps.  But we cannot tolerate it when they lose their value.  Because when they do years of our hard work just goes ‘poof’ and disappears.  Leaving us to work longer and harder to make up for these losses.  Perhaps delaying our retirements.  Perhaps having to work until the day we die.  So we want a stable currency.  Like the gold standard gave us (see Advance Look: What The New Gold Standard Will Look Like by Steve Forbes posted 5/8/2013 on Forbes).

The financial crisis that began in 2007 would never have happened had the Federal Reserve kept the value of the dollar stable. A housing bubble of the proportions that unfolded–not to mention bubbles in commodities and farmland–would not have been possible with a stable dollar. The Fed has also created a unique bubble this time: bonds. It hasn’t popped yet (nor has the farmland bubble), but it will.

The American dollar was linked to gold from the time of George Washington until the early 1970s. If the world’s people are to realize their full economic potential, relinking the dollar to gold is essential. Without it we will experience more debilitating financial disasters and economic stagnation.

What should a new gold standard look like? Representative Ted Poe (R-Tex.) has introduced an original and practical version. Unlike in days of old we don’t need piles of the yellow metal for a new standard to operate. Under Poe’s plan–an approach I have long favored–the dollar would be fixed to gold at a specific price. For argument’s sake let’s say the peg is $1,300. If the price of gold were to go above that, the Federal Reserve would sell bonds from its portfolio, thereby removing dollars from the economy to maintain the $1,300 level. Conversely, if the gold price were to drop below $1,300, the Fed would “print” new money by buying bonds, thereby injecting cash into the banking system.

Yes, the subprime mortgage crisis and the Great Recession would not have happened if the Federal Reserve kept the dollar stable.  Instead, they kept printing and putting more money into circulation.  Why?  To keep interest rates low.  To encourage more and more people to buy a house.  Even people who weren’t planning to buy a house.  Even people who couldn’t afford to buy a house.  Until, that is, subprime lending took off.  Because of those low interest rates.  With all of these people added to the housing market who otherwise would not have been there (because of the Federal Reserve’s monetary policies of printing money to keep interest rates artificially low) the demand for new houses exploded.  As people tried to buy these before others could house prices soared.  Creating a great housing bubble.  Houses worth far greater than they should have been.  And when the bubble burst those housing prices fell back to earth.  Often well below the value of the outstanding balance of the mortgage on the house.  Leaving people underwater in their mortgages.  And when the Great Recession took hold a lot of two-income families went to one-income.  And had a mortgage payment far greater than a single earner could afford to pay.

So that’s how that mess came about.  Because the Federal Reserve devalued the dollar to stimulate the housing market (and any other market of big-ticket items that required borrowed money).  If we re-link the dollar to gold things like this couldn’t happen anymore.  For if it would put a short leash on the Federal Reserve and their ability to print dollars.  How?  As they print more dollars the value of the dollar falls.  Causing the value of gold priced in dollars to rise.  So they would have to stop printing money to keep the value of gold priced in dollars from rising beyond the established gold price.  Or they would have to remove dollars from circulation to decreases the value of gold priced in dollars back down to the established price.  Thereby giving us a stable currency.  And stable housing prices.  For having a stable currency limits the size of bubbles the Federal Reserve can make.

But governments love to print money.  Because they love to spend money.  As well as manipulate it.  For example, depreciating the dollar makes our exports cheaper.  But those export sales help fewer people than the depreciated dollar harms.  But helping a large exporter may result in a large campaign contribution.  Which helps the politicians.  You see, a stable dollar helps everyone but the politicians and their friends.  For printing money helps Wall Street, K Street (where the lobbyists are in Washington DC) and Pennsylvania Avenue.  While hurting Main Street.  The very people the politicians work for.


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A Mining Boom has caused Gold to fall while Gasoline continues to Rise

Posted by PITHOCRATES - June 2nd, 2013

Week in Review

Gold and oil share something in common.  We price both of these commodities in U.S. dollars.  Which makes it difficult to hide inflation in these commodities.  Food companies can shrink package sizing to keep from having to raise their prices to factor in inflation.  But you can’t do that when you sell oil by a fixed quantity.  A barrel.  Or gold.  Which we sell by the ounce.  Which means if you depreciate the dollar (with quantitative easing where we print money to buy bonds to increase the money supply so as to lower interest rates to encourage people to borrow money and buy things) you have to increase the price of these commodities.  Because if you make the money worth less it will take more of it to buy what it once bought.

But gold and oil also have a major difference.  While an increase in the price of gold encourages gold mines to bring more gold to market environmental concerns have prevented people from bringing more oil to market.   It is because of this that the price of gold has fallen while gasoline prices are rising again (see The Gold Standard by SARAH MAX posted 6/1/2013 on Barron’s).

Gold prices rise in times of economic malaise—hence its 23% rise in 2009 and 27% rise in 2010. When prices are rising, mining stocks have historically outperformed the physical asset. Yet gold-mining stocks have lagged over the past few years, even before the price of gold plummeted from its August 2011 high of roughly $1,900 a troy ounce to less than $1,400 today. “The main reason is cost inflation,” says Foster, explaining that a global mining boom has driven up the costs of labor and materials, while forcing miners to look farther afield for new gold deposits.

As the government inflates the money supply it reduces our purchasing power.  This erodes the value of our savings.  Making the money we worked hard for and put in the bank to pay for our retirement unable to buy as much as we hoped it would.  This is why people buy gold.  Because gold will hold its value.  If they increase the money supply by 20% the price of gold should rise, too.  Close to that 20%.  So when the Federal Reserve finally abandons their inflationary policies people can sell their gold and put their retirement savings back into the bank.  Adjusted, of course, for inflation.

The price of gold has fallen despite the Fed’s quantitative easing still going strong.  So if the dollar is worth less how come it now takes fewer of them, instead of more of them, to buy a given amount of gold?  Supply and demand.  With the high gold price people mined more gold and brought it to market.  Increasing the supply.  And lowering the price.  But because the Fed is still depreciating the dollar costs continue to rise.  Making it more costly for these mining companies to mine and bring gold to market.  Reducing their profits.  And the cost of their stock.

If only the oil business was free to operate like this.  For with the Fed depreciating the dollar they’re raising the price of a barrel of oil.  Making it attractive to bring more oil to market.  But wherever it can the federal government has shut down oil exploration and production.  To appease the environmentalists in their political base.  So, instead, gasoline prices continue to rise.  While gold prices fall.  And the dollar continues to depreciate.  Which will one day ignite a vicious inflation.  Much like it did in the Seventies.  And then it will take a nasty recession to get rid of that vicious inflation.  Like we had in the Eighties.  But at least in the Eighties we had one of the strongest and longest economic expansion follow that nasty recession.  Thanks to a strong dollar.  Low taxes.  And a reduction of regulatory costs.  Something the current administration clearly opposes. So we’ll probably have the inflation.  And the recession.  But not the economic expansion.  For that we may have to wait for the next Republican administration.


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The Keynesian Fiat Economies are so Bad that the World is Turning back to Gold

Posted by PITHOCRATES - January 19th, 2013

Week in Review

Keynesians hate the gold standard.  They blamed it for the Great Depression.  Which they believed could have been avoided if the government printed more money instead of contracting the money supply.  For a Keynesian’s answer to everything is to expand the money supply.  So the government can spend more money.  This came to a head in the U.S. during the Seventies.  Foreign countries were converting their dollars into gold.  Because the U.S. was devaluating the dollar by printing so much new money.  So these countries took the gold instead.  Because you can’t depreciate gold.

The Seventies were a disaster.  It turned out that the government just couldn’t print money to pay its bills as the destruction they caused on the dollar devastated the economy.  So they backed off.  The Federal Reserve raised interest rates into the double digits to stamp out that destructive inflation.  The world didn’t return to a gold standard, though.  As most countries were still hard-core Keynesians who liked the ability to make money out of nothing so they can keep spending. But now the Eurozone is in a sovereign debt crisis.  The UK is slashing their NHS budget.  Japan is now spending twice their GDP and stuck in an economic slump going on for over two decades.  And as the U.S. is spending about 100% of its GDP they added a whopper of a new entitlement.  Obamacare.  The destruction of the dollar isn’t a question of if but when.  And now we’re seeing a quasi return to the gold standard as nations everywhere are losing faith in the ability of these Keynesian governments to spend responsibly (see A new Gold Standard is being born by Ambrose Evans-Pritchard posted 1/17/2013 on The Telegraph).

The world is moving step by step towards a de facto Gold Standard, without any meetings of G20 leaders to announce the idea or bless the project.

Some readers will already have seen the GFMS Gold Survey for 2012 which reported that central banks around the world bought more bullion last year in terms of tonnage than at any time in almost half a century.

They added a net 536 tonnes in 2012 as they diversified fresh reserves away from the four fiat suspects: dollar, euro, sterling, and yen…

Neither the euro nor the dollar can inspire full confidence, although for different reasons. EMU is a dysfunctional construct, covering two incompatible economies, prone to lurching from crisis to crisis, without a unified treasury to back it up. The dollar stands on a pyramid of debt. We all know that this debt will be inflated away over time – for better or worse. The only real disagreement is over the speed.

This is the inevitable result of Keynesian economics.  Reckless spending that destroys currencies.  And right now these countries stand in judgment of the U.S., the Eurozone, Great Britain and Japan.  Their social spending obligations have put them on a path towards currency destruction.  And they don’t want be around when that happens while holding dollars, euros, sterling, or yen.  Because they just won’t be worth the paper they’re printed on.

In Ayn Rand’s Atlas Shrugged American Industrialists went on strike.  Walked away from their companies and disappeared.  Leaving their overregulated and overtaxed businesses to the government to do with them as they pleased.  Refusing to be economic slaves anymore.  They eventually migrated to a place called Galt’s Gulch somewhere in Colorado.  Where they made their own community.  And economy.  Where creators traded with other creators.  Using that one money that stood the test of time.  Gold.  For if you wanted to buy something in Galt’s Gulch you had to have gold.  For no one accepted cash there.  Some have been predicting we’ve been on the brink of something like this actually happening for the last 80 years or so.  And now it’s happening.  Only it’s not American industrialists turning on the U.S. government but the rest of the world.

Is it any wonder that sales of Atlas Shrugged have surged during the Obama administration?  These people are seeing what these countries see.  The decline of the U.S.  And the destruction of the dollar.  Thank you President Obama.


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2012 Endorsements: Alexander Hamilton

Posted by PITHOCRATES - October 18th, 2012

2012 Election

When Hamilton looked out Across the Vast North American Continent he saw Great Economic Opportunity

Alexander Hamilton was born in the British West Indies.  At the age of eleven he had to get a job.  As his father abandoned his family after losing all the family money.  Young Alexander worked at Cruger and Beckman’s.  a New York trading house.  A window onto the world.  And international trade.  Where young Alexander learned about the world.  And business.  He had a gift for numbers.  He was bright.  And driven.  Born in the British West Indies he was also something else.  A Founding Father without any state lineage.  With no provincial views.  During the prelude to American independence when other patriots talked about the states going their own way he was already thinking of an American union.  And only of an American union.

The British response to the Boston Tea Party was the Intolerable Acts.  Or the Coercive Acts in Britain.  Where the British put the hurt on Boston.  And Massachusetts.  To separate it and isolate it from the rest of the colonies.  Reverend Samuel Seabury took to the papers and argued against uniting the other colonies to support Massachusetts.  That the people should support their king.  And Parliament.  And not the spoiled, trouble-making people of Boston.  Hamilton took to the papers and argued in support of union.  And Boston.  Warning the people that this was just the beginning for Britain.  More taxes would certainly follow.  Hamilton warned the people to put away their sectional differences.  As this attack on one was an attack on all.  And that if they gave up on Boston it would only be a matter of time before other colonies met the same fate.

That was all well and fine during the warm months of summer.  But the American colonies were part of the British Empire.  Which was a mercantilist empire.  Whose colonies shipped raw materials to the mother country.  And the proceeds from those sales were used to buy manufactured goods made from those raw materials in the mother country.  Making the colonists dependent on Britain for their clothing.  The lack of which would make a very cold and miserable winter.  Which led a lot of people to agree with Reverend Samuel Seabury.  But not Hamilton.  For he looked out across the American colonies and saw something else.  Economic independence.  The South had cotton.  The North could raise sheep for wool.  And they could build factories in the cities to make cloth and clothing.  Staffed by skilled immigrants from European factories.  This is what Hamilton saw when he looked out across the vast North American continent.  Great economic opportunity.  Made possible by an American union.

Hamilton spent the Winter Seasons at Valley Forge and Morristown Reading and Studying Economics and Public Finance

When the Revolutionary War came Hamilton joined the Continental Army.  Fought bravely.  Then ended up as General Washington’s aide-de-camp.  Serving in Washington’s inner circle he knew what the commanding general knew.  And he knew the sorry state of the army.  Half-naked, hungry and unpaid.  While some civilians were living the life of Riley.  Making a fortune off of hording commodities and selling them at high prices.  Which they could do with impunity as the Continental Congress was powerless to stop them.  As it was at the mercy of the states.  The national congress was broke and had little legal authority.  Which let the speculators run roughshod over it.  Leaving the people sacrificing the most for independence half-naked, hungry and unpaid.  Diminishing the fighting ability of the army.  Which greatly increased the risk of defeat.

Hamilton learned an important lesson.  The stronger the national government was, and the richer it was, the easier it was to wage war.  And the easier it was NOT to be defeated in war.  The problem here was that the national government was too weak.  While the state governments were too strong.  Which was fine for the people living normal lives in their states.  But not the soldiers in the field fighting for the nation.  Making things worse was inflation.  The Continental Congress was printing money.  As were the states.  And the more they printed the more they depreciated it.  Which led to even higher prices.  More profits for the speculators.  And even more hardship for the army.  Which had to at times take things from the local people in exchange for IOUs.  Making these people hate the army.  And the army hate the people.  As they were the ones risking life and limb for what was to them an ungrateful people.

Hamilton spent the winter seasons at Valley Forge and Morristown reading and studying economics and public finance.  And set out to solve the inflation problem.  What he learned was that a lot of people were benefiting by the rampant inflation.  Debtors loved it.  For the greater the inflation was the easier it was to repay loans in those depreciated dollars.  Especially the farmers.  They sold their produce at ever higher prices.  Borrowed money to buy land (and repaid those loans in depreciated dollars).  While escaping much of the ravages of inflation themselves.  Because they were farmers.  And were self-sufficient.  Eating what they grew.  Even making their own clothes.  For some inflation was a way to get rich quick at the detriment of others.  To help dissuade such activity Hamilton suggested high taxes in kind (if a farm grew wheat that they turned into flour they would pay a portion of their flour to the government as a tax) on those benefitting from inflation who where destroying the confidence in the dollar.

If Hamilton were Alive Today he would likely Endorse the Republican Candidates Mitt Romney and Paul Ryan

Hamilton also suggested a plan for a national bank.  To help restore the credit of the United States.  And to provide a source of credit for the national government.  The bank would be owned half by the government and half by rich investors.  By letting the rich investors make money on the bank it would, of course, encourage them to invest in the bank.  And provide capital the government could borrow.  Hamilton believed in bringing the rich people closer to the government.  So the government had access to their money.  Both would win in such a partnership.  And both would have a vested interest in seeing the government succeed.  The Continental Congress used some of Hamilton’s ideas.  But not enough to bring his vision to life.  He would get another chance, though.  When he became America’s first Secretary of the Treasury.

At the end of the Revolutionary War the United State’s finances were in a mess.  State governments and the national government owed money.  As they used that money to prosecute the war Hamilton believed the national government should assume the states’ debts and roll in into the national debt.  And, more importantly, the new national debt would help strengthen the union.  By binding the states to the national government.  These actions also helped to restore the nation’s credit.  Allowing it to borrow money to repay old debts.  As well as finance new spending.  Hamilton also got his bank.  And he produced a report on manufacturers.  A plan to use government funds to help launch American industry.  So they could catch up to Great Britain.  And even surpass the former mother country.

Hamilton pushed for these things because he wanted to use the power of government to make America strong and fiercely independent in the world of nations.  With an economic plan that would make the nation wealthy.  And allowing it to afford a military that equaled or surpassed Great Britain.  He did not want to make America wealthy to implement a massive welfare state.  His idea of partnering government with business was to make an American Empire modeled on the British Empire.  Making it a rich military superpower.  Able to project force.  Maintaining peace through strength.  Much like the British did with their Pax Britannica that he didn’t live to see.  And to protect what it had from anyone trying to take it away from them.  So based on this who would he endorse in the 2012 election?  The party that had business-friendly policies to encourage economic growth.  The party that was more anti-inflation.  The party that would best exploit the nation’s resources.  And the party that favored a strong military.  Which is NOT the Democrat Party.  No, if Alexander Hamilton were alive today he would likely endorse the Republican candidates Mitt Romney and Paul Ryan.


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Farming, Food Surplus, Artisans, Trade, Barter, Search Costs, Money, Precious Metals, Pound, Dollar and Gold Standard

Posted by PITHOCRATES - October 9th, 2012

History 101

Food Surpluses allowed Everything that followed in the Modern Age

Humans were hunters and gatherers first.  When the environment ruled supreme.  Then something happened.  Humans began to think more.  And started to push back against their environment.  First with tools.  Then with fire.  Bringing people closer together.  Eventually settling down in civilizations.  When the human race embarked on a new path.  A path that would eventually usher in the modern age we enjoy today.  We stopped hunting and gathering.  And began farming.

Throughout history life has been precarious.  Due to the uncertainty of the food supply.  Especially when the environment ruled our lives.  That changed with farming.  When we started taking control of our environment.  We domesticated animals.  And learned how to grow food.  Which lead to perhaps the most important human advancement.  The one thing that allowed everything that followed in the modern age.   Food surpluses.  Which made life less precarious.  And a whole lot more enjoyable.

Producing more food than we needed allowed us to store food to get us through long winters and seasons with poor harvests.  But more importantly it freed people.  Not everyone had to farm.  Some could do other things.  Think about other things.  And build other things.  Artisans arose.  They built things to make our lives easier.  More enjoyable.  And when these talented artisans and farmers met other talented artisans and farmers they traded the products of all their labors.  In markets.  That became cities.  Enriching each other’s lives.  By allowing them to trade for food.  For things that made life easier.  And for things that made life more enjoyable.

We settled on using Precious Metals (Gold and Silver) for Money for they were Everything Money Should Be

As civilizations advanced artisans made a wider variety of things.  Putting a lot of goods into the market place.  Unfortunately, it made trading more difficult.  Because while you saw what you wanted the person who had it may not want what you had to offer in trade.  So what do you do?  You look for someone else that has that same thing.  And will trade for what you have.  And when the second person doesn’t want to trade for what you have you look for a third person.  Then a fourth.  Then a fifth.  Until you find someone who wants to trade for what you have.

This is the barter system.  Trading goods for goods.  And as you can see it has high search costs to find someone to trade with.  Time that people could better spend making more things to trade.  What they needed was a temporary storage of value.  Something people could trade their things for.  And those people could then use that temporary storage they received in trade to later trade for something they wanted.   We call this ‘something’ money.

We have used many things for money.  Some things better than others.  In time we learned that the best things to use for money had to have a few characteristics.  It had to be scarce.  A rock didn’t make good money because why would anyone trade for it when you could just pick one up from the ground?  It had to be indestructible and hold its value.  A slab of bacon had value because bacon is delicious.  But if you held on to it too long it could grow rancid, losing all the value it once held.  Or you could eat it.  Which would also remove its value.  It had to be divisible.  A live pig removed the problem of bacon growing rancid.  However, it was hard making change with live pigs.  Which is why we settled on using precious metals (gold and silver) for money.  For they were everything money should be.

The Key to Economic Activity is People with Creative Talent to make Things to Trade

Money came first.  Then government monetary systems.  Traders were using gold and silver long before nations established their own money.  And when they did they based them on weights of these precious metals.  The British pound sterling represented one Saxon pound of silver.  The U.S. dollar came from the Spanish dollar.  Which traces back to 16th century Bohemia.  To the St. Joachim Valley.  Where they minted private silver coins.  The Joachimsthaler.  Where the ‘thaler’ (which translated to valley) in Joachimsthaler became dollar.  The German mark and the French franc came into being as weights of precious metals.  People either traded silver or gold coins.  Or paper notes that represented silver or gold.

We used silver first as the basis for national currencies.  Then with new gold discoveries in the United States, Australia and South Africa gold became the precious metal of choice.  Using precious metals simplified trade by providing sound money.  And it also made foreign exchange easy.  For when the British made their pound represent 1/4 of an ounce of gold and the Americans made their dollar represent 1/20 of an ounce of gold the exchange rate was easy to calculate.  The British pound had 5 times as much gold in it than the U.S. dollar.  So the exchange rate was simply 5 U.S. dollars for every British pound.  Which made international trade easy.  And fair.  Because everything was priced in weights of gold.

The pure gold standard, then, was part of the natural evolution of money.  The state did not create it.  It does not require an act of legislation.  Or political decree.  The pure gold standard existed before the state.  And states based their currencies on the monetary system that already existed.  Using weights of precious metals as money.  That is, a pure gold standard.  Central banks and fiat money are only recent inventions of the state.  And bad ones at that.  For the thousands of years that preceded the last hundred years or so there were only traders mutually agreeing to trade their goods for precious metals.  Using these precious metals as a temporary storage of wealth.  To temporarily hold the value of the things they made.  So the key to economic activity is people with creative talent to make things to trade.  And a sound money like gold and silver to facilitate that trade.  Not a central bank.  Or monetary policy.


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