Wednesday, June 08, 2005

Specious

Gold....

It's a short and simple word, with a hell of a lot of impact behind it.

I listen to a lot of conservative/libertarian/gun talk radio; and you can't avoid ads for GOLD GOLD GOLD.

Most of them play on the near universal paranoia conservatives have of the government screwing with out money supply because "Gold is not affected by such things as political turmoil"...

Yeah, right.....

In 1934 we changed our currency, from a specie currency, to a fiat currency; and certain groups of people have been bitching ever since.

There are of course some good reasons for this. One, the government simply declared that gold wasn't money any more; can someone please tell me where in the Constitution it says they can do that?

Sure they have the ability to print money, but to declare existing money isn't money anymore?

Then of course there was the creation of the federal reserve; a BIG favorite of the groups that believe the tri-lateral commission runs everything. Or maybe it's the Zionist Overlord conspiracy (his name IS Greenspan after all).

The federal reserve was and is clearly unconstitutional. There is no authority for this present in the constitution at all, or at least not in the executive branch (which the federal reserve is created out of); it's POSSIBLE congress might be able to justify it using the commerce clause.

All that said, I'm going to make a firm break with my brothers and sisters and say it was the right thing to do.

Why? Well I need to get into the differences between specie and fiat currency, and that's going to be pretty boring to those of you not interested in blackbox politics or economics.

Specie currency is that which is based in something that has "inherent or intrinsic value"; the canonical example being gold. In theory, specie currency is inherently stable, because it is tied to something tangible.

Bullshit, and I'll get into why later, but look up the panic of 1857, and the SS Central America for an example. Actually you should also read this wikipedia article:

http://en.wikipedia.org/wiki/Gold_standard

Oh and if you don't understand that NOTHING has intrinsic exchange value, only that value which a market assigns it; just stop reading now. If you do not understand monetization or mediums of exchange, or basic market economics, nothing I say from now on is going to make a bit of sense to you until you read an economics text book.

(The only things that have intrinsic value, are "useful" objects, which are necessities of life; and even then those intrinsic values are market based; it's just that the value of a useful item will never be zero, but again, that is an entirely separate discussion about elasticity in markets, and comoditization etc...)

Fiat currency is valued based on whatever the issuing body says it is; and what others are willing to buy it for(i.e. it is entirely market based). Generally this is based on world currency markets, and governments influence the rise and fall of their currency values using the adjustment of interest rates for the loans they make from their central banks, to the banking institutions of their nation.

Roughly speaking, markets value a currency based on the total productive output of that country, minus their outstanding debt, with a confidence factor figured in; divided by the amount of money issued.

This is how central banks (or the federal reserve in the case of the U.S.) control the money supply, by raising or lowering interests rates, so that banks ask for more or less money. The more money banks ask for, the more money supply in the economy (loose money), and the less each dollar is worth; the less banks ask for the LESS money supply in the economy (tight money), and the MORE each dollar is worth ... temporarily that is, until the markets (all of them including labor and goods, not just securities, equities, and commodities) adjust for it.

It's actually a very crude and limited mechanism, that effects the confidence factor more than it does the actual objective factors of the market.

This confidence factor is most strongly indicated by the international bond market, and the performance of the stock market; which is of course one of the reasons why anti-statists object to it so much. The stock market has no real value; it is essentially based entirely on speculation and manipulation (not actually true, but that's what they believe), therefore our economy is based on nothing but speculation and debt.

These people have no idea what they are talking about. And I don't care if F.A. Hayek believed in specie currency, that was 50 years ago when we were still primarily a commodity based economy. We are primarily a service economy, and service economies are entirely unsuited to specie currencies (In fact only economies based on untrusted participants require specie currency, but that's another story for another day).

The value of fiat currency has no direct legal relationship to the stock market (though of course it does to bonds), it is a second order effect, and an entirely appropriate one, as economic value should be measured based on total asset valuation, which includes the valuation of equity markets.

Specie currency is inherently limiting , and assigns an artificially high value to a scarce, and non growing resource, especially one such as gold which has little inherent value.

The advocacy of specie currency in the modern age indicates a fundamental misunderstanding of the nature of economic value. It excludes the value of both real property and labor in an economy, and both overvalues capital in general, and currency specifically.

It is also a myth of misunderstanding related directly to this exclusion of labor and real property, that specie currency is inherently stable. As the value of labor and real property rise in an economy, the value of specie rises artificially higher and higher, as it becomes more rare relative to other resources. Because the capital resource is effectively fixed (as labor will almost always grow faster than stocks of specie), its value will inevitably artificially rise, often rapidly.

Then, when the reserves of specie do change (because nothing is actually fixed), the "value" of the currency suddenly yo-yos.

This can be directly demonstrated by the periodic financial panics occurring between 1850s, and 1930s, all of which were caused, or substantially accelerated by, the sudden plunge of the value of gold after new discoveries, and then the artificially high value of capital after the assimilation of the new, higher stocks of gold and silver discovered in California, Canada, Alaska, and Nevada; and the panic that resulted when the rate of increase in these stocks slowed (or stopped). This rapid influx then freeze cycle of specie caused the valuation of currency to rollercoaster for 80 years, and not just in the U.S.

Actually for the MOST extreme example, you need to look at the decline of Spain beginning in the 16th century, and culminating in the peninsular wars (again I say look it up, but I will say right now as shorthand; Spain was completely destroyed by hyperinflation due to specie currency).

But what about inflation, isn't specie currency inherently inflation resistant?

NO, and anyone who says otherwise again, doesn't understand either monetization, the nature of commodities, or total market value very well.

First, inflation itself isn't necessarily a bad thing, UNBALANCED inflation is.

That is, price inflation that increases faster than wage inflation, or interest rates. Balanced inflation is a natural corrective mechanism of a successful market. It can be corrected easily through currency revaluation if a nation so chooses; but most simply allow inflation to proceed naturally. So long as it is balanced, it's MEANINGLESS.

In a successfully balanced economy, no mater how much inflation occurs; over time as productivity increases, the real cost of goods ALWAYS decreases; unless a resource scarcity arises. That real cost is measured in the time it took to earn the currency necessary to purchase those goods. If you don't understand this, you really don't understand the nature of compensation. Read my post "The politics of liberty" for more.

Second, only when a currencies value is determined by the total assets of the economy for which it serves, can that currency avoid hyperinflation as capital (specie or otherwise) stocks increase, or hyper-deflation as non-capital assets increase in value.

Finally, those who believe that specie currency is necessary for stability are fundamentally saying they believe that markets don't work, and that economics is a zero sum game.

Bullshit.

In a balanced economy, in order for me to win, you don't have to lose. That's an idea for the people who chant "Capitalist opressors" at WTO meetings, not for rational adults, and certainly not for libertarians.

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