Tuesday, November 9, 2010

Austerity and Gold

A post on some of the nonsense economic talk going around.

First a good video on austerity and the fallacy of composition.

Second, I just wanted to address this little slice of insanity from World Bank President Zoellick:

The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.... Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.”


It is, as DeLong points out, just plain wrong. Gold is not an alternative monetary asset. It is a commodity. That's it. I blame the internet for all this gold standard craziness. Suddenly every schmuck with access to google considers themselves an economist and the romantic notion of gold tricks people into thinking it's the solution to all our problems. They forget the problems that gold actually caused us and simply refuse to acknowledge the impossibility of going back to a gold standard. This economics "dark age" is starting to worry me.

6 comments:

  1. As per the video, is this somehow related tangentially to the paradox of thrift? I am about as literate of economics as the next person, but I am curious as to how supply side economists have challenged this particular flaw. After all, the popular meme of 'austerity' is basically an modern variant of supply side economics that become prominent during Reagan's years. I would think that after all this time, there might have been many writings about it.

    Andrew Potter's friend, Joseph Heath took a stab at it . However, the 'irrationality-as-a-feature' argument, I find, is convincing. After all, if what Blyth said is true, current austerity measures would be an exercise of irrationality, but I fail to see how this would result in some sort of correction that would a) spare the lower 40 percent and b) return to an economic equilibrium that preserves the earning and spending power of consumers who are not the upper 5 percent of society.


    It does raise an unsettling point that by making populist connections to the 'kitchen table,' the implicit premise that what economically applies to the household is almost wholly translatable into other areas of society goes uncontested or is completely acceptable as conventional wisdom. This is odd considering that this financial crisis basically illustrated that losses and gains were not allocated where they should have. Even if Bush and Obama did nothing, a vast majority of workers would have lost their entire lifestyle they built over the years with absolutely little hope of bringing it back.

    ReplyDelete
  2. As per the video, is this somehow related tangentially to the paradox of thrift? I am about as literate of economics as the next person, but I am curious as to how supply side economists have challenged this particular flaw.

    Absolutely. The fallacy of composition is the underlying philosophical argument that coincides with the paradox of thrift. It suggests that what is good for the parts is not necessarily good for the whole. Paradox of thrift just applies it in the context of savings. Attacks on the paradox of thrift are multi-pronged but I believe the only one that comes close to making sense is the suggestion that increased savings result in a decrease in demand and an increase in supply of money and therefore leads to lower interest rates, more lending, more spending and everything is rosey again. Obviously that's less than applicable to today's problems given current interest rates, and generally speaking, right thinking economists acknowledge the paradox in this kind of situation since people are not acting rationally.

    It does raise an unsettling point that by making populist connections to the 'kitchen table,' the implicit premise that what economically applies to the household is almost wholly translatable into other areas of society goes uncontested or is completely acceptable as conventional wisdom.

    It's a good point, though I'm not sure it's as simple as that, all the absurd analogies to household saving aside. The simple fact of the matter is that even at the household level, most people, no matter the income level, find themselves in debt. Very few people consider their mortgages or car loans bad things. Yet for some bizarre reaon some amateur economists insist that the government, which has infinitely more assets and a much longer time horizon, should operate in the black.

    Rather, for all their sober talk of rationality, folks like the Austrians just get off on watching people get punished. The sad(der) thing is that they get mixed up about who should be punished.

    ReplyDelete
  3. I think you misunderstand the nature of money.

    Paper money is not money because the government decides it is but because the public accepts the governments right to say it is. With numerous countries destroying their own currency through QE and debt part of the public and the market is saying "we no longer accept governments right to declare what is of value and have chosen gold and silver as our proxy."

    Anything is money when the public decides it is a valid medium of exchange and preserver of wealth, kuri shells, wampum, or gold.
    Of all the things used for money in history gold and silver have never had zero value, scores of fiat currencies have become worthless. Gold is too rare and too concentrated to become the only currency but it can act as a currency if people want it to be.

    You also have to look at culture bias. India and China (and other parts of Asia) are becoming ever more powerful in the markets and their cultures still believe that gold and silver are a type of money. The way the Chinese are growing in economic power if they decide yaks are money rest of the world will eventually end up on the yak standard.

    The west and its fiat money machine has lost legitimacy in the east, and the east will turn to what they have historically valued whether you see it as legitimate or not.

    ReplyDelete
  4. Been using PMs to pay for your groceries have you?

    ReplyDelete
  5. No but I did buy 2 bushels of potatoes and my thanksgiving turkey for 4 ounces of silver last year and while I can't pass gold at Metro or Sobey's they don't accept yen or Euros either. Inability to pass it universally does not disqualify it as money, bogus reference.

    I have one coin collector who occasionally pays me for yard work in junk silver coins, those that he considers too worn to have graded for selling to other collectors. While highly volatile in value he's continued to pay me to $2 of face value per hour, (ie 2 silver dollars or equivalent small change)

    I can also buy legal tender coins from many nations who's value is its metal value rather than its fiat declared value.

    Indonesia has actually started a parallel silver currency to compete with paper.

    The Lakota bank runs a parallel system based on PMs.

    Even today U.S. Pilots carry Gold Sovereigns in their survival packs when flying over Iraq because they as close to universal money as you can get.

    Simply claiming its not money is not an argument. People ARE using PMs for money, its a historical constant that western bias and your nay-saying cannot refute.

    You can argue its not a good form of money but that's a different issue.

    ReplyDelete
  6. You're moving the goal posts. You think Zoellick was referencing downed fighter pilots?

    Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.

    He's talking about the use of gold as a store of value, he has no clue what a monetary asset is. You're dreaming if you think he was making the suggestion on account of the use of gold in Indonesia.

    ReplyDelete