A short note on the gold standard

by on September 3, 2012 at 9:45 am in Economics, History, Uncategorized | Permalink

I do not favor a gold standard, nor do I for that matter favor price stability, nor do I think a gold standard brings short-run price stability.  I think a gold standard today would be much worse than the 19th century gold standard, in part because commodity prices are currently more volatile and may be for some time.  I do not favor commodity bundle standards.  I favor some amount of ongoing inflation, and my reasons for this view are close to those of Larry Summers.

That all said, when I read recent critiques of the gold standard, occasioned by recent GOP debates on the topic, I feel I am living in a different universe than those who wrote them.  A few points:

1. Jim Hamilton aside, hardly anyone has reported the denouement: “…the final document [the GOP platform] makes no mention of gold, and instead seems to have settled on a proposal that is unlikely to do any harm…”

2. Why is no one mentioning Christina Romer’s work on how discretionary macroeconomic management does not have a totally superb comparative historical record in lowering volatility?  Start here, but there is more in this literature.  She is still a prominent economist.

3. Dare anyone critical of the gold standard bring themselves to utter these (roughly true) words?: “For the Western world, the gold standard era, defined say as 1815-1913, was arguably the greatest period of human advance ever, at least in matters of economics, culture, and technology.”  Chunks of the post-WWII era contend for this designation, but still this sentence is not a crazy one.

4. I remain baffled by treatments of Japan’s slow growth era as primarily a monetary phenomenon.  Under such a view, how was Europe’s 19th century possible at all?  Why wasn’t it a total economic disaster?  Data from government bonds show that “expected inflation” across the period was close to zero, yet somehow “For the Western world, the gold standard era, defined say as 1815-1913, was arguably the greatest period of human advance ever, at least in matters of economics, culture, and technology.”

Good economics is to integrate #2 and #3 with the fact that one need not favor a gold standard.  I’ve been seeing a lot of arguments against gold standards, many of which I agree with.  What I haven’t been seeing is the integration with the broader set of relevant facts, which of course present a more complicated picture.

1 Alexei Sadeski September 3, 2012 at 10:02 am

Is it actually true that commodity prices were more stable in the pre green revolution 19th C than in more recent history??

2 joeftansey September 3, 2012 at 10:25 am

“I think a gold standard today would be much worse than the 19th century gold standard, in part because commodity prices are currently more volatile and may be for some time.”

Commodity prices, when priced in dollars, are more volatile. The volatility is an artifact of the state abusing fiat currency. You’d have to show that the price-ratios (gold vs oil, for example) are more volatile now than they were in the 19th century.

3 Anthony September 3, 2012 at 12:33 pm

The problem isn’t that *commodity* prices are volatile, it’s that the price of gold is volatile. However, a good chunk of that volatility is *because* we don’t have a gold standard. People buy gold as a hedge against fiat-currency inflation, and the demand for gold above a certain baseline for industrial and jewelry use will fluctuate wildly as different governments show differing degrees of monetary fecklessness. Since gold has a very liquid worldwide market, changes in instablity or fear of bad government policy anywhere in the world will affect the price of gold.

If any large country, or group of them, went back on a gold standard, that volatility would be transferred to the forex market. (Where some of it already is, as people in smaller countries will often flee into dollars or euros instead of gold, when the percieved risks of their own country’s currency increase.)

4 buddyglass September 3, 2012 at 3:35 pm

Wasn’t the ratio of two of the most commonly traded commodities (silver and gold) fixed for most of the 19th century (i.e. up until the civil war)?

“The volatility is an artifact of the state abusing fiat currency.”

What if we priced commodities in terms of a basket of global currencies?

5 nickMR September 3, 2012 at 5:04 pm

Commodity prices, when priced in dollars, are more volatile.

Or when priced in euros or other fiat currencies. And the prices of many commodities relative to each other are also more volatile under a fiat currency, because the more money-like commodities (especially precious metals) are used more to hedge the risk of future inflation in those fiat currencies. So the price of gold is especially volatile under a fiat currency: it is not sticky whereas the fiat currency wages and prices of consumer goods such as Big Macs are. During the long gold and silver standards eras, the prices of those two metals in terms of each other moved so slowly that they could often just be legally fixed.

The most recent example of the pathological effect fiat currencies have on commodities was the flight to safety during the financial crisis, which caused a flight to both bonds and gold, and to a lesser extent semi-monetary commodities such as oil, to hedge the inflation risks of those bonds. More here. The high volatility of nominal commodity prices under a fiat currency also causes greater uncertainty about the expected real supply and demand of those commodities, leading to scarcity scares and hording during periods when inflation expectations have risen, which further add to the volatility of the normal industrial and agricultural commodities.

And whereas low inflation under gold has a reputation of hurting the poor, fiat currecies seem to have hurt the poor and the middle class even more: inequality has increased since the most of the world (per Bretton Woods) went off gold in 1970, and real wages have stagnated.

6 Alex' September 3, 2012 at 10:29 am

Why define the gold standard era as 1815-1913? It feels like your just cherrypicking the Industrial Revolution. Why not define it as ~1000BC-1913? I get your point that economic activity is dependent on a lot more than just price levels, but humanity’s been on some sort of metal standard for most of its entire history and choosing one of the those periods for one group of people as an illustrative example just seems intellectually dishonest.

7 Ape Man September 3, 2012 at 10:42 am

I am not sure where you are coming from. It seems to me that Cowen explains in the text why he choose his time period. The point of focusing on 1815-1913 is that it poses special problems for the critics of the gold standards, and not because it is the only time period available. Also, it is hard to make a fair comparison between and industrial economy on fiat currency and a pastoral one on the gold standard. So if you want to make an attempt to compare apples to apples, you are pretty much limited to the time period that Cowen lays out.

You could still argue (and I myself would support this argument) that it is not really fair to use the 1800s as a comparison because of other factors. But that is the big problem in economics. It is hard to come up with apple to apple comparisons that are truly fair.

8 Daniel Francis September 3, 2012 at 10:55 am

Alex’ still has a point though – it presents a couterfactual that show why it is unlikely that gold was responsible for all of the cultural and technological boom of the 19th century. Gold existed as a currency for the 18 centuries before that point, and we did not see a capitalist nirvana of growth.

9 The Anti-Gnostic September 3, 2012 at 11:03 am

Money is just the medium of exchange. Do you think Zimbabwean millionaires are actually wealthy?

10 Ape Man September 3, 2012 at 11:10 am

Like I said, the comparison is not fair because of other factors. But fiat currency did not cause the industrial revolution either. Given that the industrial revolution occurred, is it really fair to compare a fiat currency in an industrialized country to a gold standard in a pastoral one? It seems to me that no matter what comparison you make, it won’t be “fair”. Cowen chose a time period that was most behavioral to the position (remember, he does not support the gold standard) that he does not agree with. To me, that is the best way to argue even if it is not “fair”.

11 JonF September 3, 2012 at 11:08 pm

Re: The point of focusing on 1815-1913 is that it poses special problems for the critics of the gold standards, and not because it is the only time period available.

There’s no “special problem” unless you accept, petitio principii, by axiom that the gold standard led to the advances of the 19th century (and of course ignore the problems and calamities that did happen in the era). There are plenty of other candidates for the 19th century advances starting with the scientific and technological discoveries and inventions of the era, which have absolutely zilch to do with gold and would have occurred in any alternate universe that did not feature planetary catastrophe. Also: the easing of the Little Ice Age that had afflicted the northern hemisphere with bad harvests and severe epidemics since the late Middle Ages. The opening of the Great Plains, Australia, and the Pampas to grain farming and cattle husbandry. European imperialism, whereby local problems (and populations!) could be partially exported abroad. Finally, any harm the gold standard did was partly damped by gold strikes in the American West, and by the opening of South African and Siberian gold mines so the amount of gold was not fixed as it had been for centuries, but could (very roughly) grow with the economy.

12 Ntrust September 3, 2012 at 10:48 am

“Why define the gold standard era as 1815-1913? It feels like your just cherrypicking the Industrial Revolution. Why not define it as ~1000BC-1913?”

Likely he chose the 1815 (1816?) starting point because it’s when the UK adopted a formal gold specie standard. He’s not the first or only person to choose this period. It’s true that metal currencies have a lot longer history than that, but there’s a lot of discontinuity as well, i.e. going bimetallic, revising weight standards, and switching to fiat money (esp. outside the UK), etc.

“I get your point that economic activity is dependent on a lot more than just price levels, but humanity’s been on some sort of metal standard for most of its entire history and choosing one of the those periods for one group of people as an illustrative example just seems intellectually dishonest.”

If I understand Tyler’s point here, he’s simply addressing the critique that the gold standard restrains growth, hobbles finance, exerts harmful deflationary pressure that depresses the economy, etc. If that’s the case, a single good illustrative example showing sustained economic growth under a gold standard regime is sufficient to demonstrate that it’s not *necessarily* hobbling, restraining, and harmful to the economy, and that’s leaving out an account of other virtues such a system entails.

Personally, I’m rather ambivalent about returning to the gold standard, but feel it is often rather hastily judged an anachronism without a full account of its costs and benefits.

13 Roger Sweeny September 3, 2012 at 3:54 pm

But Tyler is not saying that a gold standard guarantees prosperity. He is simply saying that it is compatible with prosperity, unlike what “recent critiques of the gold standard” say.

I don’t think smoking marijuana means someone will get good grades in school. But I know students who smoke and are academically successful. It is simply untrue that the two can’t go together–and it is hardly unfair to point that out. Of course, that doesn’t mean that I would recommend it, any more than Tyler recommends a gold standard.

14 libert September 3, 2012 at 5:10 pm

I’ve never heard the critique that the gold standard “restrains growth, hobbles finance, exerts harmful deflationary pressure”.

As I understand it, the critique among economists is that fixing the price of money prevents flexibility in the loanable funds market during recessions.

It’s not that the gold standard is incompatible with long-term growth; it’s that the gold standard exaggerates the effects of the business cycle.

15 Andrew' September 3, 2012 at 6:23 pm

Gold was money, and kings sought to capture it. That may be different from a gold standard.

16 Ricardo September 3, 2012 at 10:32 am

“3. Dare anyone critical of the gold standard bring themselves to utter these (roughly true) words: “For the Western world, the gold standard era, defined say as 1815-1913, was arguably the greatest period of human advance ever, at least in matters of economics, culture, and technology”? Chunks of the post-WWII era contend for this designation, but still this sentence is not a crazy one.”

That’s easy to admit. Not only is post hoc not propter hoc but the start and end dates give the game away: these correspond to the end and beginning of large-scale European conflicts, not to any economic or monetary policy. The period after 1870 was especially fruitful in terms of scientific advances: you get the second industrial revolution, unprecedented advances in science and chemistry, steel skyscrapers, modern urban transportation infrastructure, steamships, railroads criss-crossing much of the world, etc. Nobody needs to explain to the author of “The Great Stagnation” that it is not at all clear that the gold standard played any role in this.

17 Ntrust September 3, 2012 at 10:54 am

“Nobody needs to explain to the author of “The Great Stagnation” that it is not at all clear that the gold standard played any role in this.”

I really don’t think Tyler’s saying those things came about because of the gold standard. The context is that people are saying the gold standard would be ruinous for the economy. It’s a different matter to offer an example showing that that isn’t necessarily so.

18 Ricardo September 3, 2012 at 12:36 pm

But I don’t think anyone has claimed that a gold standard would hold back scientific progress or depress long-term growth of GDP per capita. What people have claimed is that a gold standard may well make business cycles particularly unpleasant for low-wage workers and heavily indebted farmers. The period 1870-1913 is full of labor unrest, violent general strikes, and radical and populist political movements driven by the grievances of low-wage workers and farmers. A classic book in American history covering the early part of this period is tellingly called, “1877: Year of Violence.”

19 TheNumeraire September 3, 2012 at 2:44 pm

Don’t forget though that the U.S. government created a deliberate deflation from 1873 onward by returning the dollar to its pre-Civil War parity of $20.67/ gold oz. This deflation raised the real value of debts, and pushed wages and prices back towards pre-inflation levels. If the gold standard had been re-established at the new post-inflation level rather than at the pre-war parity, much of the unpleasantness of the populist movement could have been avoided.

20 Ricardo September 3, 2012 at 10:14 pm

But note we are already getting away from the ideal of a non-discretionary monetary policy. What value of the dollar should the U.S. have settled on, who should have made the decision, and what would they have based the decision on? It sounds to me like you would want to get together a panel of experts to pore over price and wage data and then have them make the decision. And then what happens would you get something like the Great Depression, where maintaining gold parity leads to similar populist movements from the economic harm it does to debtors and workers?

In other words, if you advocate a gold standard that can be abandoned or modified whenever there is a serious global depression or war, that’s basically the same thing as advocating no gold standard at all. Why bother once you have abandoned the goal of long-term price stability (or, at least, long-term non-inflation)?

21 TheNumeraire September 4, 2012 at 12:49 am

I didn’t claim anything or advocate a gold standard or any form of non-discretionary monetary policy. You tried to link the populist unrest that occurred after 1870 to the existence of the gold standard of the time — I added the proper context.

The real culprit was the attempt to try and correct a previous inflation with a deliberate inflation, which is problematic whether pursued under a metallic monetary system, fiat system or any other type of monetary arrangement.

And if you want to suggest that one of the cons of a rules-based monetary policy is that it can be abandoned under the discretion of policy makers, then there is no such thing as a non-discretionary, rule based policy within a central bank monopoly.

22 JonF311 September 3, 2012 at 11:11 pm

Yes indeed. Look at how the gold standard era finally ended. The war, depressions and genocidal ideologies of the 20th century, all directly traceable to unresolved problems in the 19th, should serve as a fit warning.

23 Ntrust September 4, 2012 at 2:43 am

“But I don’t think anyone has claimed that a gold standard would hold back scientific progress or depress long-term growth of GDP per capita.”

I don’t think that Tyler was really emphasizing the scientific progress, which would be beyond the scope of the discussion.

As for long-term growth, there certainly are formal critiques on that score. Just looking at the Wikipedia page, under “Disdadvantage”, it’s one of the first things listed:
But I was just as much referring to the hyperbolic pronouncements against the gold standard that pop up in the comments sections of blogs as to the academic research.

The point you’re focusing on, regarding the business cycle and debt, is certainly another valid issue. But it’s hardly the exclusive or even most common point that I’ve seen raised against the gold standard.

24 Ricardo September 4, 2012 at 3:48 am

I think your comment illustrates more about the short-comings of Wikipedia or internet debate than it does about the state of debate within economics. One of the most famous critics of the gold standard who frequently serves as a foil for gold standard advocates is Barry Eichengreen, who I cited above. The Wikipedia article you reference cites a book by someone named David Mayer. Eichengreen is widely regarded as an expert on the history of the gold standard, has published several books and academic articles on the subject and has won professional awards for his work in this field. As far as I can remember, Eichengreen does not advance the argument about long-term growth that you attribute to gold standard opponents. The book cited by wikipedia appears to be a popular audience book by a professional educator and it’s also not clear from the quote whether he is addressing long-term growth or not.

If someone can point to an article by a mainstream economist asserting that the gold standard would inhibit long-term economic growth, I will concede Tyler’s point. However, I have tried to keep up with this literature and simply have not encountered this point being advanced by people doing work in monetary economics or in economic history.

To conclude, if you don’t see the business cycle and debt points as being common, I really think you are looking in the wrong places for substantive debate. These are, in fact, the points most commonly raised by economists.

25 Ntrust September 4, 2012 at 10:55 am

“I think your comment illustrates more about the short-comings of Wikipedia or internet debate than it does about the state of debate within economics.”

Uhm, indeed, which is Tyler’s point: the debate definitely has its shortcomings. I’m not sure why you’d confine your analysis of the arguments being made to just those “most commonly raised by economists” in “places for substantive debate”. Did it seem like Tyler’s post was inspired by a recently published journal article? For my part, I stated explicitly that’s not what I was looking at. Right now, because the Republicans have made noises about the gold standard, places on the internet not normally concerned with economic esoterica are chiming in with their opinions. And yes, they’re not always “substantive”, to put it mildly. Not a lot of Eichengreen citations, rest assured. Common arguments include the psychological: advocacy of the gold standard stems from the fetishization of shiny objects; and the simplistic: it would be ruinous to the economy, no specifics. But I’m digressing…

Now, with regard to the idea that it may limit growth, I’m rather surprised that you think it’s so uncommon. I’m not in a position to say with any real accuracy what is the most common criticism, but I have seen it mentioned many times, though not always in the same terms. It even has a certain intuition to it, i.e. the extent of the economy is limited by the money supply, so if the supply of gold is restricted (as it is) and gold is money, then the economy is restricted by a gold standard. QED.

Just to reiterate, I do share your opinions about debt and cyclical issues as ones of actual worth. My own misgivings stem, in part, from such concerns. Nevertheless, I do have to observe that there’s a lot of nonsense “debunking” of the gold standard going about, especially now.

26 Meegs September 3, 2012 at 12:53 pm

” Nobody needs to explain to the author of “The Great Stagnation” that it is not at all clear that the gold standard played any role in this.”

That’s exactly his point. That perhaps the role of the gold standard and monetary policy in general is overstated.

27 Ricardo September 3, 2012 at 10:20 pm

Again, who exactly has argued that the gold standard holds back technological progress and long-term GDP per capita growth? Maybe some economist at some point has tried making the argument but I have never seen it. I’m pretty sure Barry Eichengreen didn’t mention it in “Golden Fetters.” Instead, the argument against the gold standard is roughly what I cited above: that it leaves debtors and workers particularly vulnerable to recessions and financial crises and one sees the reaction of these groups in the tumultuous political and social history of the late 19th century.

28 Joe Smith September 3, 2012 at 1:10 pm

“The period after 1870 was especially fruitful in terms of scientific advances: you get the second industrial revolution, … , steel skyscrapers, modern urban transportation infrastructure, steamships, railroads criss-crossing much of the world, etc.”

And all of that development was a follow on consequence of cheap steal courtesy of Bessemer and Mushet which was developed between 1855 and 1865.

29 Ape Man September 3, 2012 at 10:35 am

I would think it would seem obvious to anyone with a decent historical education that nations have grown their production capabilities curve with mild inflation and nations have grown their production capabilities with mild deflation. I would also think that anyone with a decent historical knowledge should understand that a currency based on gold does not necessarily produce a stable monetary system that produces desirable results (Spain for example). Can’t we all just agree that monetary policy only matters on the margins?

30 The Anti-Gnostic September 3, 2012 at 10:37 am

Prices should reflect supply and demand. The Federal Reserve has no more idea what prices should be than the Gosplan.

Government monetary policy should stop with the Bureau of Weights and Measures.

31 Daniel Francis September 3, 2012 at 10:47 am

“Good economics is to integrate #2 and #3 with the fact that one need not favor a gold standard. I’ve been seeing a lot of arguments against gold standards, many of which I agree with. What I haven’t been seeing is the integration with the broader set of relevant facts, which of course present a more complicated picture.”

I haven’t read #2 yet, but for #3… weird correlation point that would require extremely tenuous theoretical explanations to connect a worse-than-or-equal-to quality monetary policy with huge technical and cultural changes. Piracy was also more popular during this period (I’m just guessing, but take your pick), so I would argue that what we really need to do is destroy the navy.

32 Dismalist September 3, 2012 at 10:52 am

What is special about 1815-1913, in addition to the phenomena mentioned up thread, is that countries learned to manage a gold standard properly by subjecting themselves to fiscal discipline [as pointed out by Thomas Sargent, I believe].

What is wanted is a way of imposing fiscal discipline. The means are secondary.

33 JWatts September 3, 2012 at 11:36 am

“What is wanted is a way of imposing fiscal discipline. The means are secondary.”
From what I can tell, most of the gold standard advocates are behind it purely as a means to enforce fiscal discipline. If Greece had exchanged the Fiat drachma for a gold backed drachma instead of the Euro, would they be better or worse off today? It’s just a guess, but I suspect the answer is that they would probably be a lot better off today.
On the other hand it’s doubtful that a gold backed Mark replacing the Euro in Germany would have helped at all. So it’s fiscal discipline that matters. However, fiscal discipline seems to be a rarity in the world today.

34 Hunter September 4, 2012 at 1:50 pm

What was special about that time period? Peace. It was the time between the Napoleonic wars and WWI
There were no major wars in the European continent at that time except a side show in the Crimea.
There was not the tangled mess of red tape that we have now either. Have peace and no governement
regulation and you’ll have growth.

35 Ray Lopez September 3, 2012 at 10:54 am

Professor Cowen is correct–I’ve made the same points–as Magnus Andersson (not to be confused with Magnus Carlsen) pointed out, the late 19th C has the same per capita growth rates as the late 20th, and with deflation in the latter. As to human progress under the gold standard, if you choose from 1000BC to 1913 you’ll note tremendous progress in human activity–save the health issues, which arguably for the planet as a whole are net negative (since most human creativity manifests itself in youth, not old age, so having 7B old people on the planet arguably is economically not that great). So indeed under a gold standard, from -1000BC to 1913, the human race achieved more than in the post 1913 era. Technologically speaking, the basis for the 20th century was set in the gold standard–Google Maxwell equations, Lorentz transform, Rutherford and Currie’s discoveries, Wright brothers, Benz, Watt, Edison, Tesla etc etc etc these are all 19th century people in spirit even though some lived in the early 20th century.

36 Ray Lopez September 3, 2012 at 10:56 am

Oops I meant Angus Maddison, the economic historian. His data goes to 1996 but if anything it’s gotten worse for modern per capita advancement in the western countries since then.

37 Anthony September 3, 2012 at 11:07 am

Like many other large systemic changes, one very big problem with a gold standard is getting to a gold standard. The Austrians have shown that a fractional-reserve gold standard caused the Great Depression, so only a non-fractional-reserve gold standard would be an improvement over the current system. (Does anyone believe that under a fractional-reserve gold standard, governments wouldn’t make “adjustments” to the reserve requirements in order to create inflation?) But for the amount of gold available, a fully-backed gold standard would require converting dollars to gold at a significantly higher price than the current market price – I’ve seen an estimate of somewhere around $6000 – $10,000/oz. That would create an enormous immediate windfall for current holders of gold, which would create enormous distortions in the economy. Once the period of adjustment was over (which would also include most governments learning fiscal discipline, which would create its own upheavals), a gold standard would probably work better than the current fiat-money system. But the immediate short-term costs will be huge, and it’s not clear that the discounted long-term benefits would be worth it.

38 TheNumeraire September 3, 2012 at 2:19 pm

The period Tyler cites (1815-1913) was not a fully-backed gold standard; not even close, in fact there was much variation between how much gold was held in reserve by the various sovereign currencies (the Bank of England famously held very little gold reserve). This era was very obviously a “fractional-reserve gold standard” — it was mostly a system whereby the monetary issuer maintained gold parity not by stockpiling more gold, but by adjusting the amount of currency up or down (mostly up to accomodate growing demand) to maintain the value of the currency in terms of gold.

39 Lord September 3, 2012 at 2:49 pm

That is because a non-fractional-reserve system can’t exist in any meaningful sense. The part played by the fraction is simply diverted into credit instruments which boom and bust identically to fractional reserves. No one is interested in the prohibition of credit.

40 nickik September 4, 2012 at 3:41 am

Wrong. It is not FRB that caused the depression! Free banking is perfectly fine and would not have cause the great depression. The problem was the central bank exampending and then banks expanind on top of that. Without the central bank examping in the first place the banks on top of that would not have either.

Read George Selgin or Larry White on this.

41 Yancey Ward September 3, 2012 at 11:09 am

There is nothing special about a gold standard other than this- bank runs can reveal frauds very quickly. Under a fiat money system, frauds can run for longer periods of time.

42 Claudia September 3, 2012 at 11:13 am

Isn’t the debate over the gold standard just a special case of the debate over rules versus discretion in monetary policy? There seems to be some distracting baggage with gold, so why don’t its proponents simply push for more rule-based monetary policy? Personally I don’t see how you accommodate all the possible shocks to our economy in simple rules, but I do recognize that discretion has limitations too.

43 Claudia September 3, 2012 at 2:47 pm

Here’s an example of a more credible threat IMO to current discretionary monetary policy than the gold standard: a recent WSJ oped from Cochrane: http://online.wsj.com/article/SB10000872396390444812704577609384030304936.html I don’t agree with him, but I take him more seriously than the leading gold standard advocates.

44 Andrew' September 3, 2012 at 6:47 pm

These are well-intentioned people trying really hard and they still screw it up. But if The Great Depression and The Great Recession are the result of monetary mismanagement it is a point for my “policy marches toward obscurity” thesis.

45 Claudia September 3, 2012 at 7:46 pm

I disagree. Monetary policy did not (on its own or primarily) cause the Great Recession. Good policy (fiscal, monetary, regulatory) is as important as ever (no obscurity march).

46 chuck martel September 3, 2012 at 8:55 pm

That’s the issue. Humans don’t need a “policy” implemented by wizards to successfully exchange goods. Gold standard advocates think that tying a monetary system to gold puts shackles on government. The reality is that governments should get out of the money business altogether. Traders can come up with their own medium of exchange. But the MMT guys wouldn’t like that.

47 Claudia September 3, 2012 at 10:29 pm

Market makers are not infallible either. Remember how “house prices can’t fall nationally?” Markets (or traders) don’t always remedy systemic risks the way they “should.”

48 Andrew' September 4, 2012 at 1:04 pm


You apparently haven’t seen where I post a link to the hilarious Fed Funds rate chart.

If they weren’t over-controlling, it wasn’t for lack of trying.

49 Andrew' September 4, 2012 at 1:11 pm


See the second chart. It’s a visual punch line. Probably the best you can say is The Fed is taking the top off the booms. Maybe next time they can try keeping it to themselves.

Then again, I don’t see many other people pointing this out. So, it must be obscure enough to fly under the radar.

I have heard more than one economist describe this recession as different because it wasn’t caused by The Fed. Where in heck do they get that idea from?

50 nickik September 4, 2012 at 3:43 am

Exactly. We want the best of gold and fiat. I would point you to this paper: Quasi-Commodity Money http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2000118

51 Orange14 September 3, 2012 at 11:14 am

As recently as last week, the Washington Post published yet another call from James Grant for a return to the Gold Standard: http://www.washingtonpost.com/opinions/ben-bernanke-should-return-the-fed-to-its-golden-roots/2012/08/30/033bd9f0-f2d5-11e1-892d-bc92fee603a7_story.html

52 david September 3, 2012 at 11:40 am

Regarding #3: the (I think) obvious point is that achieving economic growth via mobilizing huge amounts of resources exposed by technological advance doesn’t need easy money to sustain speculative capital investment. It helps, certainly, but as a matter of political economy, states in the 19th century simply grabbed what they needed by force. It just needed lots of organization and coercion to dismantle existing social orders and sustain the new one, hence colonial conquests and a militaristic Continent.

But once you run out of ‘low-hanging fruit’, then you need raw capital accumulation, and that requires financial deepening.

53 8 September 3, 2012 at 11:43 am

People want easy money. They want to spend and borrow in fiat; save in gold. The savers/hard money group is a small one and can never hold the line on any type of hard gold standard unless they had minority control over the government (monarchy, etc.). The easiest solution is to allow parallel currencies. Untax gold and silver coinage and let the free market run.

54 Yancey Ward September 4, 2012 at 11:15 am

Only comment in this thread that really gets it.

55 merci September 3, 2012 at 11:47 am

Is there enough gold for the expanding world economy? Would we not end up with deflation?
Second, it is fairly easy to get off the gold standard. Is it not a bit naive to assume that gold standard would impose fiscal discipline?

56 Ed September 3, 2012 at 11:48 am

This is an intellectually honest post and one reason I keep returning to this blog. I’m agnostic (or baffled) on the gold standard question.

One of the hilarious features of one of the versions of Civilization 4 is that sometimes an option pops up to allow players to create a “Federal Reserve” whose effect will be to curb inflation. Its hilarious to anyone who knows the effect of the actual, historical Federal Reserve in the U.S. However, I think the interest in the gold standard is really due to a lack of confidence in the actual present central banks, particularly in the U.S. It makes as much sense as wanting a return to rule by kings and nobles due to disgust in the corruption and fecklessness of current elected officials, though come to think of it that position is starting to make more sense these days.

57 david September 3, 2012 at 1:43 pm

Inflation in Civ 4 is less like ‘inflation’ and more a way to hobble players conducting buying sprees in the late game, anyway…

58 Benny Lava September 3, 2012 at 12:00 pm

Why stop at 1913? Why not go up to 1933? Or 1971?

59 Samuel September 3, 2012 at 1:55 pm

I assumed because of the creation the Federal Reserve coming into existence.

60 Benny Lava September 3, 2012 at 6:32 pm

So? Dollars were still convertable to species until 33, and the dollar value pegged to gold until 71. If we are going to pick dates, should there at least be an explanation?

61 Lord September 3, 2012 at 2:33 pm

Because of the suspension during WWI and the travails of the attempts to re-establish it.

62 Millian September 3, 2012 at 3:15 pm

Because the period ending in 1913 had such great consequences immediately afterwards?

63 Benny Lava September 3, 2012 at 12:05 pm

Also, 3. is not crazy but it is a good critique of goldbugs. Goldbugs think we can turn the clock back to a period of time when over 50% of the American workforce was in agriculture and there were huge amounts of natural resource to mine. Iron and copper in the Lake Superior region, coal in Appalachia, oil in Texas, as well as huge amounts of arable land available for repossession from Native Tribes. For some reason goldbugs argue that going to a gold standard will make all those things available again. When I question this logic, I am usually met with silence.

64 Ranjit Suresh September 3, 2012 at 12:20 pm

Well, frankly, we do want to make similar resources available again. We do want to tap the Athabasca oil sands. We do want to explore the oil potential of ANWR. We do want to develop much of the 28% of U.S. land owned by the federal government. We do want to be able to build homes on private property without the EPA declaring it to be federally protected wetlands. We do want to be building up hydroelectric power instead of removing dams to protect obscure and economically irrelevant endangered fish.

All this talk about the low-hanging fruit of natural resources being used up basically accepts today’s outrageous levels of environmental over-regulation as a fait accompli.

65 Benny Lava September 3, 2012 at 12:38 pm

Thank you for your candor and honesty.

66 aidian September 4, 2012 at 2:48 am

“Obscure and economically irrelevant endangered fish”? You’re misinformed. The Northern California salmon fishing industry used to provide one of the few sources of economic opportunity in my hometown. Dams and water diversions have destroyed the salmon population and the industry that lived off it.

67 Ricardo September 4, 2012 at 6:06 am

Oil sands may be described as many things but “low hanging fruit” is not among them. Energy economists sometimes use the concept of Energy Return On Investment which relates the amount of energy you have to spend mining a particular natural resource to the energy output you get from it. Oil used to have an EROI of more than 20; now it is down to 10 while the Alberta Oil Sands have an EROI of between 5 and 7.2.

68 Jonathan M.F. Catalán September 3, 2012 at 12:14 pm

Commodity prices are volatile in terms of currency; this reflects more on the instability of our currency.

69 Matt Waters September 3, 2012 at 12:50 pm

You can price gold since 1975 in terms of Big Macs, hotel rooms or even barallels of oil if you wish. Compared to common goods and services, gold has fluctuated violently any way you look at it.

Taken to its logical extreme, a pure, iron-clad gold standard would have meant deflationary of 50+ percent in the early-80’s and in the last few years. As real gold prices fell in the 80’s and 90’s, possibly due to more mining, it would have similarly meant 20, 30 percent inflation. That’s really the ideal for stability? Or should the Fed target prices directly, as it already does through the CPI?

70 nickMR September 3, 2012 at 11:28 pm

Consumer prices are much stickier than commodity prices. If the standard for consumer prices were gold, the gold price for Big Macs, hotel rooms, etc., would be remarkably stable. Ditto for non-agricultural commodities: their prices would only vary with industrial demand and political supply disruptions, rather than adding the extremely volatile monetary component that has existed since 1970. Witness the slow movement of the gold/silver ratio over the centuries before 1970 — such low volatility that it could often simply be fixed by legal or bank policy.

71 Matt Waters September 3, 2012 at 12:45 pm

As a market monetarist and gold stndard critic myself, I think the relative success of that era was due to the different nature of work and firms. As firms become smaller, sticky wages have less of an effect. At the extreme, a farmer will sell at whatever the market price will bear. Even in industry, my understanding is that it was mostly small tool shops for most of the 19th century. Again, if it’s just a one man gig, he would sell at whatever the market would beat.

As firms become larger due to economies of scale, owners have more incentive to lay off workers instead of lowering wages. It has always been this way, with industrial production showing remarkable cyclical dips way before even the federal reserve. There was no way the dips in, say, steel production were structural.

As the economy shifted wholeheartedly from farming and small firms to large corporations, the Great Depression shows what happens in modern times with tight monetary policy.

72 Brian Donohue September 3, 2012 at 1:33 pm

modern times? In 1955, GM employed more than half a million people. See also steel and other heavy industry. Also, insurance companies.

73 TheNumeraire September 3, 2012 at 2:38 pm

I doubt this argument carries any water. The only way a gold standard could work at all was because gold over the long run maintained a high stock-to-flow ratio.

Roy Jastram looked at centuries of price data and concluded that the real value of gold was remarkably stable over the long observed periods. However, there was considerable volatility over shorter periods, namely periods where the gold stock-to-flow ratio constricted. The best example was probably the 1873-96 when supply growth from mines diminished and most major nations moved away from bimetallism onto gold. The result was a narrowed gold/stock flow, a rise in the real gold price and a persistently falling price level in gold standard nations.

The Great Depression resulted from tight monetary policy (a rise in currency demand unacomadated by central banks plus a large unnecessary flow of gold into the central banks of nations like the U.S. and France). How that has anything to do with the size and nature of firms and business enterprises is beyond me. Didn’t poorer agrarian countries who were also on the gold standard suffer measurably during the Great Depression?

74 Colin Docherty September 3, 2012 at 1:22 pm

“For the Western world, the gold standard era, defined say as 1815-1913, was arguably the greatest period of human advance ever, at least in matters of economics, culture, and technology.”

Low hanging fruit?

75 Saturos September 3, 2012 at 2:39 pm

4. You know, there’s a difference between demand-side and supply-side deflation…

76 Lord September 3, 2012 at 2:41 pm

Technology was certainly an important part of this, perhaps most important part, as was the population growth and market specialization due to growth. Population growth was more a result than a cause but even in the absence of further advancement, population growth promotes economies of scale and increases in specialization.

77 TheNumeraire September 3, 2012 at 2:52 pm

Tyler, regarding point #4 and Japan;

-Japan has not had any NGDP growth in two decades, the 19th century European monetary system obviously allowed for positive NGDP growth

– Japan went from having 7-10% NGDP growth to having none, an obviously nominal income shock by which debts, asset values, price and wages would need to adjust to. If you look at periods of 19th history with rapidly falling nominal income growth, those eras are also stagnant or contractionary (e.g. the U.S. from 1837-1843)

-Japanese bond prices seem to indicate not only no inflation going forward, but also no nominal income growth period.

78 Brano September 3, 2012 at 3:16 pm

2. So why is then Christina Romer endorsing NGDP level targeting? Well, I gues the velocity shocks may look different nowadays compared to 19th century.
3. 1815-1913 RGDP p.c. growth averaged 1.5%
1914-2011 RGDP p.c. growth averaged 2.2%. But the gold standard was maintained until 1933.
I have no idea how the gold standard influenced culture. Perhaps money was shinier.
4. Supply of the gold was increasing (covering the productivity growth so there was just little inflation). Supply of money in Japan is rising at slower pace, but nevertheless Japan’s RGDP p.c. growth 1990-2011 averaged 1%.

79 TheNumeraire September 4, 2012 at 1:10 am

Well, NGDP targeting is obviously rules-based and far from the type of actions the Fed has pursued the past 3-4 years. Much like John Cochrane suggests, the Fed has been exercising discretion and authority in an attempt to influence specific outcomes — buying certain types of assets to influence specific interest rates, paying interest on reserves to aid bank solvency and profitability, allowing non-depository institutions to be classified as depository institutions in order to access the discount window etc.

The closest thing the Fed had to a rules-based policy was the inflation-targeting regime. The Fed managed to fail at keeping inflation at its target of 2% (although the target was not an explicit formal target under very recently).

A good analogy would be to suggest that the Fed, in its role as captain in steering the ship (nominal AD), failed to follow the rules that would have kept the ship on course and instead became concerned with handing out life jackets and preservers to the passengers, so as to minimize the harm the passengers would incur as the ship drifted onto the rocks.

80 nickik September 4, 2012 at 3:35 am

A gold standard can react perfectly to changes in velocity! Or it could in the US befor 1913 when the central bank was asstablished (it can ajust too with a central bank but the central bank can mess it up easily and the Fed did).

If you have individual banks with a gold reserve the can expand based on there gold, in diffrent banking system the gold reserve was about 2-30% depending on how big the demand for there reserves are (by costumers that want gold or other banks that want gold to expand themselfs).

Now if you have a constant velocity you can pretty easly have a fix reserve of gold and be done with it but if velocity changes individual banks have to change there reserves, that is if velocity falls (and therefore there is less demand for there reserves) it can lower the reserve ratio (and therefore expand the money supply). The individual bank would of course do this because the lower the reserve ratio is the more money the make! The same process is fore faster velocity.

Emperical study shows that velocity is mostly constant while slowly growing and only in special cases falls (recessions).

From a macroeconoimc view this would to the something simular as a low growth NGDP target. If you look at it in terms of MV=Py, if the velocity V falls every individual bank expands thus M expands.

I hope I could show that a gold standard system can be perfectly happy to react to a changes in V.

81 TheNumeraire September 4, 2012 at 1:27 pm

There is also empirical evidence that the real gold price has substantial short-term variation even with much more long-term stability (see Jastram). Don’t you realize how much this short and even medium term variation has on the demand and velocity of a gold-linked currency unit?

Much of what you describe (changing reserve requirements to offset changes in velocity) can also be done under central banking or free banking arrangements, with no need for any gold reserves.

82 nickik September 5, 2012 at 4:31 pm

I am not in faver of gold per se. I just dont like bad critisims of gold.

Your point is a valid one, short term changes in price of gold would probebly impact the economy. I am not sure how much since prices are sticks. Since gold is long term stable prices would probebly just ignore short term switches since it is not worth it to change them, as long as gold is long term stable it would work out (this depends on how short short is).

I have not studied this enougth to say anything.

Also I wont to point out that fiat courrency are not short term stable, read this paper by the George Selgin on the FED: http://www.cato.org/publications/working-paper/has-fed-been-failure

A central bank could be better but it has many political problems, that why I prefer gold to central bank fiat.

83 Millian September 3, 2012 at 3:17 pm

The century following 1813-1913 was way better, even after accounting for all the mass murders. 1913 looks great from 2012 if you earnestly believe you would have been a white male capital owner and not any of the schmucks.

84 maguro September 3, 2012 at 7:32 pm

Sure, but who’s saying that 1913 was better than 2013?

85 Dismalist September 3, 2012 at 9:47 pm

Not if you were a murderee, or even a premature dier. Let’s not succumb to survivorship bias.

86 JonF September 3, 2012 at 11:17 pm

Re: 1913 looks great from 2012

1913 looks great in the same way that (for older people) the age of say, 22, looks great. The problem is that you can’t freeze time. 22 eventually gets you to 62 (assuming you do not die first) and 1913 led to 1914 and everything that went down hill from there.

87 Doug September 3, 2012 at 6:09 pm

Does anyone else know if anyone has considered an equity index standard for money. One unit of currency would be pegged to some unit of a broad equity market index, e.g. S&P 500 or MSCI World Index.

So the index would stay at a constant price, and individual stock prices would fluctuate relative to the index. Debt would be issued and re-payable in the equity index and paper currency would be analogous to a physical version of SPY. This keeps the economy fully invested, and prevents the risk-on risk-off phenomenon that seems to drive the business cycle currently.

Equities would be considered the risk free asset as fiat cash is today, and wealth would stay fully invested 100%, preventing a drying up of investment during recessions. In the case of a demand shock, the value of the equity index would be have less real worth, so employees would not suffer from money illusion.

88 Ritwik September 3, 2012 at 6:42 pm

3 is cherry picked (at least until 1873 it was the gold AND silver standard – this bit is quite important) but 2 and 4 are remarkably important. And ‘d say that the successes of the gold standard were in large part due to the implied price level targeting. One can do the same with an index of producer prices now.

89 lester September 3, 2012 at 10:08 pm

It seems to me a bunch of articles were rushed out in response to the GOP having a mention of the gold standard in their platform. Thus, the articles are mainly meant as punditry against republicans as related to this current election, not as serious ruminations on the efficacy of the policy.

90 Lord September 3, 2012 at 10:49 pm

That period also saw some of the largest increases in gold production and supply as well. Not so much as the 16-18th centuries perhaps, but much more than the 20th.

91 nickik September 4, 2012 at 3:20 am

I think something you disrigard is the diffrence between natural and nonnatural inflation/deflation. Both inflation and deflation can be natural, in the case of deflation innovation and productivity and in terms of inflation supply shocks.

Japan for example is nonnatural deflation that is why it is harmful. The US in the so called ‘long deprssion’ had natural deflation, that is why it is not harmful.

You say that you want to have a little bit of inflation (say 2%), well do you care about natural or nonnatural inflation? If you just want inflation in any case, would you be ok with montary contraction to reach that number?

Many monetary economist have only reasently started to think about the diffrents, that is why the NGDP targeting growed is so up in comming. If you target NGDP of say 5% growth you would have 2-3% inflation plus 2-3% normal growth in a normal year. In a year where you have a recession monetary policy would be more easy to counteract movments in money velocity or how I rather call it ‘demand to hold money’.

I think that as long as states want to manage money anyway gold will not really help, but the good features of gold should be used. Gold can not be printed at will beeing the main one.

Why not make a fixed set (or slowly growing if you really think a little bit of inflation is good) of reserve currency and on top of that a free banking system (that is free note issue) that uses this money as if it where gold coins.

The would give the best features of gold (not printable) with the best features of fiat (your money has no alterntiv use that can change the value of your money).

This paper by Georg Selgin is a good reference: Quasi-Commodity Money http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2000118


For a disscussion if a little bit of inflation has any use I would point to this wunderful little book (100pages): Less Than Zero: The Case for a Falling Price Level in a Growing Economy (http://mises.org/books/less_than_zero_selgin.pdf)

92 Simon C September 4, 2012 at 9:30 am

Do you think people should be allowed to use gold as currency if they prefer? If you could make your accounts in gold and there were no dollar sales taxes on gold transactions we could really see which currency is preferred by the free market. Or is it better to restrict people from having such freedom?
My guess is that given the choice people would choose gold and the value of the paper dollar would gradually fall to zero.

93 Andrew' September 4, 2012 at 11:19 am

Apropos to nothing, when I wake up to a Fed and Treasury policy oriented entirely to prop up banks to take peoples’ homes, I feel like I took a time machine to the 19th century.

94 Doc Merlin September 4, 2012 at 1:45 pm

Even Ron Paul isn’t a gold standardist. He believes in free market currency a-la Hayek.

95 Tom September 4, 2012 at 10:49 pm

Does anyone have the data on how world population and world life expectancy gains from the Gold Standard era compare to the Keynesian era since? Has the gold standard been proven to have been responsible for the gains in the former time period?

96 Rimvydas Mieliauskas September 5, 2012 at 3:25 am

A global crisis, what’s next?

My letter is about the next stage of the current crisis. Now about my forecast accuracy – as I chose a job in Scotland in 2005, I have been thinking about this crisis; I knew, that it is unexpected and that it lasts until 2020. Nouriel Roubini predicted the twelve stages of current crisis, I predicted the first eight stages – how it will start and develop in USA and UK, but I didn’t predict that it covers the whole world and in 2005 I knew that 2020 China will be the largest economy in the world.

A dollar crash is inevitable, as now is going the four processes, which can not be stopped:
1. The ever worsening economic situation in the world, because has been not eliminated a main reason for this crisis – the financial black holes – tax havens, which sucked from world economy 21-32 trillions $.
2. The decreasing dollar market share.
3. The protectionism, the regulation of investment, prohibition to sell the most important companies and more and all these measures have been taken to guard against the dollar…
4. The global system of the tax havens is becoming every year bigger and stronger and more influential, it is practically impossible to reform it now, as show the tax havens history.
A only way to reform the global financial system and central part of it – tax havens is crash, a only question is when?

Now, about the financial system and globalization. The crisis in 2008 showed that the world has become a gigantic financial superpower in which all countries are financially bonded together, and crisis in one big country is a crisis almost everywhere in the world. Such fact has approved the current crisis in the euro area. The money in this system is something similar to water: a small country or its currency market is like a very small body of water, and if you add a lot of water and if it is isolated, the water level rises abruptly, similarly it is with the money – if a small country prints a big number money, hyperinflation occurs, an example – Zimbabwe, a big country is like a great pond and you need a lot more water to launch a level rise, as well as lot more money to rise the inflation and if there is leak – the water flows away. Something similar happened with the convertible currencies. UK 1973 and in the years Margaret Thatcher as prime minister and USA 1983 Ronald Reagan as president, with help of the representatives the largest business began the reforms taking away limits amount of credit issued by the banks and taking away limits for capital flow abroad and helped create a global network of tax havens, soon followed by the main other developed countries and globalization began. The world is like a large lake, which requires a lot of water in order to launch its level to a rise, similarly the finance require a lot of money to launch a rise in level, but unlike water, for every human being the income and the amount of money in his account is very different. The peculiarity of this crisis is, that in the developed countries the money have been allocated very unevenly. During 30 years of globalization for 90% of the population real incomes increased slightly or remained the same and the illusion of the better life was created by the credits and mortgages, that triggered real estate bubble. The only winners from globalization were 10% of population and a real winner was 1% of population.

And now about what scares me, it’s not the eurozone crisis, permanent eurozone crisis is very useful for one country – Germany, a low euro rate promotes its exports, a unemployment is reduced to a record level and enables Germany to reform EU in the way they want and because of the euro collapse its interests would be seriously undermined and the crisis is easy to complete, by release the required amount of eurobonds or simply printing electronic money, as are doing the UK and the USA and not a single eurozone country’s elite, even Greece don’t want to leave euro, because new national currency will be significantly devalued and who want lose their money or receive lower wage and this crisis is creating United States of Europa, a economic system, where Spain is like California with the big problems and Greece like Montana.

Different from Eurozone banks, UK and USA banks may use the same scheme as Barclay‘s bank – after loosing 28 billion £ they called them the bad debts, set up a bogus offshore company, gave it a credit of 28 billion £, bogus company bought the bad debts and a bank loss turned into a normal credit with base percentage 0.5%. In USA it‘s even better, a base percentage is 0.0% and it will remain so for two years and this only encourages short-term speculation and financial casino. That scheme is good for increasing bank’s actives too, so that they can meet all the requirements and increase the size of issued credit. USA has a big budget deficit, commercial banks credits, quantitative easing, economic stimulus packages, trade deficit flood with dollars the world and that triggered two processes that lead to the next phase of the crisis:
1. Dollar is a central part of the world’s reserve currency and its market share in 1999 reached 71.0% and decreased in 2011 to 62.1%, this process was slowed down by the euro crisis, but from beginning of year 2012 this process has gained momentum; the BRIC and OPEC member countries and other countries signed the trade agreements to use local currencies between them. During the first four months of this year yuan part in China foreign trade increased from 0.0% to 7% and is projected to reach 50% soon. USA strengthen this trend with sanctions against Iran, which are pushing Iran from dollars market. All these measures have been taken to guard against the dollar.
2. This trend is accompanied by the second process, tightening regulation of investment, prohibition not to sell the most important companies and this trend is only getting stronger because of the recent economic stimulus packages.

USA, Germany and other countries, even the UK, as show a conflict with the Jersey, are starting to shake tax havens, but it looks like shaking a hornet’s nest: money, a lot of money, which until now was lying quietly, without making a damage, begins movement. The dollar world market share is like a lake – when it decreases, and the amount of water remains the same, the level is rising, and if more water flows, its level is still rising, similarly is with dollar, a shift from the dollar to trade in their own currency, the dollar was pushed from this market share, restrictions and regulations reduce the dollar market share, smaller market share and amount of dollars remains the same, in smaller dollar market new dollars are poured more – the budget deficit, bank credits, quantitative easing, economic stimulus packages, the result will be more regulation, more protection and these processes inevitably leads to the dollar crisis. The globalization‘s only winners in developed countries is 1% of the people and the official statistics show only visible part of their property – real estate, bank accounts, companies, shares and it is an iceberg peak, while the tax havens are the hidden part.

IMF specialists estimated that in 2010 in tax havens were 18 trillions $ and this numbers is without Switzerland, greatest tax haven in a world.The latest statistic from Tax Justice Network show that there is at least 21 trillion $, and possibly as much as 32 trillions $, but part of them are in a other currency. The tax havens, as show a their size, is a main reason for a this global crisis. In the developed countries revenue grew only for this group of people and this leads to inflation, their inflation. The houses cost 125 millions $, the yachts 125 millions $, the paintings 120 millions $ and the the stock price rose to unprecedented heights, for internet companies they pay crazy amounts of dollars, like Facebook‘s value estimated at once $ 104 billions, which last year received $ 1 billion profit, well below inflation, but since this is a very risky investment – changes in fashion, someone can find that there is a new site, which is cooler and Facebook can go after its predecessor My Space. The world’s most expensive company Apple is estimated 622 billion $ and the next Exson Mobile is estimated 405 billions $, Apple got max profit 2011, because iPad was an unique product. Apple has created at first iPod – a very small computer, then a small computer iPhone and the iPad is larger, now larger iPhone i smaller iPad, what next? These were the unique products, but now Apple only can improve existing products and profits will fall as competitors appear. The Dow Jones index reach 13 275, this is more than before the 2007 crisis and the situation is getting something like the Internet bubble in 2001, but now it covers a wider range economy’s – it is a detonator, US economy is suffering the same diseases as UK, only a milder form, financial stimulus are not working, the cuts will have the same effect, as in UK and a very large amount of money is flowing in the tax havens in USA and around USA and a result will be the second dip and it can be spark and the explosives are the hidden deposits in dollars in the tax havens – 15-20 trillions $ plus trillions $ in the commercial bank’s open accounts, it is 25-35 trillions $ in disposition of very small number of people, so we are talking about a very large deposits. The 30 years of globalization created global system of the tax havens, which become too powerful to reform, that system like a vampire is sucking money from the world economy.

The USA economic elite with help London City, through their greed, created a gigantic financial bomb, whose explosion will have unpredictable consequences and a bomb is growing a every hour, a every day, a every month, a every year, it is sufficient that a small group of global elite would panic and began change their dollars into other currencies and the situation would become out of control, because the amount of money is too big, that could intervene in the central banks, buying up dollars to keep rates, so when the dollar starts to fall down, there is no stop.

A dollar crash is inevitable, as now is going the four processes, which can not be stopped:
1. The ever worsening economic situation in the world, because has been not eliminated a main reason for this crisis – the financial black holes – tax havens, which sucked from world economy 21-32 trillions $.
2. The decreasing dollar market share.
3. The protectionism, the regulation of investment, prohibition to sell the most important companies and more and all these measures have been taken to guard against the dollar…
4. The global system of the tax havens is becoming every year bigger and stronger and more influential, it is practically impossible to reform it now, as show the tax havens history.
A only way to reform the global financial system and central part of it – tax havens is crash, a only question is when?

I wrote the words about EU even before the EU meeting on 30.06.2012. However, EU meeting decisions can make euro a real alternative to the dollar and that also increases the possibility of my scenario.

When I was writing this, I find Nouriel Roubini interview.


A best proof, that I am right, I got from Roubini Global Economics Project, I send this letter as comment to RGE Analyst Blog, it was divided in four parts, because number words was too big and every comment must be approved. A first part was approved very fast, but with second part it was a long stop, you can see a result:


97 lester September 5, 2012 at 10:14 pm

Simon C- exactly. which money would YOU rather have: one that’s adjusted for the governments inflation or one that isn’t? The question isn’t what’s good for practicle for the economy or society, but what is the better form of money.

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