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Conservatives may talk a lot about gold, and yes, gold is very useful for things like tooth fillings, wedding rings, stereo connectors... It's valuable stuff with many commercial applications, but they are deceiving us with their main claim for gold's value.

When these conservative economic, banking, finance lizards wizards speak of gold, they are usually referring to gold as a basis of the world's money. A sort of God particle of all economics.

At one time gold was considered to be the stuff of which money was made. It was essentially money, once it was formed into a standard coin. But gold was unwieldy, especially in large amounts, so paper money was brought in for convenience. However, there had to be gold in a government treasury in sufficient quantity to back up the amount of paper money issued. One had to trust the government that the gold existed and would be exchanged for the paper money upon demand. Conservatives, who tend not to trust people, were uneasy with this arrangement.
However, in 1971 the U.S. went off the gold standard and the U.S. began issuing currency not backed by gold, although there remains much gold in storage. Detractors refer to this process as "just printing money". The word "just" or "only" refers to a missing step--that of ascertaining that there is gold backup for the money being printed.

This non-gold-backed money is called fiat money, and with modern technology it is not limited to printed paper, but can also consist of  electronic blips in computerized accounting systems.

We've used fiat money for 40 years, but some economists and their conservative followers still call for a return to the gold standard.   But they never seem to address the fact that there is not enough gold in the world to back up all the financial needs of its people plus allow for all the industrial and decorative uses of gold.

So money has gradually evolved from commodity money (as in bartering, where the exchange is between two commodities) to representative or symbolic money (where paper bills symbolize stored gold) to fiat money (where there is no physical backup for the paper bills or electronic records).

The historical progression from bartering physical goods to dealing with increasing levels of abstraction in the use of money is analogous to the maturation of a child's brain from concrete thinking to abstract thinking. Those who cannot understand the nature of fiat money are behaving somewhat like the child who insists that he must have "his" nickel, which he can identify from its private marks, and will accept nothing else.
From psyched's book "Money as information"

It's easier for anyone, mentally mature or not, to deal with concrete, physical things rather than abstract concepts. That's one salient reason why the notion of money as a physical thing can persist. Especially in our TV age of images, it's difficult to represent abstract concepts without picturing concrete objects, such as a sack of coins to represent money or riches.

If something is physical, there can exist only a limited quantity of it in the world, and so it must be conserved lest we run out. If money is physical, we must be careful to keep it in the hands of deserving people. These are subconscious ideas generated by the conviction that money is physical.

Those with limited abstracting abilities or authoritarian orientations (read: Teapartiers?) will more easily latch onto the notion of withholding limited money from those deemed to be enemies.

Turning again to the financial leaders of the world, we can assume that they are generally above average in intellectual development, given the rigors of their professions. And yet we find that nearly uniformly these people are preaching a conservative money viewpoint. Why is this? Why do they hold a symbolic-money view when with their intimate acquaintance with finance they must be somehow aware of the fiat-money reality.

The answer to this puzzle is probably complex, but I want to suggest one line of thought: To rise to leadership level in such a field requires a degree of egoism and power-seeking that at least border on antisocial personality disorder. These people have access to the tools of money creation and could hardly help being aware of the abstract, contractual nature of money (money as a social contract). Yet they would have the world behave as if it functions on symbolic money.

We're being conned

To state it bluntly, you and I, John Q. Public, are being conned into believing that government budgets affecting our well-being, our rights as humans and citizens, must be trimmed and minimized and even eliminated because money is scarce. And at the same time these leaders know that they can essentially create their own money through shrewd dealings with opaque manipulative financial tools and have the political and financial power to legislate wealth and influence away from the middle and working classes and into a growing plutocracy. Money is not scarce for them, but they want everyone else to believe that money is so limited that we must practice austerity, and not surprisingly the austerity measures will be aimed at government programs other than those that buttress sources of plutocracy wealth.

These actions are consistent with antisocial personality disorder because they demonstrate lack of empathy for the many people adversely affected by them and because they benefit primarily the power-hungry perpetrators.

Stanford University

 Another incidental but not unimportant observation is the strong connection between uncontrolled sex drive and the equally power-driven demand for wealth. This point was well-demonstrated in Charles Ferguson's documentary film "Inside job" as well as in recent news revelations. So we find that too often high-level economic decisions affecting many millions of people are being made by risk-taking, sex-crazed, egomaniacal, sometimes drug-using sociopaths. They would not appear to be suitable individuals for attending to the needs either of the huddled masses or of a generally stable nation.

Is fiat money, unlike gold-standard money, unlimited?

For a nation like the U.S., the ability of the federal government to create fiat money is theoretically unlimited. However, in actuality it has been limited by poorly considered actions of Congress. When the nation went off the stifling gold standard, Congress required that whenever the government spends money it must record a debt in its records, and a debt limit must be set. These are actions derived from the old gold standard that Congress could not move away from. These legislators who could not perceive the full meaning of the new fiat money era were afraid that the government would run out of the now-unused gold, and even required that the government borrow money from other nations to cover its deficit-spending.

The debt-issuance requirement Congress set up is crippling and anachronistic. Co-blogger Letsgetitdone notes the way out of this bind:

What Congress can do to end the debt ceiling crisis, other than raising the debt ceiling, is to allow the Executive to deficit spend Congressional appropriations without issuing any additional debt. Congress can do this at any time, and the Treasury will never have to issue debt instruments again in order to deficit spend.

It’s unreasonable to expect the present Congress to resolve this problem. We need to replace the present houses of Congress with progressive activists who can be persuaded of the value of Modern Monetary Theory (MMT). Folks in the Executive Branch will also need replacement or re-education. Most of the lowly Congressmen and Senators do not understand these concepts and merely take marching orders from their conservative benefactors, with the commands trickling down from high-level economists and financiers—a case of trickling-down that is actually, unfortunately effective. The present economic system serves the tricklers well, so they’re not eager to change it. MMT-er Warren Mosler had this to say about financiers:
I’ll be the first to say that the financial sector is, by and large, a total waste of human endeavor…

Even with the debt-issuance problem cleared up, the government has spending restrictions. Congress sets budgets for the various programs, which cannot be exceeded without further Congressional approval. However, in approving budgets, Congress would no longer have the false argument of debt ceilings to hold up.

False arguments are currently impeding the enactment of desperately needed programs to strengthen the economy, to put people back to work and to help those who cannot work. Conservatives opposed to fiat money and freer government spending will throw up the specter of inflation with increased government spending. But co-blogger maddogg explains:

The good news is that the federal government can create money at will.  Which means that the federal budget is constrained by inflation, not revenue.  Even better is that fixing these problems wouldn't be as highly inflationary as our congressional friends fear. The kind of inflation that is as large as they fear occurs when the government and private sector demand more than can be produced.  But...  the economy can afford to produce these things.  We have enough teachers, construction workers, and houses to prevent demand exceeding supply.  So even deficit spending to get these things would cause very little - if any - noticeable inflation.  Even if it did rise a little, inflation is so low from our recent recession that we can afford to let it go up a bit without damaging our economy.  What we need to do is stop worrying so much about our currency, and look at whether or not the resources needed to do something exists.  

The cost of damage to the economy from failure to enact ameliorative programs is far greater than any cost of a small or even medium rise in inflation. And MMT experts Warren Mosler and Bill Mitchell shockingly note:

Warren Mosler: It’s probably fair to say that the losses from unemployment over the last two years just in terms of lost output are far higher than all the costs of all the wars the US has ever fought in its history combined. Seriously. That’s just gone forever. Plus the ongoing losses because it’s all path-dependent. Once you change your path, you’ve lost it, the growth rates have to be much higher to get back onto path.

Bill Mitchell: And millions and millions of dollars a day, every day, our countries are forgoing. Millions of dollars a day. Inflation will never go anywhere near that.

Warren Mosler: Well, if we have twenty percent unemployment, I know not everybody’s equally valuable, but it wouldn’t surprise me if the losses are twenty percent of GDP every year, or something close to it.

Finally, we must take account of another stumbling block in understanding fiat money: The federal budget is not like the household, business, local government or state government budgets we are more familiar with. The overseers of these budgets cannot create their own money. Only the federal government can do that, so these other budgets are dependent upon collecting revenue or income in order to function.

In my next diary I hope to consider what an ideal nation and economy would look like. We spend so much energy just trying to patch up holes in our system that it would be helpful to take an overview of what it is we're trying to create with our piecemeal efforts.

Much of this analysis is based on Modern Monetary Theory (MMT). It's a (relatively) new "Post-Keynesian" economic school of thought.  If you're interested in learning more, please follow our group, Money and Public Purpose.  Also, there is a small, but growing MMT wiki that is worth checking out.

Thank you for reading and reccing

Originally posted to Money and Public Purpose on Sat May 21, 2011 at 08:00 AM PDT.

Also republished by Community Spotlight.

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Comment Preferences

  •  Excellent! (2+ / 0-)
    Recommended by:
    native, Creosote

    I do have a couple of nits, which veer off the hypothesis.

    One -- it is absolutely essential that the US Dollar is removed as the World's Reserve Currency for this theory to work. As it stands now -- the Dollar is a unit of Debt (not wealth) guarenteed by the full faith and credit of the US (ie. sweat that rolls off your back in the form of labor) -- and it is no longer backed by gold, which makes this a moot point. Indeed, word has it that the US may sell off all of its gold holdings.

    Gold, in this context, is a distraction. However, it will be part of the basket of currencies and gold that will back an IMF synthetic currency to replace the Dollar as a trading medium.

    And, of  course, I will continue to own and buy gold (like China, India, and the other BRICS nations and Mexico, because it is making us rich.

  •  They live. (5+ / 0-)
    Recommended by:
    puzzled, psyched, Black Max, Matt Z, Justus
    Money is not scarce for [the growing plutocracy], but they want everyone else to believe that money is so limited that we must practice austerity

    -- We are just regular people informed on issues

    by mike101 on Sat May 21, 2011 at 11:44:21 AM PDT

  •  Rich People Get Richer By (2+ / 0-)
    Recommended by:
    Mighty Ike, phonegery

    making a lot of money
    preventing others from making any money.

    TAX the RICH!  TAX the RICH!  TAX the RICH!
    They can afford it but simply don't want to pay their fair share.

  •  Haven't we had fiat money since at least 1913? (0+ / 0-)

    That's when the Federal Reserve System was established.  The amount of money in circulation isn't just the coins and bills; in includes the money in 'demand accounts' -- checking accounts and similar deposits.  That adds up to many times the cash in circulation.  The Federal Reserve has had at least some control over the size of that money supply all along.  Before electronics, it was kept track of on paper.

    We're all pretty strange one way or another; some of us just hide it better. "Normal" is a dryer setting.

    by david78209 on Sat May 21, 2011 at 12:53:47 PM PDT

  •  Sometimes the ads are as good as the post. (5+ / 0-)

    Not to diminish the quality of this fine diary (which I  tip and recommend), but upon reaching the bottom I was treated to an ad for a "Free Investor's Kit".

    Oh, such a hard question; coins or bars? Since I have a little coin, I'll head for the bar.


  •  A few things (3+ / 0-)
    Recommended by:
    Justus, dnpvd0111, martinjedlicka

    I'm definitely not a conservative, and I'm definitely bullish on gold.

    You mention "the stifling gold standard".  Yeah, it stifles our nation's ability to spend itself into staggering amounts of debt, which is where we find ourselves at the present time. While the fed can continue to digitally "print" money to pay our bills, eventually this will destroy the credibility of US treasuries.  China is already offloading T-bills and buying gold by the ton.  India, the same.  All central banks are now net buyers of gold, as of the last few years. Why? Because the US dollar is on the big slide.  Why gold?  Because humans like shiney, there are finite amounts of gold, and most importantly, central banks cannot print more gold whenever they wish.

    Anyone interested, I suggest you take a look at this chart to see how much the dollar has lost in purchasing power in the last century.  Note in particular the trend since 1971.  

    In the last decade, Gold out vastly outperformed stocks.  From 1998 to 2011 you would have made 29% return with the S&P, vs a whopping 410% with gold.  29% since 1998 barely keeps up with inflation.

    Here is another way to see the ability of precious metals to preserve wealth. In the mid 1950s, $20,000 or 400 ounces of gold both would have bought you a really nice house.  At the present time 400 ounces of gold will still buy you an extremely nice home, while $20,000 paper dollars won't even buy you a nice garage. Or, in the 1950s, a couple of dollars or a couple ounces of silver would jfill your gas tank.  Today, 2 oz of silver will still fill your gas tank, but it now takes $50-60 paper dollars to do it.

    I'm not a conservative but I hold gold and I will continue to buy it as I can afford to.  After watching my small mutual funds and IRA holdings barely keep even with inflation, when I turned 59 I cashed out everything and went into precious metals. I feel much more secure managing my own wealth this way. It's much easier to commit fraud with paper instruments than it is with precious metals.  It is also my way of dropping out of this Ponzi scheme of an economy.  Watch the stock market drop when the fed ends their  "Quantative Easing" program this summer.  

    he good news is that the federal government can create money at will.

    I don't agree that this is "good news".  See the inflation chart above.

    Which means that the federal budget is constrained by inflation, not revenue.

    They don't seem too constrained by inflation to me, since inflation has been a constant state for the last 90+ years. At the present time everything is inflating rapidly with the exception of home values and wages, two things that are kicking the average working American in the gut.  The government has changed the way they officially calculate inflation to make it appear lower than it really is.  Look at the Shadow Statistics website for a reality check.

    At the present time revenue lags far behind expenditures, how can this not be a constraint?  The US doesn't need to balance the budget, seems to be your argument.  How long can that can keep being kicked down the road?  

    Inflation is the real tax on workers and savers.  With current savings account interest rates around 1%, money in the bank is actually a negative interest rate since inflation is at the very least 4% a year. Those Americans who attempt to preserve the value of their earnings are now forced to gamble their earnings in a corrupt and unregulated stock market, in which the average share is held for less than 30 seconds as high-speed computers use buy and sell algorithyms to try to time small market moves.  This is not my father's stock market.  Another clue -- the insider selling to buying ratio is over 500:1 -- the rats are leaving the ship.

    There are periods when owning gold is a losing proposition -- but this is not one of those times. This is the era of the end of US economic hegemony, and things are going to be volatile for quite awhile.

    The gold standard could only work if gold was valued at around $8000 an ounce.  It might help us live within our means, which we have not done for a very long time.  Maybe we wouldn't be such warmongers if we could not afford them.

    •  I have no idea how long ago (3+ / 0-)
      Recommended by:
      Jasmine Van Pelt, millwood, Creosote

      you turned 59, but if it was within the last couple of years you may not be so happy with your investment in the future. It's quite possible that we are nearing the bursting of a gold bubble (and we're definitely near or even past the peak of a silver bubble), with the price topping out somewhere below $2000. I've heard $1800, around the end of this year.

      At some point in the future, the BRIC economies will be doing well enough, and their citizens become financially sophisticated enough, that they no longer feel it is obligatory to hang a couple of kilos of gold around their daughters' necks when they get married, and then the price will start to deflate.

      It is also disingenuous to compare modern gold prices with those of the 1950's, when the price was fixed by the government at $35 to foil speculation. You should think about the late 1970's, when the free-floating price was around $800, equivalent to about $2000 in today's dollars; by the turn of the century, when the US economy was doing just fine, that price had fallen to about $260, in 2000 dollars.

      Of course, I'm hoping for this - I'm a jeweler.

      The only thing we have to fear is fear itself.

      by sidnora on Sat May 21, 2011 at 03:59:20 PM PDT

      [ Parent ]

      •  Well... (0+ / 0-)

        the US economy was not "doing fine" at the turn of the century, it was in an earlier stage of a bubble. Real wages have been going down for decades. The illusion of affluence has been maintained by cheap consumer goods manufactured overseas, which allowed Americans to feel that they still had some purchasing power with their shrinking dollars, and people pulling money out of second mortgages and lines of credit against the ever-increasing bubble value of their homes.  That bubble has now popped and the great deleveraging has begun.

        As far as gold... take a look at this 2000-2011 chart for gold, and tell me what technical indicator or trend is going change that climb. How are the fundamentals better now for the dollar and the US than they were last year, or the year before that?  This chart does not indicate a bubble, it is a slow and steady climb with plenty of buying support. It's going to go up until interest rates go up enough or until sovereign defaults in the EU and here in the US are no longer a possibility -- and that's not in the cards anytime soon -- the Fed is clearly on a totally opposite path.

        Silver is another story of course, and a look at the 10 year silver chart shows a parabolic rise that indicates an obvious bubble.  This is what a bubble looks like... I don't see that with gold and apparently central bankers the world over agree with me.  I started buying silver last fall, and when the ratio was favorable early this spring, began to trade it into gold, so I've done pretty well, I've made about 25%. Silver is a very small market and is easily manipulated, gold, not so much.

        •  With respect, (0+ / 0-)

          I think you may have missed my point: we've been here before (late 70's).

          I have no answer as to what is going change the climb, but that doesn't mean that nothing will change it. There are just too many variables and no crystal balls. Being a natural pessimist, I'm emotionally disposed to believe that things will only change for the worse. But precisely because of my emotional nature,  I remind myself rationally that just because I feel that way, that doesn't necessarily make it so.

          I recall a meeting the LH and I had with our financial advisor sometime in the late 90's. He projected that the economy and the market would continue to perform just as it was performing then, for the indefinite future. I looked him straight in the eye and said, "nothing lasts forever" (he's a lot younger than we are). That can be just as true of bad things as good ones. I'm taking a very long view here.

          The only thing we have to fear is fear itself.

          by sidnora on Sun May 22, 2011 at 10:16:00 AM PDT

          [ Parent ]

          •  The long view (0+ / 0-)

            is almost always bullish for gold, at least as long as we have Keynesian economic policy.

            We have not "been here before" -- in the 1970s we did not have the same crushing level of debt, we were not stuck in two costly wars, and the dollar was not in danger of losing its status as the world reserve currency.  

    •  why do we have to go into debt? (3+ / 0-)
      Recommended by:
      psyched, millwood, Letsgetitdone

      This is the point of the diary. If we grow enough food to feed every citizen, and make enough clothing to clothe them (no longer true due to outsourcing, but still possible), and build enough houses to house them, why can't we have a certain percentage of the population doing work for the common good, like firefighters? Why can't we have infrastructure projects, as long as we use only domestic products, raw materials, and workers, without borrowing anything? The illusion that we have to borrow something in order to decide that people are going to work at these jobs is an illusion that keeps the wealthiest 1% firmly in control of our economy and our government policy. For the last thirty years they have succesfully used this leverage to veto every kind of government activity that doesn't exclusively benefit the wealthy. That is why 90% of the population are no better off now than they were thirty years ago, while the wealth of the top 10% has grown and the wealth of the top 1% has skyrocketed. To help you wise up to this, consider this wierd contradiction: according to the right wing, the more debt the US government carries in proportion to the GDP, the more doomed we all are. But look at any private company, especially a Wall Street company, and you will see that they strive to maximize capitalization (=debt) and maximize leverage on their net worth (borrowing as much as they can on the security of what they own) so as to maximize their ability to spend money in a productive way that leads towards future prosperity. Can you logically explain why this works wonderfully for private enterprise but is the pathway to hell for a nation?

      Of course it doesn't work for an individual family, but that is because the modern nuclear family is a unit of consumption, not production. I fear that one reason this nation is headed for bad times is that we have re-visioned ourselves as a nation that consumes, instead of a nation that produces.

      I share your opposition to mindless growth. But admit it: a zero-growth platform for the Democratic party today would be political suicide. The voters will not elect anyone who does not promise them economic growth. I will debate with people about what a sustainable, non-growing population and economy would look like in a bull-session context, but not in the context of talking Democrat vs. Republican, which is what this site is all about.

    •  Your definition of inflation (1+ / 0-)
      Recommended by:

      Is a popular one with gold bugs and libertarians. Looking at the value of the dollar since 1913 leaves much out of the equation for standard of living.

      You arent suggesting we were better off in 1913 just because we could buy 3 loaves of bread for a dollar and now a dollar only buys a quarter of a loaf?  How many hours did you work for that dollar?  What else could you buy with that dollar? What percentage of a car with air bags and power steering/power brakes could you buy with the 1913 dollar?  How much radiation therapy for lymphoma could you purchase with your dollar?

      How many weeks paid vacation did you have at a job in 1913?

      We are so astronomically better off than 1913 its not even worth arguing about. Looking at the value of our currency in the way you do requires astounding tunnel vision.

      Yes our cost of living is rising, but I would argue its a regression to the mean. We as Americans have lived an incredibly cheap lifestyle at the expense of the rest of the world for decades. We have 5% of the population and consume over 25% of resources. This is unsustainable as the rest of the world enters the 21st century. Arabs and Asians are embracing the possibilities of our modern age and OUR share will decrease. It must.   Europes been paying  almost 4$ gallon for gas for over a decade.

      Our spoiled American lifestyle is coming to an abrupt end but we still have the capacity to fund a Social Security system and  health care for all Americans.  We cannot run out of money, unless we let the banks control our financial lives.

      •  I agree with you (0+ / 0-)

        on most of these points. It is true that Americans' rate of consumption had to change. However, the present economic policy of western central banks is still bullish for gold -- the debt is everywhere and they are printing money.  Japan is also trying to print their way out of the earthquake and nuclear disaster...

        The cost of living is reverting to the mean, but the mean was over 100 years ago, beyond living memory. Our leaders have done nothing to prepare the people for this, instead they have allowed these bubbles to happen -- it is simply "extend and pretend".  No one is telling Americans that their lifestyles have to change, or encouraging them to conserve. Low interest rates do not encourage thrift, if you are saving dollars. There are going to be many economic shocks in the next several years, which will continue to have people looking for a safe haven, one of which is gold, at least until interest rates go up to where it is profitable to save dollars.

  •  The government wasting resources is bad (1+ / 0-)
    Recommended by:

    Krugman and the rest of the deluded believe that government spending begets demand which in turn creates economic growth.

    Even if that be true which is a dubious proposition at best.  We already have unsustainable growth and growth for the sake of growth is a really stupid idea.

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