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America's experiments with a Federal Reserve system has been nothing less than financial rape of people who work hard to save what little they can. Inflation is a particularly vile foe because it is so hard to see.
This is that same thinking where inflation only affects your costs (i.e. other people's prices) but not your prices (i.e. other people's costs). In this thinking, I or my business must product 5% extra value per year just to maintain constant real earnings b/c all my vendors' prices are going up, but I can only raise prices if I add value. I don't think you're actually arguing that, but it sounds that way when you say inflation makes it hard for investments to give a positive real return. It's saying every thing else's price goes up except whatever your business and investments happen to be selling.
Money is a medium of exchange, not a long-term store of value.
The difference between fiat-based currency and backed currency is that with fiat-based currency all you have is extrinsic value. You can't even burn the paper for heat it is so worthless.
A backed currency has both the extrinsic value of the faith in one using it AND the intrinsic value of the backing material. Will the actual intrinsic value of the backing material fluctuate slightly as to market demand? Absolutely. But those are reflections of real value - not merely the faith of the transaction participants.
I understand what you are trying to say in vernacular or colloquial English, but without the correct epistemology you start down a path that leads to a thicket of thorns. There lies the briar patch of bad politics and failed economics. The words _objective_ and _subjective_ allow more precision while avoiding problems.
Consider the standard US Silver Dollar 1878-1935. It contains 0.77344 troy ounces actual silver weight. At today's spot price, it contains about $15.81 in silver. But you would be hard pressed to find a coin store that will sell you one for less than $20 - and a >well worn< one that that. That is a 30% mark-up, at least. It is only because Americans love American silver dollars and are willing to pay more than the "intrinsic" i.e.. _"objective"_ value for them.
"Objective value" means "relative to all the other goods and services on the market right now." (That is what you call "intrinsic.") Subjective value includes patriotism and nostalgia and whatever else that is within the individual.
The reason that I caution against "intrinsic" and "extrinsic" versus "objective" and "subjective" is that those first two words carry a lot of philosophical baggage that led int the past and still leads today to grave errors including failed civic politics and so-called "political economy." To claim intrinsic value is to confuse the metaphysical with the man-made. Mass, energy, wavelength, velocity... those are intrinsic properties of real existents. As standard of action for people, values are objective or subjective.
However, when you are dealing with matters of economics, you are dealing with matters of value per se. You are dealing with utility. And utility is ALWAYS going to have some subjective portion because it is an evaluation based on that person's judgement of such. That's why business negotiations take place at all: there is a meeting-of-the-minds where each decides at what point they can compromise to maximize the utility to both. Money is not immune to this phenomenon, but the variability and volatility of the utility of money is directly affected by its tie to actual backing. When backing is used, there is an independent standard erected that places a non-arbitrary value on a unit of currency that decreases the volatility and variability of the valuation of the money itself. With a fiat currency, the value of money becomes whatever the issuer says it is - a vague and variable notion!
When 50% of our society is unproductive, this nation will "flip" over to complete dependency and will fall into a looting stage where you won't be allowed to store time.
Get ready to shrug.
I agree with most of what you say except the hint that money may be a good long-term store of the productive time.
I have to work 5000 hrs to earn the value of my home or the one down the road where I lived as a kid. My parents had to work 5000 hrs to earn that much value too, but the house cost $60k instead of $250k. Because the neighborhood didn't change much in 40 years, a house turned out to store value decently. If you'd put $60k in businesses and RE actively meeting peoples' needs 40 years ago, it would easily be millions. If you'd worked 5000 hours and put the $60k under the mattress, you would have lost the vast majority of it. Money is a medium of exchange that's not completely free to its users. Most of its value is gone in 40 years if left under a mattress.
I think this is completely a myth. The ave job provides the same lifestyle as a job 40 years ago. A bad thing about this is we've had so much growth in the form of return on capital, and it hasn't gone to wages. I think it's b/c of automation. I have no solution, and am not sure we should even treat it as a problem to be solved. I think this fact has the potential to drive more support for socialism, which in general is a bad.
"The size of the debt is so high that it is like having a child I didn't father as a dependent."
If you mean national debt I agree. If you mean personal debt, it's the problem of those who signed the note.
It's a HUGE problem. On the other hand if we just took modest steps, the problem would disappear. We don't take modest steps though. All we want to do is take symbolic steps, like a politician at a ground breaking ceremony moving one 300ml of dirt. We should address it now while modest steps would work, not wait for it to become a crisis.
2) America does not even want to take symbolic steps to reduce the debt anymore. When Paul Ryan's and Tim Penny's plans for reducing the deficit (not the debt) are viewed as extremist when they aren't even close to enough, it is time to shrug.
And that will make this depression and the great depression both look like hiccups. And spread worldwide
Rates would go *down* if we started retiring debt. We should start right now before some event causes rates to spike and generates a crisis.
Investment in companies - I stick to mutual funds like Vanguard. I really don't have the time to monitor individual stocks.
In the late 1990s, I did invest in gasoline futures and home heating oil futures. As risky as those are, I did make a killing on them. I'm not sure I have the stomach for that anymore, but I might pursue this path again.
I do have a good job and am 47. We did great financially until about 2000. A couple more years like the late 1990s, and I could have retired at age 40, but my progress toward retirement in the last fourteen years has been pretty slow.
However, the first "Long Recession" 1873-1879 or even 1873-1896 was also America's greatest age of industrial expansion. Prices were falling, but among those prices were wages and agricultural products: factory workers and farmers organized to fight the bankers. William Jennings Bryan's "Cross of Gold" speech July 9, 1896, capped the era. And yet many of us long for that better time of glorious capitalism.
It is always easier to solve someone else's problems. If I had a Ph.D. in chemical engineering and a job at a university, and if money were at zero percent, I would be forming all kinds of companies to invest venture capital in new ideas. Maybe it is harder than it looks...
In the late 1990s, I did invest in gasoline futures and home heating oil futures. As risky as those are, I did make a killing on them."
We invest in the same way, except I have no exposure to precious metals right now and I've lost money or broken even almost every time I've traded derivatives. I know a decent bit about them, but when I speculate I usually lose.
There never is a perfect store of value. We could measure value with a basket of goods and services used by consumers and business, but it gets difficult over decades b/c technology replaces human labor and makes difficult things, like having a library of movies at home, easy.
If you do want to store value, you can easily do a conservative portfolio of short- and intermediate term corporate bonds and Treasuries. You can add a little RE, income stocks, and precious metals if you can tolerate the volatility .
The "everything is worthLess" joke is similar to where this discussion with advocates of tight monetary policy ends up. They end up arguing that the basket of goods and services I buy and everything I bill for is actually worth less than it used to be b/c things are generally going to the devil. I tell them, "10 years ago I bought a bottle of pop for $1, and it costs $1.25 in today's dollars." They say, "$1.25 in today's dollars is actually more like $0.75 in 2004 USD. You're getting less value out of that pop, and the bottler is earning less real profit." Saying *everything* has less value sounds suspiciously like some form of depression. I'm not putting those arguments in your mouth; just pointing out "everything is worthless" is a serious argument for many advocates of tight monetary policy.
One more note: I'm not an advocate for tighter or looser policy. I think the Fed Reserve has done a decent job during my adult life (past 20 years or so). I also think automation is creating so much value, that it's hard to quantify.
I have some precious metals. They did fine for awhile, but not so hot recently.
I have some invested in stocks, but right now the market looks like a bubble ready to burst.
Real estate is not a bad buy right now. It would have been better about four years ago, but I didn't really want to go into debt in order to acquire it. I guess I could have gotten a REIT.
In this case I'm not saying to own individual bonds but rather a portfolio of them or a mutual fund that owns a diversified portfolio. Also, I'm not talking about a good rate of return in this scenario. I'm talking about storing value. So in this scenario, I would avoid high yields bonds and anything that requires me to assess broad trends. This is just for storing value.
I agree with all that stuff, though, when the goal is investing. That's my personal situation too. I'm not in a mode of storing value away somewhere. I want growth, through my businesses and things I invest in.
Yes. Short-term Treasuries alone, esp these days, are NOT a great store of value. 2-3% per year sounds right.
These 19th century notes all carry the empirical evidence of (nearly) unregulated banking. And the regulations themselves tell stories. (In frontier Michigan, a bag of gold coins ran from bank to bank ahead of the auditors.) Reading the histories also requires a perspective. A newspaper story from Georgia complained that paper money from Michigan traded at a discount. Many people thought that money should never have a transaction cost.
As for your gold coins, what happens when they wear down? Is it fraud to spend a coin that has previously been circulated? Hard money people have their hearts in the right place, but Rothbard was a sloppy scholar and his theories are full of holes because he never relied on the facts of numismatics.
http://www.coinbooks.org/esylum_v12n32a0... )
People today wring their hands over the shaving of coins as "dishonest" but it was the easiest way to bring the coinage into conformance with commerce. There were NO copper coins. People used lead tokens and other expediencies. The silver pennies had been cut along the long cross into fourths (farthings) for 300 years by Newton's time, creating yet another largely undocumented expediency of small silver slivers.
(Again, there was no copper. That problem was solved by the Birmingham Button Makers of the Soho Mint. They make copper coins economically feasible. And coinage was a monopoly of the crown - and protected by a charge of treason which brought drawing and quartering in punishment. By contrast, in the USA of the 18th and 19th centuries, we had a plethora of coinages, with Federal coins being a second or third tier and Spanish or Mexican being first with UK second in many place. Many banks in New York, Michigan, Alabama, etc., showed pictures of Spanish coins while promising to pay Federal. See "Spanish Coins on American Money" here: http://scoan.oldnote.org/ ) Merchants along the East Coast kept their books in pounds-shillings-pence until the 1830s, fifty years, a lifetime, after Independence.
As for armies of coin inspector, just exactly such an army did exist. The job title - the guild - was called "The Shroff." In China of 18th through 20th centuries shroff schools trained clerks in the certification of silver coins. (See my article "The Shroff" here http://www.coinpeople.com/index.php/topi... ) Of course, today, we would have machines for that - and such machines do exist.
Also, today, we would have electronic coin cards and digital coin codes and all the rest. And, indeed, we do.
Minor silver coins - Half, Quarter, and Dime - were struck on a lighter standard. Four silver quarters only weighed 25 grams .900 fine. In addition other fractional silvers such as the 20-cent and 3-cent came and went. (The 3-cent was only 0.750 fine; it was always a token.)
Your confusion of a dollar being worth a dollar in silver stems from the universal confusion of money of account with weight of metal. For about 2100 years (about 550 BCE to about 1550 CE), a coin was worth its weight, nothing more or less. Henry III or IV of France created a coin called the "franc." From that point on, the franc was worth whatever the government claimed it was. Other nations followed suit.
Note, however, that even today the British Gold Sovereign has no statement of value on it. Our own Eagle gold coins of 1795-1804 also had no statement of value. The first silver dollars - by law our standard coinage - said "one hundred cents one dollar or unit" only on the edge, not the obverse or reverse. (The half dollar was similar.)
As for "a dollar's worth of silver" the price of silver relative to gold has always been in flux. That was another conceptual challenge beyond the grasp of most people in 19th and 20th century America. From the Bland-Alllison Act of 1878 forward, silver was inflation money. Rising against the dollar during the Civil War, the price of silver collapsed both with peace and huge strikes in the west. The government propped up silver miners by buying their metal at above market prices and by law striking 2 million silver dollars per month from 1878 to 1904. By the Depression of the Thirties, silver was down to about 34 cents per ounce, making a silver dollar worth about 21 cents.... if metal was all that mattered.
I'm not sure I can accept that a gold-backed currency is anything more than an unrealistic fantasy in 2014 - as great as it could have been in 1914.
Second, money has always been the _second_ use of gold: jewelry was always first.
Even as money, gold was primarily for large transactions. It was the medium of kings and emperors, not commoners (or barons). For most of history in most places, silver was the common currency. Capitalism changed that. Of all the coins of the US Mint 1794 to 1934, the $5 gold - about the same size as the UK pound sovereign - was a steady product, one always produced regardless of whatever else was struck. America led the way with small gold coins, the quarter eagle ($2.50) and one dollar - even as the dollar was legally defined in terms of silver.
The price of gold today versus 1914 relative to the economies tells you what gold would be worth. A nice three-piece man's suit is still about an ounce of gold. But a cellular telephone under contract is 1/10 ounce or less - and that did not exist at all in 1914. Candy or eggs versus Lakers tickets or an hour in a Cessna with a flight instructor, whatever you measure, that which existed in 1914 costs more or less the same (allowing for industrial progress), and that which did not exists is "miraculously" affordable to just about anyone in the West - and many people everywhere. (Cells phone time is an informal currency in parts of Africa.)
And how does the biggest economy in the world make this transition? How does the federal government acquire the gold that it would need to back the dollar? Certainly if it began buying it the price of gold would go up drastically.
According to the M2 definition, there are about $10.5 Trillion in existence. So if the government went to the gold standard and set the price at $1,000 per ounce (a price that at today's rate nobody would accept), it would take $10.5 billion ounces of gold to back up our currency.
Here is an article on how much gold there is in the world by the BBC. If we use the larger estimate of 2.5 million metric tons of gold as the total in the world, then that is the equivalent of 80.376 billion troy ounces. So the US government would have to own 1/8 of the world's gold and have it sitting there, redeemable in Ft Knox (or someplace else obviously). If we use the smaller estimate of 171,000 metric tonnes then there are only 5.5 billion troy ounces in the world total so the price of the dollar would have to be $2,000 per oz and the US would have to have stockpiled all the gold in the world.
I'm not seeing how this could work. It seems to me that the world's need for currency has greatly outstripped its supply of gold.
http://www.bbc.com/news/magazine-2196910...
Worked, struggled, succeeded, saved. And now, it is just so much fun to see all those savings and investments withering away. Not because of bad investments. Not because of overspending. But because the money buys less and less every year, because the money diminishes in value while prices inflate.
Compared to many others, we are in pretty good shape. Almost enviable shape. Everything is paid for. Anything bought on credit is only done if it can be repaid at 0% interest. Even with all of that, there's a pretty good chance that the dough won't last until we assume room temperature. That is, unless we exit earlier than planned. So...I've been hard-working and pretty smart my whole life, to what avail? So that some drooling idiots who think wealth is created because they say so is causing me grief.
Am I off topic?
Where else can I complain if not here, to people who get it?
Insofar as work is concerned, when I was in my 20's, I looked ahead and decided that I would probably need to continue working until I died. I did not think that Social Security would be around to provide me with an income, nor that I would be able to accumulate 'an independence'...nor that I would want to. (I have seen too many people fall apart after retiring.)
Fortunately, I do not work digging ditches (when I was in my 20's I was employed as a medical technologist), so continued employment was quite possible. Now - as a software designer - it is even more so.
So Herb: Have you considered putting your considerable intelligence and talents to finding something to do that can provide you with an income? No, it is not good that what you worked for has been taken away from you, but the only real remedy that I can see is to bring more money in.
Jan
(Which advice makes it obvious that I do not work for the federal government. If I did, I would have suggested that Herb start a counterfeiting business and just print the money he needs.)
The tet-a-tet between jbrenner and CircuitGuy though seemingly off track is indeed relevant to the basic subject matter of the original post.
These 19th century banknotes, issued by independent, private banks focused several conceptual problems with "money qua money." Doty's book is about the images, the stories of America and Americans told by the vignettes. The notes themselves as monetary media underlie that.
In some ways, the history of banking parallels the history of physics and calculus. Ancient people had spears and catapults, but no good theory of motion - and none that explained both terrestrial acceleration and planetary orbits So, too, did some men of the Middle Ages borrow and lend money at interest - with some subterfuges because of Christian law - and they kept track with double-entry bookkeeping. As I said earlier, they created abstract money of account (pounds-shillings-pence) to deal with the plethora of local coinages; and yet at great fairs, cleared their books without ever touching coin. But that was not the retail banking that we think is "normal". We learned that from the National Bank Era 1863-1933: money so stable that it falsified Gresham's Conjecture. That model served us until 2000 or so.
When banks failed periodically 1817-1857, people were outraged and incensed. They demanded that the government "do something." Pharmacies could fail. Farms failed. Banks were held to a different standard. You all must know the scene from Mary Poppins where the boy wants his tuppence back and the argument starts a run on the bank. By law, a bank had to pay all demands by the end of the day or be declared bankrupt. Barbershops did not have that problem.
So, here, jbrenner and others want a passive investment that stays ahead of inflation. Even gold is not good enough because it is not "performing well." Every farmer wants a crop that will plant and harvest itself. Inflation is a serious problem. We all know that it comes from the government writing bad checks and everyone else accepting them. As an external problem, inflation is just another kind of hurricane or earthquake.
In the early 19th century when these banknotes were created, banks were engines of local credit. They created circulating media for people who needed to keep track of their incomes and expenditures. Some banks failed right away. Others failed later. A few survived for 20 years or more depending on the success of the village and the acumen of the directors. LOOK AT THE PEOPLE ON THE NOTES. khalling has asked rhetorically (The Bell Curve here in the Gulch http://www.galtsgulchonline.com/posts/ce... ) why America's greatest era of economic expansion took place with so many people of such apparently low intelligence. Let people be free and they will work miracles. That does not mean that even they will understand why. If they had, we would still have laissez faire.
As for the passive investment that stays ahead of inflation, I am willing to take risks in the stock market in order to increase my wealth. The increase in the stock market lately seems like a bubble because of all the low interest money out there right now. My concern is that many of these companies are ridden with more debt than they were prior to 2000.
What they fail to realize is that when they retire, the value of their retirement will shrink in purchasing power as fast as their ability to pay off their mortgage grew. In this inflationary world you have to hope you die before your retirement becomes worthless.
From my studies of money through time, there has yet to be a utopia where money actually in use had a constant value through time. While gold and silver have retained roughly the same value in terms of purchasing power, they are no longer 'money' any where that I know of. If a government were to try to back its currency with gold, it would have to value it so highly to maintain convertibility that it would be a real boon to those who knew (and acted on the knowledge) of what the government had been doing in debasing the currency. The US dollar no longer serves one of the most important functions of money - that of being a store of value. (See http://www.cliffsnotes.com/more-subjects...)
Just as well would be a currency that replaces current currency and is unable to be reproduced. Something with a serial number maybe. 1 out of 1,000,000,000,000, and is infinitely divisible, like Bitcoin.
Some type of proven secure, redundant system would have to track the whole thing (cloud or otherwise), but essentially, fraud would be impossible unless someone could spoof the owner of a currency's "key", which could be a combination of three things: Something you know (password), something you carry (a rotating key generator), and something you are (your fingerprint, retina, something).
The retina scan would go through a hash that is based on the key you carry, which would then also go through a hash based on the password you input, and compared to what it should be, which is stored on the system in some manner.
It's way more complex, but if done right, fraud would be near impossible. Even if someone hacks the system, the transactions related to the hack could be tracked down and reversed, unlike bitcoin.
Jan
As for silver, I would compare it to stainless steel in terms of ease of corrosion. Yes, both do corrode, just not all that quickly or easily.
Bitcoins can be lost. Just, disappear. Gone, forever. Whoops. Instant deflation. Plus, bitcoins are still being "made". I think there's something in there that they'll stop "making" them at some point, but I'm not sure.
Silver and gold
Everyone wishes for silver and gold
How do you measure its worth?
Just by the pleasure it gives here on Earth.
(from Rudolph the Red Nosed Reindeer movie)
LOL.
"His 1998 book, “The Soho Mint & the Industrialization of Money,” explored important links between an 18th-century British inventor’s use of steam power rather than manual labor to make coins and the influence of that breakthrough on minting worldwide. No one had connected those dots before, [Smithsonian curator Karen] Lee said." -- http://www.washingtonpost.com/national/r...
It is also important to place paper money in its commercial context. In the first half of the 19th century, a skilled worker earned 50 cents a day (for a 10- or 12-hour day). Call that about $100 in present value and you can see that a $2, $5, or $10 was clearly intended for large transactions, not retail purchases by consumers.
Therefore, these bills spoke to the upper tiers of commerce and finance. When they tout slavery or present women as decorative (and decoratively undraped) they reflect the implicit values of those people of that time.