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Parcus

Money and the gold standard

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I'm a monetarist, meaning I follow the doctrines of Friedman. I adhere to the quantity theory of money, which explains changes in nominal aggregate expenditures reflecting changes in both the physical volume of output and the price level  in terms of changes in the money stock and in the velocity of circulation of money (the ratio of aggregate expenditures to the money stock). The gold standard is TECHNICALLY QTM neutral (inflation at zero %) but this obviously wouldn't be the case in the real world. Having inflation at zero % may seem desirable, but in reality, low rates of inflation (I believe the government target is 2%) helps to relieve price rigidities and make the labor market more elastic, it basically acts as a kind of lubricant. Also, increasing the money supply can have short run effects on output, as several studies have shown, with minimal distortion of the capital structure. Anyway, I just wanted to open up a board to get the objectivist take on monetary theory and if you go for the gold standard to say "screw you" to the government, or respond to recessions and maintain a constant rate of inflation in order to prevent serious downturns, which is typically far more dangerous to economic freedom. 

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Technically, the Objectivist position is that economic actors should be free to choose what they use for money, and how they use it...but Ayn Rand predicted that they would choose gold. I'm not so sure everybody would. I think some form of crypto-currency that keeps all the good features, but improves on some of the properties of gold, would be more likely to become dominant in everyday transactions (leaving gold mainly to its current role, as investment/jewelry). But, of course, Ayn Rand couldn't have predicted crypto currencies.

As for monetary inflation (literally, increasing the amount of money in circulation), the problem with inflation is that it is a unilateral action by the government, on a currency that is being imposed on the population. That is, in essence, theft: every time you unilaterally inflate the currency you issue, you are stealing value from the users of that currency. Objectivism opposes that...not because it "hurts the economy", or "screw the government", but rather on principle. Objectivism is opposed to theft.

But you can have inflation without stealing. You just have to let users know ahead of time that you will inflate the currency you issue. A good example of this is Bitcoin. It uses inflation as a form of reward for record keepers. So, in essence, inflation is how users of bitcoin pay the people who make the system work. With bitcoin, anybody can be a record keeper, there is no single "issuer" of the currency, but, obviously, you could just as easily have a currency issued by a private, central entity that gets paid the same way. The key is, the level of inflation (or at least the methodology of setting that level) has to be announced ahead of time, otherwise it's fraud.

Gold isn't zero inflation either, by the way. The total amount of gold in use grows by 1.5% each year (if you believe mainstream estimates of how much gold there is in the world). In the Bitcoin nomenclature, record keeping is actually called "mining" as a reference to gold (even though it is a flawed analogy, since, unlike gold miners, bitcoin miners actually provide a service). But you're probably right, the inflation of gold is not enough. That is one of the ways in which a crypto-currency could improve on that (by providing either a fixed rate of expansion, or, even better, a "smart" rate, that depends on supply and demand and aims to stabilize value fluctuations...like bitcoin, although bitcoin does also have a hard limit coded into it, probably for PR reasons). And, of course, unlike with gold, creating new crypto-currency doesn't require digging up all that dirt (and poisoning all those fluffy critters). Instead, the new currency can be used to reward the people who maintain the system.

Another interesting feature that might be implemented into a private currency is large scale theft prevention. A very current example is the $50 million theft that occurred at the Ethereum (a relatively new crypto-currency) using venture capital fund called the DAO. If that had happened to a regular bank, the money would be gone, and the thief would be rich.

But, because Ethereum is a virtual currency, the consortium that runs it could, in theory, manipulate the system to make the stolen funds worthless, and replace them with $50 mill. worth of "ether"  (that's what they call it, it's stupid, I know) that they give back to the rightful owner. That's a very dangerous power to have, but, since this theft involved 5% of all ether in circulation, it seems like that's precisely what's going to happen. And yes, this (Ethereum as a whole, but especially the DAO) is a terribly ill-conceived project, but there is a lot of potential there as well.

 

 

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Yes, he argued that it didn't adequately explain the demand for money, which imo doesn't seem correct. First, you must distinguish between ULTIMATE wealth holders and enterprises. Ultimate wealth holders just see money as a way to store wealth, and enterprises see it as a producers good. For ultimate wealth holders, the demand for money is determined by 4 different factors: Total wealth, the division of wealth between human and non-human forms, the expected rate of return on money and other assets, and finally, determining the value attached to liquidity, to borrow a Keynesian term. Another variable that is important is the degree of economic stability expected, since instability enhances the value wealth holders attach to liquidity. That is one reason why a notable increase in real balances often accompanies the outbreak of war. There was a decline in sensitive prices at the outset of both World War I and World War II for example. Then finally, inflation has been empirically shown Empirically, variability of inflation tends to have a  negative effect of on the quantity of money demanded. 

Anyway, Mises' argument is hardly taken seriously anymore, Keynes critique and Krugman's demonstration that increasing the money supply 3 fold in a liquidity trap does nothing are much more pertinent critiques, but keep in mind these are only critiques, not necessarily a debunk. 

 

Edited by Parcus

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10 hours ago, Nicky said:

Technically, the Objectivist position is that economic actors should be free to choose what they use for money, and how they use it...but Ayn Rand predicted that they would choose gold. I'm not so sure everybody would. I think some form of crypto-currency that keeps all the good features, but improves on some of the properties of gold, would be more likely to become dominant in everyday transactions (leaving gold mainly to its current role, as investment/jewelry). But, of course, Ayn Rand couldn't have predicted crypto currencies.

As for monetary inflation (literally, increasing the amount of money in circulation), the problem with inflation is that it is a unilateral action by the government, on a currency that is being imposed on the population. That is, in essence, theft: every time you unilaterally inflate the currency you issue, you are stealing value from the users of that currency. Objectivism opposes that...not because it "hurts the economy", or "screw the government", but rather on principle. Objectivism is opposed to theft.

But you can have inflation without stealing. You just have to let users know ahead of time that you will inflate the currency you issue. A good example of this is Bitcoin. It uses inflation as a form of reward for record keepers. So, in essence, inflation is how users of bitcoin pay the people who make the system work. With bitcoin, anybody can be a record keeper, there is no single "issuer" of the currency, but, obviously, you could just as easily have a currency issued by a private, central entity that gets paid the same way. The key is, the level of inflation (or at least the methodology of setting that level) has to be announced ahead of time, otherwise it's fraud.

Gold isn't zero inflation either, by the way. The total amount of gold in use grows by 1.5% each year (if you believe mainstream estimates of how much gold there is in the world). In the Bitcoin nomenclature, record keeping is actually called "mining" as a reference to gold (even though it is a flawed analogy, since, unlike gold miners, bitcoin miners actually provide a service). But you're probably right, the inflation of gold is not enough. That is one of the ways in which a crypto-currency could improve on that (by providing either a fixed rate of expansion, or, even better, a "smart" rate, that depends on supply and demand and aims to stabilize value fluctuations...like bitcoin, although bitcoin does also have a hard limit coded into it, probably for PR reasons). And, of course, unlike with gold, creating new crypto-currency doesn't require digging up all that dirt (and poisoning all those fluffy critters). Instead, the new currency can be used to reward the people who maintain the system.

Another interesting feature that might be implemented into a private currency is large scale theft prevention. A very current example is the $50 million theft that occurred at the Ethereum (a relatively new crypto-currency) using venture capital fund called the DAO. If that had happened to a regular bank, the money would be gone, and the thief would be rich.

But, because Ethereum is a virtual currency, the consortium that runs it could, in theory, manipulate the system to make the stolen funds worthless, and replace them with $50 mill. worth of "ether"  (that's what they call it, it's stupid, I know) that they give back to the rightful owner. That's a very dangerous power to have, but, since this theft involved 5% of all ether in circulation, it seems like that's precisely what's going to happen. And yes, this (Ethereum as a whole, but especially the DAO) is a terribly ill-conceived project, but there is a lot of potential there as well.

 

 

In regards to inflation being theft, you get yourself in a bind by saying that. The main reason, I assume, that you think inflation is theft is that it erodes the value of assets, which harms everyday people. But then, you must logically conclude that DEFLATION is also theft, because it destroys wealth just as inflation does. Except low rates of inflation tend to foster of the creation of wealth, and low rates of deflation get you into situations like the Japanese "lost decade." It has been estimated the 08 crash (caused by government mind you) destroyed 19.2 TRILLION dollars in American household wealth. That is far more destructive than the 14% inflation we saw during the 70s. Is this 19.2 trillion lost due to deflation not theft? So, the point is, if inflation is theft, deflation is theft, so you must chose which theft you would like, because 0% inflation is nearly impossible to reach, and it literally impossible to maintain. 

Next, I said gold is TECHNICALLY fisher equation neutral, but in the real world it tends to be moderately deflationary or moderately inflationary. Between 1913 and 1971, when the United States was on some form of a gold standard, there were 12 years when deflation occurred – the highest levels were in 1921 (-10.5%), 1931 (-9.0%), and 1932 (-9.9%). After we left the Brentonwoods system, however, we've only had one year of sustained deflation. Furthermore, gold couldn't even sustain our money supply. "As of 2012 the US treasury held about 260 million troy ounces of gold reserves. At the market price of gold, about $1,662 an ounce (as of Dec. 27, 2012), that would equal about $434.6 billion in gold. The current United States money supply, is about $2.6 trillion including bank deposits." The only way to implement a gold standard system today would be to A) Mine more gold, which is easier said than done, and there is no chance it will be equal to the quantity of money. b. charge TEN THOUSAND DOLLARS AN OUNCE  for gold C) let the quantity of money contract and suffer a recession. Option B seems like a viable idea, but it's probably the worst idea out of all of them. This is because the marginal logarithmic (±%) volatility (which wouldn't change no matter what the exchange rate of gold/$ is) would have a much bigger effect on the marginal nominal (±#) volatility. Consequently, the pricing system would be significantly harder to calibrate, and people with less money would be the first to experience adverse effects. 

 

I havent done mich research into Bitcoin, but based on what I know, it's extremely volatile, and  it would be hard to get the whole US monetary system to covert over, because of the networking effects first theorized by Friedman then empirically backed by several studies on Somalian competing currency markets. 

Edited by Parcus

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21 hours ago, Parcus said:

In regards to inflation being theft, you get yourself in a bind by saying that. The main reason, I assume, that you think inflation is theft is that it erodes the value of assets

No, it,s not. Inflation is only theft when there is both involuntary interaction and loss of value. Together, those two (forcing someone to use your currency, and then devaluing it) constitute theft.

Like I said above, I'm not opposed to inflation when all actors in the marketplace act voluntarily and fully aware of the money issuer's plans and actions.

Quote

The only way to implement a gold standard system today

Why are you telling me about ways to implement a gold standard system? Did you misunderstand my post to mean that I'm in favor of that? I'm not.

You seem to be talking past what I wrote, and arguing against the assumptions you came into the thread with.

Edited by Nicky

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3 hours ago, Nicky said:

No, it,s not. Inflation is only theft when there is both involuntary interaction and loss of value. Together, those two (forcing someone to use your currency, and then devaluing it) constitute theft.

Like I said above, I'm not opposed to inflation when all actors in the marketplace act voluntarily and fully aware of the money issuer's plans and actions.

Why are you telling me about ways to implement a gold standard system? Did you misunderstand my post to mean that I'm in favor of that? I'm not.

You seem to be talking past what I wrote, and arguing against the assumptions you came into the thread with.

Deflation is involuntary and causes a loss in value though, and they're forced to use a devaluation currency 

 

and yes I misunderstood as I thought you wanted a gold standard, my bad. 

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17 hours ago, Parcus said:

Deflation is involuntary and causes a loss in value though, and they're forced to use a devaluation currency.

I don't know what that means. Anyway, bottom line is, if someone is forced into an arrangement (any arrangement whatsoever) and it causes them some kind of loss, that's theft.

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18 hours ago, Nicky said:

I don't know what that means. Anyway, bottom line is, if someone is forced into an arrangement (any arrangement whatsoever) and it causes them some kind of loss, that's theft.

So any form of aggregate price level change on the standard US dollar is theft in some form or fashion? 

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On 7/15/2016 at 0:25 PM, Parcus said:

So any form of aggregate price level change on the standard US dollar is theft in some form or fashion? 

I don't think there's any way to make my point any more clear than I already made it. Which part do you not understand?

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On 7/15/2016 at 5:25 AM, Parcus said:

So any form of aggregate price level change on the standard US dollar is theft in some form or fashion? 

Nicky's point was that this aspect -- whether prices rise or fall -- as not the essential when judging if it is theft. The essential is whether something was done by consent or not. To quote him: "... if someone is forced into an arrangement (any arrangement whatsoever) and it causes them some kind of loss, that's theft"

I'm repeating it because this is Rand's unique way of defending Capitalism. She does not argue primarily from a utilitarian viewpoint, but from a moral viewpoint (obviously, using her moral code as a basis). Whether a system works or not is critical, and it is actually closely tied to whether it is moral, but that's a slightly more involved argument. When we speak of theft, we have to start by understanding whether something is moral.

Edited by softwareNerd

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21 hours ago, Nicky said:

I don't think there's any way to make my point any more clear than I already made it. Which part do you not understand?

 

18 hours ago, softwareNerd said:

Nicky's point was that this aspect -- whether prices rise or fall -- as not the essential when judging if it is theft. The essential is whether something was done by consent or not. To quote him: "... if someone is forced into an arrangement (any arrangement whatsoever) and it causes them some kind of loss, that's theft"

I'm repeating it because this is Rand's unique way of defending Capitalism. She does not argue primarily from a utilitarian viewpoint, but from a moral viewpoint (obviously, using her moral code as a basis). Whether a system works or not is critical, and it is actually closely tied to whether it is moral, but that's a slightly more involved argument. When we speak of theft, we have to start by understanding whether something is moral.

Yes, I understand that and I'm not contesting it, but I asked, if inflation is theft due to the loss of wealth which wasn't consented to, then is DEFLATION not theft as well, since it's destroys wealth, arguable moreso than inflation, and typically isn't consented to (I don't know many people who consent to recessions.) If the answer to my question is yes, then you have a dilemma, because you can either have the government step in and have low rates of inflation, which all may not consent to (theft by your definition) or you can have government out of the monetary and fiscal framework, and have periods of DEFLATION, which is far worse than inflation, and like I said earlier, people don't consent to, which by your definition is also theft. So you're left with a choice (since zero inflation/deflation is impossible to maintain) do you want government-induced theft (inflation) but with minor economic damage (it even benefits the economy if it's low) or government absence induced theft (deflation) where the losses are far far worse than low rates of inflation. That is my question. In an economy with 300 million plus people, there's no way to get everyone to consent to one plan, individual preferences cannot be properly aggregated and have all preference orders met. Furthermore, allowing the use of different currencies wouldn't resolve this issue, as currencies have networking effects as first theorized by Friedman when debating Hayek on competing currencies. People wouldn't switch to a new currency anyway. 

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4 hours ago, Parcus said:

 

Yes, I understand that and I'm not contesting it, but I asked, if inflation is theft due to the loss of wealth which wasn't consented to, then is DEFLATION not theft as well, since it's destroys wealth, arguable moreso than inflation, and typically isn't consented to (I don't know many people who consent to recessions.) 

Oh, OK, I see the problem. I haven't fully explained what I mean by theft.

Theft is a violation of individual rights that results in a loss of property for the victim. I assume you don't know what I mean by individual rights either though....

Unfortunately, explaining that would take a little more than a couple of sentences. So I'll leave figuring that one out to you (it's explained in The Virtue of Selfishness, by Ayn Rand, for instance). We'll pick this back up afterwards, if you wish.

 

 

Edited by Nicky

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