Us Monetary Crisis

[visaplace]

Where can I find recent discussion about mounting US government debt and the debasement of US currency in Objectivist literature? It seems to me that the effects of Keynesian economics are comming to a head in the not so distant future. The Fed continues to print money, the debt is increasing and the price of gold is going up.

The debt bubble will soon get so big that the value of paper money will decline to the point that gold may once become the currency of choice again. The economy, based on paper money, it seems is heading for a cliff. Those that don't have a significant amount of gold in their portfolio are in for a major hit.

[Oakes]

First of all, I've never taken a formal class on economics and I can't point you to any Objectivist writings on the subject. However, I'd like to comment anyway.

What little knowledge I do have about money came from reading The Future of Money by Bernard Lietaer. In it, he talks about the oncoming monetary crisis and how the solution, as has been in the past, will be alternative currencies. He sites several examples.

During the German monetary crisis of the 1920's, in which one dollar equaled 4.2 trillion marks, an coal-mine owner named Hebecker started creating his own paper money called the Wara. The currency spread until 2,000 corporations all over Germany were using it. in October 1931, the German government decreed the Wara was illegal and Hebecker's mine had to shut down.

Around the same time in Austria, Mayor Michael Unterguggenberger of the town of Worgl created his own currency that revived his worn out town. The currency was so successful, 200 surrounding Austrian townships wanted to copy it. In November 1933, the Austrian government decreed it illegal, and Worgl went back to 30% unemployment.

Not all alternative currencies have been suppressed, though. They have popped up in countries all over the world, like some kind of natural phenomenon, and many have survived to this day. I highly recommend Lietaer's book and the website in my profile if you want to learn more about the history and the technicalities of alternative currencies (there's more to it than just printing bills out, if you want it to be a success).

[visaplace]

Currencies, any currency, has to be backed by objective storage of value and gold has always been the best candidate. The US twin debts, combined with Islamic terrorism makes for a perfect storm for the increase in the price of gold over the next decade and the debasement of the US dollar and then ALL other paper money. The flight to the Euro will become a flight to gold and to silver in the near future.

The only alternative currency that will work will be one supported by the gold standard. In the mean time, it will be a return to gold itself as the prime world currency.

You now know where in an putting my paper money.

[argive99]

Currencies, any currency, has to be backed by objective storage of value and gold has always been the best candidate. The US twin debts, combined with Islamic terrorism makes for a perfect storm for the increase in the price of gold over the next decade and the debasement of the US dollar and then ALL other paper money. The flight to the Euro will become a flight to gold and to silver in the near future.

The only alternative currency that will work will be one supported by the gold standard. In the mean time, it will be a return to gold itself as the prime world currency.

You now know where in an putting my paper money.

Be wary of this. While you are right in theory, or to say it another way, while your assessment of fundamental monetary phenomena is right, the time frame involved for this is impossible to predict. Libertarian pro-gold economists have been predicting these catastrophe scenerios for decades and they have not come to pass. It is true that if Western governments continue to debase their curriencies there will be a flight to gold (but what kind of civil and social chaos will exist at that time?). But you can't know when and it may well be folly to stock up on gold certificates when there are far better short term investments to make.

Rome didn't fall in a day and the US wont either. (hopefully it wont)

[visaplace]

But you can't know when and it may well be folly to stock up on gold certificates when there are far better short term investments to make.

You are right that you can't time the market but as they say "the trend is your friend" and the trend since 2001 at the start of the new gold bull market has been clear. Now with the spike in oil prices, the picture is complete. The gold market conditions are very much like they were in the 70s (only better--for gold--). So while I nor no one can predict when exactly, a rush to gold will begin, once can forecast with a high degree of certainty, the general trend towards higher gold prices which is underway.

What is of particular interest to Objectivists is how the Fed keeps on printing money and how the US debt is mounting on the principle that money grows on trees. Perhaps we are too early in this gold bull market for most investors, including Objectivists, to take notice of the direction paper money is headed in the not so distant future. Once people begin to see that the Fed can't stop inflation and tame the debt, the flight to gold will be front and center in the financial papers.

[Betsy]

Where can I find recent discussion about mounting US government debt and the debasement of US currency in Objectivist literature? It seems to me that the effects of Keynesian economics are comming to a head in the not so distant future. The Fed continues to print money, the debt is increasing and the price of gold is going up.

That's the way it was forty years ago when I first had an anxiety attack about the economy. I was talked out of it by Allan Greenspan, who was giving a series of lectures on economics at NBI I was taking, and by my stock broker who was also an Objectivist. Nowadays you can be talked out "our coming economic collapse" anxiety by knowledgeable Objectivists like Richard Salsman, John Allison, and Yaron Brook.

Despite huge economic problems, our economy has grown and prospered anyway. The reason is that, in addition to our economic and political liabilities, we also have counterbalancing human assets: a few enterprising, innovative entrepreneurs and enough freedom for them to still create wealth.

[Tom Rexton]

The trigger may come sooner than some think, for it seems that Saudi Arabia is on the brink of revolution. The Royal Family may be ousted soon, and you know what that would do to the price of oil--and consequently, the entire world economy.

Sometimes, I wish it would actually happen, so that we can speed up the collapse and thus recover afterwards anew (somewhat like Atlas Shrugged). But I doubt it. The economy will probably continue to stagnate, booming briefly and then declining slowly for a while and then booming briefly again.

[Ed from OC]

...it seems that Saudi Arabia is on the brink of revolution.  The Royal Family may be ousted soon, ....

What's the evidence for this?

[Tom Rexton]

What's the evidence for this?

Take at look at this series of articles (the ones without the red "E->" under "Recent Articles") that report on the recent violence and chaos within the country.

http://www.economist.com/countries/SaudiArabia/

I doubt it'll happen. But it seems more likely than ever.

[Oakes]

The only alternative currency that will work will be one supported by the gold standard.

Why do you say this? None of the examples I gave were backed by gold. If you go to the website in my profile, there are several examples of other kinds of alternative currencies. Ithaca HOURS is an example of a successful fiat alternative currency, made by a central authority and not backed by any commodity.

As for backed currencies, gold is one possibility, but certainly not the only one. In Lietaer's book, he proposes a currency called the "Terra" valued by a group of commodities and services (ex. 1/10 barrel of oil + 1 bushel of wheat + 2 pounds of copper + ... + 1/100 ounce of gold). The Terra could then be translated into US$ simply by adding up the current prices in dollars for all these commodities.

Alternative currencies can even be backed by time. Time Dollars are backed by 1 hour of work. ROCS are also backed by time, tho the time is not specified so it can be negotiated upon transaction (because 1 hour in the operating room is worth more than 1 hour flipping hamburgers).

Nowadays you can be talked out "our coming economic collapse" anxiety by knowledgeable Objectivists like Richard Salsman, John Allison, and Yaron Brook.

Maybe I am having an anxiety attack, but it is not unwarrented. David Korten, author of When Corporations Rule the World, once asked, “What is this madness?” On one hand, he saw a booming economy and a record-setting stock market, and on the other, social breakdown and a populous increasingly struggling to get by. He and many others have observed a problem with our money systems and with our perception of money.

The problem, he says, is that we don’t know the difference between money and wealth. Wealth is the actual factories, farms, homes, food, products, etc that we use to meet our needs, while money is simply a convenient way to trade it all with. The inability to distinguish the two leads to people becoming obsessed with the accumulation of money to the point where they become disconnected with the real world, looking to increase their pot of money without really doing anything physical.

The practice of gambling and speculating in the "global casino" is so disconnected from reality that not even the great Bernard Lietaer could explain it to me sufficiently. All I can extract is that it is bad. Lietaer, in his book "The Future of Money", says that this practice has increased so dramaticaly, it has gone from barely anything in the early 70’s to eventually take over 98% of all foreign exchange transactions, with only 2% relating to the trade of real goods.

According to Korten, it's a game of nerves where you place big bets and get out before the bubble bursts. When it does, the government always has to step in, as it did during the Great Depression, and bail everyone out. A more recent example is the Mexican crisis of 1994, which Bernard Lietaer remarked had avoided total economic meltdown "only because the US cobbled together a last-minute emergency package on an unprecedented scale -- $50 billion." The Mexican crash was then followed by the South-east Asia crisis of 1997, followed by the Russian crash of 1998 and the Brazilian crisis in early 1999. Lietaer remarked that "unless precautions are taken, there is a 50-50 chance that the next five to ten years will see a dollar crisis that would amount to a global money meltdown."

[argive99]

The practice of gambling and speculating in the "global casino" is so disconnected from reality that not even the great Bernard Lietaer could explain it to me sufficiently. All I can extract is that it is bad. Lietaer, in his book "The Future of Money", says that this practice has increased so dramaticaly, it has gone from barely anything in the early 70’s to eventually take over 98% of all foreign exchange transactions, with only 2% relating to the trade of real goods.

This is simply not true and it resembles leftist attacks on speculation and speculators. Speculation is absolutely necessary for an economy. Speculation allows for: risk management and transfer to those most willing to bear it, increased price visibility to more accurately reflect value, greater mainanence of inventories, transfer of resources to where they have alternative uses more valuable than where they are presently.

Here is what Thomas Sowell says about speculation:

"Speculation means that complementary knowledge is thus coordinated, creating greater efficiency in the production of products which have inherent risks associated with their production. These risks can never be eliminated, but they can be minimized by having them borne by those best able to bear them..."

from Basic Economics

International currency speculation is no different.

[Betsy]

Maybe I am having an anxiety attack, but it is not unwarrented.

I know. Back in the 1970's I got upset reading Harry Browne.

I suggest you get a good grounding in economics -- Economics in One Lesson by Henry Hazlitt is a good place to start -- and then learn enough economic history to understand why all the predictions of economic disaster since Malthus never came to pass. Then learn enough about personal finance to invest wisely and protect yourself without falling for economic fads and frauds.

I realize that's a tall order, but it's the only prescription for economic anxiety that really works.

[scottkursk]

Pegging currency to gold is the equivalant of exchanging comfort and stability for freedom. You are asking a govt official to take control even more so than now.

Ok, so the fed bases our currency on gold/platinum/helium etc. So the fed chairman sets the standard at USD$1=1/365th an ounce. Cheers go around from gold standard supporters now that we have a "fixed" currency. Under pressure or because the fed chair is bad, the new standard is 1/400th an ounce. Now how is it that is at all different?

If the gold standard was re-established, the ability to modify exchange rates would be held by the fed, or some such national comodity float board. The peg rate would flip around just as much as our current money supply rates. Plus, you have the added volatilty of exchange rates being pegged to comodity prices.

The only thing that could possibly be worse than the fed controlling the peg rate, would be the legislative or presedential branches.

As for alternate currencies, there were a few examples cited above. The fed itself currently recognizes alternate currencies in their M1/M2 calculations. Every money order, traverlers check, charged debit card, etc adds to the money supply. The same applies to food stamps. Amongst smaller retail store owners, a very good black market exists that trades food stamps for goods and services. The same is true for travelers checks.

[Tom Rexton]

Pegging currency to gold is the equivalant of exchanging comfort and stability for freedom. You are asking a govt official to take control even more so than now.

Ok, so the fed bases our currency on gold/platinum/helium etc. So the fed chairman sets the standard at USD$1=1/365th an ounce. Cheers go around from gold standard supporters now that we have a "fixed" currency. Under pressure or because the fed chair is bad, the new standard is 1/400th an ounce.  Now how is it that is at all different?

If the gold standard was re-established, the ability to modify exchange rates would be held by the fed, or some such national comodity float board. The peg rate would flip around just as much as our current money supply rates. Plus, you have the added volatilty of exchange rates being pegged to comodity prices.

The only thing that could possibly be worse than the fed controlling the peg rate, would be the legislative or presedential branches.

So you think that if the gold standard were reinstated, the fed would necessarily remain and continue to manipulate the money supply?

A 100% gold standard does not necessitate a government owned central bank.

[Scott_Connery]

In fact, there are a number of private gold currencies right now.Sadly, they have very limited circulation.

[scottkursk]

Yes. Given the current system, it's the fed and treasury that control the money supply. Still, the fed main controls are the fed funds rate and FOMC comittee that buys securities on the open market. Fluctuations in supply aren't nearly as vast as people expect.

Ok, so maybe if something magical happend and the fed disappeared and private banks started issuing currency denomiated in gold. You'd still have issues with inflation. Due to competition, you'd still see variations in exchange due to the different firms abilities to make physical delivery, cost of physical delivery, content of physical delivery, etc.

Gold backed currency is admitedly seductive anarchistic idea. Iif you devolve currency into gold, there will be people (as US history has proven) that eventually want a silver backed currency. Then you'll have petro dollars etc. Unless of course there is a govt agency that regulates it all to prevent anarchy but then your back to where you began.

The closest thing that we have to that system is comodities. Contracts are backed by a guaranteed delivery of certain physical assets. Gold dollars are like tiny comodity contracts. The problem with that is the crap you'd have to go through to get physical delivery. Plus you have the added problems of the value of your currency making very real gains and losses due to fluctuations of gold.

Most telling is if there was a genuine economic reason for using gold, business would denomiate contracts in gold and easily establish hedges via futures contracts. It's easier and more economical and in fact predictably to denomiate in currencies. But they don't.

So you think that if the gold standard were reinstated, the fed would necessarily remain and continue to manipulate the money supply?

A 100% gold standard does not necessitate a government owned central bank.

[The Durande]

The only hedge against some monetary disaster that I can think of is : Be Marketable (that is:know how to do something well that people will always want or need). Even this,however, is useless if you're headed to a concentration camp, or Siberia.

On a positive note, I don't think the latter will happen in this country, people are basically freedom loving, spread out, and in many cases, well-armed. What can happen if there is a monetary collapse is chaos and civil war - which would at least be an interesting show. For once I would like to see panic in the eyes of the scum running this country - a "winston-tunnel-like" feeling.

***Please** by no means gather from this post that I have ANY anarchist leanings. I just say that if it comes to that, so be it. I feel more prepared than most. - The day is coming anyway - Objectivism may indeed be gaining momentum, but, as I have heard Leonard Peikoff say on occasion, things in this country will probably get worse before they can get better.

I think that for people to learn to respect the sources of material wealth, they may have to lose it for a while.

Atlas Shrugged didn't just appear in Ayn's mind because it is a brilliant story - it probably came because she, on some level, saw it as a natural progression of the way things were going. Things, I would argue, are worse. On every level, every branch.

The only thing is - we have her works. That is our only long-run chance.

[Jack Wakeland]

Gentlemen,

If you'd like to buy a couple pre-1933 American $20 gold pieces, go ahead.

They're beautiful. They are also historical artifacts of America's rich tradition of defying government prohibitions. (It's my understanding that essentially every American gold coin minted before 1933 was held illegally -- in defiance of Franklin D. Roosevelt’s order that prohibited private ownership of gold...an order that wasn't lifted until 1973.)

But don't INVEST in gold.

Many a good man has lost his savings speculating gold -- a commodity he didn't truly understand. Buying gold is a way of selling America and all of Western civilization short. Many monetary collapses have been predicted, but they are very rare events. America has had about as many of them as we have had magnitude 8.2 earthquakes. But hucksters trying to talk you out of your life's savings for a commission pop up every day.

Never put your savings into something that you don't understand, understand down to its root. If you don't have reliable information on the future value of something, don't put your money into it.

Gold is not an investment. It is a store of value. Over the long term it does not appreciate or depreciate. To put it in the simple terms that Richard Salsman has, in 1900 a man could buy an inexpensive suit for one ounce of gold. Today he still can.

Gold is a way to duck the ravages of inflation. But in a time of high inflation, you're often better off buying real estate (which is an investment that generally grows in value at low, stable rate...even in times of inflation).

But we are not in high inflationary period. Furthermore, there is no threat of inflation in the foreseeable future.

After what happened in the 1970s (6, 8, 12% inflation), the American political culture has become inoculated to inflation. In 1969, the vast majority of Americans did NOT know that inflation is government plunder of the money supply. In 2004 the vast majority of Americans understand that government is the cause of inflation.

In this informed environment, to get inflation, Americans would have to WANT it. To want it would require the creation of an overtly evil political movement, say of debtors -- people strung out on consumer credit -- vs. the bankers. And it would have to be a broad, popular groundswell amoral enough to come right out and say they wanted to plunder.

The enormous government debt $6.7 trillion and the rapid addition to that debt ($450 billion annual deficits) do not exert an inflationary pressure on anything. The only thing that can cause inflation is if the Federal Reserve Open Market Committee buys government debt (with Federal Reserve Notes) too quickly.]

Paul Volker ended that practice back in 1981. And Alan Greenspan -- complete with all his double talk and a couple of minor mistakes (the shallow recessions of '91-'92 and '01-'03) -- has maintained a policy of slow, stable, monetary growth and low inflation (1 - 4%) for almost 20 years.

Please remember that the $6.7 trillion in Federal bonds does NOT constitute all of the government's liabilities. For example, the present value of all the future payments already promised under Social Security is about $5 trillion -- and that liability increases with every payroll check an employer writes. High government debt is a problem that can be solved in two ways. Cut spending and/or raise taxes to generate a surplus to pay down the debt and establish endowments for entitlement programs. Or stop adding to the debt and patiently wait for the economy (and the income tax base) to grow large in relation to the debt.

As you can tell from the multiple means available to reduce government debt, public debt is NOT fundamentally a liberty v. statism issue. It is rational for the government to, at times, carry a debt in order to spread out the tax burden of an extraordinary expenditure (e.g., $3 Trillion to defend against global Communism, or $0.6-$1.0 trillion to defend against the Muslim World...things are more expensive than they were back in 1955.)

What is irrational, evil, and statist, is to shift the burden of altruism from the present to the future. It is an evil system in which the generations who can vote appropriate the moral 'credit' (under altruism) for helping those who have less, while imposing some of the costs on a future generation who don't yet have the right to vote.

Rome didn't fall in a day.

[Ursus]

What can happen if there is a monetary collapse is chaos and civil war - which would at least be an interesting show

I'm not trying to hijack the thread here, but this is a comment that I simply cannot leave untouched.

Chaos and civil wars are not "an interesting show." These things do not occur for the amusement of observers, as if such a position is even possible. Chaos and civil war discriminate between right and wrong about as much as an atom bomb. They are horrible things which leave untold destruction and suffering in their wake. Especially when one kind of wrong fights another. In this case the war is but a prelude to barbary, slavery, and terror. Freedom loving or not very few people outside of Objectivism can even explain what freedom is, let alone provide a justification for it. While they are busy figuring it out you can bet someone will come along and settle the argument, and not in the way most people find desirable.

Think hard about this country and protections it still provides for the good just people who live here. Think about all of the scum and villians which hide now in the shadows of those good just people, just waiting for everyone to turn their attention to this "interesting show" of yours long enough.

There is a kind gross depravity the like of which most decent people find difficult to visualize lurking in the underbelly of any decaying civilization. A civil war and chaos is their clarion call to rise.

No, they're not the kind of thing you sit back and watch while nibbling on biscotti and sipping herbal tea. If civil wars are a show then the whole nation is the stage and all of its people players.

Sorry to interrupt the discussion on currency...

[The Durande]

Ursus,

I simply meant it in the same light as Francicso's "witnessing the farce" or in the sense that all in Galts Gulch could look on at the impending, and actual, chaos and not lift a finger. I agree with their actions (or inactions), and I repeat that I would do the same, and, yes, find the whole thing QUITE interesting. I made it clear that I am no anarchist, but that doesn't change the fact that JUSTICE is a metaphysical fact. People do, and WILL, get what they deserve. Years from now, if this country will have gone a century with Ayn Rand's ideas out there, and somehow still manages to slip into chaos and civil war, pretty darn near everyone in this country will have deserved it. Those of us few who don't have deserved it, will at least have had the satisfaction of knowing it. It will be a tragedy, much in the sense of Kira's death.

PS. I hope this wont be taken to mean that I am not for "buying time" as it is put by many on this board. I am just saying that, if there is no more time to buy, life will still have to go on, and that I will sure see to it that I am fit to live, at least for a while, in a chaotic country with civil unrest or wars going on. AND,YES I will still find that life "interesting"

[The Durande]

I stated it so well that I just have to repeat it:

Years from now, after having Ayn Rand's ideas out there for all too see for a century, if this country manages to get itself into that kind of trouble ----- yes, almost everyone in this country will have deserved it.

Ursus,

These good, just people out there you talk about.... .. .almost every one of them out there has heard of or read at least something by Ayn Rand, or a least been exposed to her by degrees of sepapration. ----- they are almost ALL indifferent to ANY ideas or thought - MUCH LESS hers. We have all run into that.

People, and countries, do get what they deserve.

Because A is A.