DEBUNKING RON PAUL’S TALKING POINTS

Ron Paul is one of the truly honorable and honest men in Congress.  I doubt that there are many in power who want better for this country than he does, but some of his talking points need to be re-framed and corrected in order to avoid confusion about the way our modern monetary system operates.  In an interview this morning on CNBC he made some frighteningly inaccurate points.

The most glaring mistake he makes is his comparison of Europe and the USA.  He says:

“we have a debt crisis in Europe and here. That’s why we have to cut back.”

I’ve covered this point ad nauseam, but this myth persists so it’s important to reiterate.  The EMU is made up of currency USERS.  The USA is a single currency system with a Federal Government (unlike the EMU).  This means the USA is a currency ISSUER.  If the USA wants to create money they simply spend it into existence by changing numbers in the computer system.  It might sound bizarre to the layman or even the neoclassically trained economist, but the USA no longer resides in a system in which its currency is convertible into gold.  Therefore, there is no such thing as a solvency constraint.

The only constraint the USA has is an inflation constraint.  And while this might be a form of insolvency, it is by no means similar to what the EMU nations are undergoing.  Dr. Paul is implying that the USA can spend too much and cause a “debt crisis”.  This is categorically false.  There is no such thing as the bond market funding our spending or holding us hostage as they hold Greece hostage.  The price of our debt is controlled by our central bank which sets the interest rate via open market operations.  You can call this manipulation or whatever you want, but it is an irrefutable fact that the Fed controls interest rates as the supplier of reserves to the banking system.  The point is, Dr. Paul’s comparison is based on a convertible currency system (which he is an advocate of), but it is 100% inapplicable to our non-convertible fiat monetary system.  Comparing the federal government of the USA and the nations of the EMU is like comparing apples and oranges.

Dr. Paul implies that we must cut back because we could have a debt crisis like Greece.  But nothing is further from the truth.  We could suffer an inflation crisis, but that’s a very different phenomenon than the crisis Greece is suffering from.  The distinction here is incredibly important and should not be overlooked as a semantic point.  Our government could certainly benefit from cutting back on some unproductive forms of spending so as to avoid potential decline in our standards of living, but to imply that we are somehow Greece or Spain is a gross misunderstanding of our monetary system.

He later says:

“you can’t keep dumping the debt on to people.”

This is another bizarre comment.  Have you ever heard your Grandmother say: “Gosh I wish Uncle Sam would pay off the national debt so I could get rid of my Treasury bonds!”?  Of course you haven’t.  Government bonds are the equivalent of a savings account.  So, when you hear people like Ron Paul talking about paying off the national debt while also complaining about how the Fed is “starving savers” via low rates, you can hopefully see the obvious contradiction in these two comments.

The deficit of the entire government (federal, state, and local) is always equal (by definition) to the current account deficit plus the private sector balance (excess of private saving over investment); see here for a more precise and detailed discussion on this.  The private sector in this country owns over $10 TRILLION in government bonds.  These are safe interest bearing instruments which allow the private sector to save.  “Dumping” debt on the people provides them with a savings account in place of what is essentially a checking account.  Now, this is not an excuse for the government to issue more debt or spend recklessly, but again, he’s making a basic misunderstanding of national accounting by implying that these bonds represent some outside constraint that makes us at risk of some solvency crisis.  There is simply no such thing.

Dr. Paul has been very vocal about massive spending cuts.  Joe Kernan mentions the austerity that is ravaging Europe and Dr. Paul’s response is the standard mainstream austrian econ response.  Kernan says:

“you know, you’re talking about a trillion dollars in cuts in one year. You’re going to immediately hear about, you know, they tried austerity in Greece. It made things work. They tried austerity in the UK and it made things worse. The pain that people would talk about, the american public feeling with a trillion dollars in cuts.”

The pain is relatively easy to quantify given the current economic malaise.  Unfortunately, Dr. Paul misunderstands our current economic crisis so he thinks the cuts are necessary due to the insolvency of the USA that is not going to occur.  He says we need to cut the deficit massively in order to stave off our Greek moment.  But again, this is a basic misunderstanding of irrefutable national accounting identities.  If we review the sectoral balances we can see exactly how the above mentioned accounting identity looks.  What you’ll notice is that the US government is pretty much always in deficit (and we have been since inception).  This is because, as the currency issuer, they must make the currency available to its users before they can ever use it.  So the government’s deficit is the non-government’s surplus.

So what happened when the “fiscally responsible” Bill Clinton decided to balance the budget in 1999?  We can see exactly what happened.  You’ll notice that he literally starved the private sector.  As a current account deficit nation, our budget deficit failed to offset this leakage and directly contributed to the private sector’s deficit.  This forced the private sector to tap into the banking system as their ATM in an attempt to maintain their standard of living.  What ensued was one of the great debt bubbles in modern history and one of the worst periods of economic growth in American history.

What would a $1 trillion cut do to the US economy currently?  Well, we know that the sectoral balances must add up to zero ((I – S) + (G – T) + (X – M) = 0).  And we all know the private sector is suffering extraordinary weakness on the back of this massive debt bubble as they de-leverage.  The USA runs a current account deficit so the math is very straight forward.  If all three sectors try to “tighten their belts” at the same time the economy will contract.  If we assume continued weak private sector growth, continued current account deficits and a $1 trillion cut to the budget deficit in the coming 12 months my growth model looks like this:

I hope it’s becoming clear to the reader why austerity is pulverizing many of the EMU nations.  They are suffering this same sort of rare recession where all three sectors are “tightening their belts”.  Except, as currency users, EMU countries are unable to counteract the effects of their trade imbalance and solvency constraint.  It’s a total disaster.  The EMU is an incomplete monetary system without sovereignty.  In this regard, it is similar to the gold standard and it is failing for the same exact reasons the gold standard failed (trade imbalances leading to solvency constraint).

Now, in fairness, Dr. Paul likely wants to see some retrenchment.  As an Austrian economist he thinks the market should “clear” its excesses.  But what excesses are we experiencing (aside from the obvious private sector debt excesses)?  I hope I’ve already conveyed the message that we don’t have excess debt (there is simply no such thing for a sovereign currency issuer).  So perhaps he believes we are suffering from an inflation problem (even though headline inflation is in-line with its historical average and core inflation is running well below average)?   Either way, it seems as though his message is not being portrayed in a light that accurately reflects the realities of our modern monetary system.

In fairness, I should add that Dr. Paul makes some excellent points in this interview.  Specifically, he says:

“sometimes the government spending is actually a negative.”

100% accurate.  A printing press and monetary sovereignty does not give the USA the right to print in excess of our productive capacity and effectively reduce the overall standards of living of the citizens.  But we have to understand that government spending is not always evil.  In fact, as the currency issuer, some level of deficits (I prefer tax cuts to spending) are necessary at times.  Furthermore, we must ignore these debt warnings.  They are just flat out wrong.  If you want to make the inflation or hyperinflation argument then let’s hear it.  But scaring people about debt because of your misunderstandings of the workings of the EMU or the USA is a grave injustice to your listeners.

He continues:

“certainly I do defend those who have their head turned –screwed on right and say, yes. We’re sick and tired of the bailouts. And when corporations and banks get held at the expense of the middle class.

the poor are getting more numerous and the wealthy are getting wealthier. And they have a reason to gripe about that. But it’s not because the few are productive. It’s because the system is designed to help those who made how to lobby washington and get either regulation or the tax code written in their favor.”

I agree 100%.  We should not be angry at our great innovators and wealth accumulators.  We should be mad about the 0.15% of our population who trade financial products like hot potatoes and create systemic risk leveraging government money for no public purpose.  And we should be furious that these banks have been bailed out with more government money in order to sustain this unproductive business.  I could care less if private companies want to run speculative businesses, but the banking system in this country cannot be poisoned by greedy profit motives that lead to excessive leveraging of the system and increases overall systemic risk by causing contagion in the private banking system.

Dr. Paul makes some really excellent points in his discussion this morning, but we have to better understand our modern monetary system before we can move forward with policy prescriptions that will increase our standards of living and help get this country out of its current rut.

* See the full interview here:

 

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. Two simple questions:

    Paul says he wants to eliminate the Department of Interior. The Department of Interior, among other things, manages the National Park System, and provides firefighting services on over 200 million acres of land.

    If Paul is elected, and does what he claims he wants to do, what will become of, say, Yellowstone National Park? And who will fight wildland fires on those 200 million acres?

    • If Paul is elected, and does what he claims he wants to do, what will become of, say, Yellowstone National Park? Huckleberry

      Presumably it would be sold off to the private sector with loans from the counterfeiting cartel to finance the purchase.

      Dr. Paul needs to realize that much of the wealth disparity in the US needs to be reversed before ANY thought of selling off the public commons is considered.

    • Who fought fires in Yellowstone in the millions of years before Europeans arrived on the scene? The place seemed to be in pretty good shape when the US Forest Service was first created.

      Actually there is lots of evidence that lightning fires played a critical role in the ecology of many areas of the Southwest. In the old days, lightning fires would burn through many areas every few years without killing the trees. But if you suppress the fires, plant litter collects on the ground over the decades and eventually sets the stage for a huge unstoppable fire which kills everything.

  2. My quick input to a very interesting article and thread.

    The problem the US will have to face, and pretty soon I believe, is that a country cannot run a perpetual trade deficit without hitting a wall. The US has used its ‘exorbitant privilege’ of having the world’s reserve currency for nearly 100 years.

    The US policy of overspending and printing caused it to devalue against gold several times (as sensible overseas entities chose to take gold rather than US Treasuries). Eventually the tie with gold was broken, the dollar floated, and the US retained its exorbitant privilege til now.

    But even though MMT does describe the system pretty well, in a global context it seems to ignore the thoughts and actions and desires of all of America’s trading partners, who have basically been funding a lifestyle that cannot be afforded for the past 40 years plus.

    Eventually the world will choose not to transact in dollars, and from that moment the US will be forced into austerity. In a global marketplace eventually one has to pay one’s dues. Anyone that believes differently is not living in the real world.

    How will it end? My belief is still that the US will keep socialising the banking losses, turning fake money (i.e. money that was part of the housing bubble, equity that really was never there and has long since disappeared) back into real dollars by saving banks/pension funds asses. The impact on confidence in the dollar will be massive.

    Eventually I believe confidence in the dollar will disappear, and real assets will be sought as a store of wealth, evetually causing a shortage of dollars, and the printing presses to run on overtime, and hey presto that’s your hyperinflation.

    America’s saving grace will be the simultaneous destruction of the paper gold markets, and a global desire to revalue gold against all currencies to rid us of the debt overhang. So, America will settle up with China with some of its gold, but at around $50,000 per ounce (in today’s money).

    We’ll probably have 5 more years of these debates before the final day of reckoning arrives, let’s all hope it ends as I describe, without a shot (nuke) being fired. Somehow I suspect the US will get antse and attack Iran and others, just to prolong matters and distract attention. We will see.

    As I always say, good luck America, the world needs you, but with allof your current problems behind you. The market always forces the issue, resolution cannot be avoided, and the price has to be paid for 40+ years of living beyond your productive means.

    • Japan puts a mighty big wrinkle in your whole reserve currency theory…..You’ve been claiming that this creates artificial demand for the USD for years now. And your persistently inaccurate (Aurtian) hyperinflation predictions have been largely based on this thinking. But the truth is that there is enormous demand for our currency because we are 25% of total world output. It’s not a whole lot more complex than that. You don’t have to find some reserve currency boogeyman to blame it on.

      • 25 % of world consumption – there is a difference.
        Much of the productivity growth in America comes from imported goods
        We give you goods , yee gives us paper.
        You consume.

    • During an interview I recently had for a management consulting position, I was speaking with a Director who had done some work with Treasury and Fed. She said that the Fed actually performs the auctions of Tsys. (I’m assuming that she’s right, I am a true layman in this area although I’d rather not be…) That doesn’t exactly sound independent to me.

      • The karldenninger.com website is just crazy…is that a real fansite or a parody?

        did he really say that if you “poop out a kid” you have to pay for it’s education, or be made to break rocks? Yet he sends his own kid to a public school? WTF?

        • It’s a parody of what he’s actually said at his website. The folks that set the place up were banned at Denninger’s site for merely disagreeing with him. Many of those banned were out $150 that bought greater access to his site. There were no refunds either. There is no one falsehood at Karldenninger.com. The man is nuts.

  3. Cullen, sorry, but you cannot argue the US is on an even keel in terms of trade. And you cannot argue that the reserve status doesn’t create huge artificial demand for the dollar. If you really honestly believe that is the case you will have gone down in my estimation greatly.

    Your point re Japan is a little obtuse, however perhaps you are hinting that they are in the same boat as the US (minus a reserve currency) but have yet to experience a currency collapse.

    Simple reason…have a look at this link, and as I’m sure you are aware, Japan runs a trade surplus, so they’re ok at the moment. Check out the US’s figures, scary eh? Those big debit figures have to be ‘paid up’ eventually. I don’t know where you get your 25% figure from, but if you’re consuming more than you can pay for in a global context, it’ll bite you eventually.

    http://stats.oecd.org/Index.aspx?DataSetCode=MEI_BOP

    Do you realise why the Fed just arranged some pretty big swaps with Europe? Solely because of the reserve status privilege, and a real shortage of dollars in Europe due to a credit crunch. So, yes, that is why there is currently still demand for the dollar.

    And as for my hyperinflation prediction, generally predictions aren’t proven inaccurate at the time they are made. I give the dollar-based system 5-7 years before it is replaced, and that is the timeframe for hyperinflation. I’ll be here when it does!!

    • The current account deficit is roughly 3.5% of GDP. The Fed swaps represent 0.003% of GDP. Do you think you’re greatly exaggerating the impact of these “problems” you discuss? In my opinion, you are.

  4. I’d just have a look at the long-term dollar chart on this webpage. It doesn’t really matter whether I’m overstating matters does it.

    http://www.oftwominds.com/blogapril11/dollar-rally4-11.html

    The market has hacked 50% off the dollar’s value versus its trading partners since 1985. And yes, I am fully expecting a counter-trend rally back up to 100 or so next year, but the trend is firmly down. It looks even worse over the last 80 years. The bottom will be reached eventually.

    All good things (empires) come to an end.

    • So that’s all there is to it? You cherry pick a range and point out a trade weighted decline in the USD? The one thing we agree on is that the bottom will be reached eventually. We all reach the bottom at some point. The bottom of a coffin. But you’d be a fool to expect the USA to hit “bottom” during our lifetimes. One day perhaps, but you don’t go from being the greatest growth story in the history of man with the greatest innovators and corporations of all-time, to “the bottom” overnight.

      I see great people in this country doing great things every day. The American dream isn’t dead. It’s just on pause. Bet against that at your own peril.

      • Hardly overnight, it’s going to have taken over 100 years. Feel free to post any dollar chart that shows a strong dollar over any decent period or range you like, if you can find one.

        Britain, my home country, was for many years the biggest player in the world. Look at us now. Same with Rome, Prussia, Italy, Greece. History, it unfolds. Empires end.

        America will sadly reap the rewards of its economic demise, and we will both see it happen. It won’t be the end, as there is no ‘end’, but America will become like Britain. Maybe one day it will be back, who knows. But in its current form it will face its day of reckoning.

        • I’ll take that bet. I am not a little bit bullish on America over the next 50 years. I am rabidly and wildly bullish about America. Come talk to me in 20 years. :-)

          • Seriously?

            Have you LOOKED at the results of our skool system, compared to China (and others in the Far East)??

            And you think we’ll be BETTER in 50 years?

            • Last time I checked, our top 10 corporations earned more revenue in a year than the entire GDP of Russia or India. 10 corporations. TEN of them. You’re trying to downplay American innovation, entrepreneurship and productivity. It’s not going to work.

              • Yeah, we do REALLY well at innovating things like Credit Default Swaps, don’t we?

                The other thing we do REALLY WELL is to use foreign slave-labor to make huge profits for American CEOs.

                I guess you’re right! :)

                • I know. America sucks. It’s an awful place. Our standard of living is horrible and we produce nothing. Does that pretty much sum up your position?

                  • In the last few years, basically (but not absolutely).

                    In the past century or further, when .gov wasn’t nanny-state-ing everything, no.

            • http://www.nybooks.com/articles/archives/2011/sep/29/school-reform-failing-grade/

              Another little-known fact is that American students have never performed well on international tests. When the first such tests were given in the mid-1960s, our students usually scored at or below the median, and sometimes at the bottom of the pack. This mediocre performance is nothing to boast about, but it is not an indicator of future economic decline. Despite our students’ mediocre test scores, the nation’s economy has been robust for most of the past half-century. And the news is not all terrible. On the latest international test, the Program for International Student Assessment, American schools in which fewer than 10 percent of the students were poor outperformed the schools of Finland, Japan, and Korea. Even when as many as 25 percent of the students were poor, American schools performed as well as the top-scoring nations. As the proportion of poor students rises, the scores of US schools drop.
              To put the current “crisis” into perspective, it is well to recall that American education was in crisis a century ago, when urban schools were overcrowded, swamped with students from Eastern and Southern Europe who didn’t speak English. The popular press at that time warned that the nation was being overrun by a human tide from inferior cultures, and the very survival of our nation was supposedly at risk.

    • It’s mostly rambling…but he does say this…

      Nice try Cullen; your explanation is (Bulls**t)

      • Denninger has absolutely no expertise on the subject. He doesn’t even have a college degree. Period. He is rude, crude and vile when he argues. No matter what subject comes up, Fukishima, politics, monetary theory, BP oil spill, etc ad nauseum, Denninger claims to knows more about it that anyone alive. He is a charlatan (and I’m being kind). Don’t waste a minute on him.

        • Cullen,

          Be careful if you link to him from your site. He’s been know to redirect to porn sites if he dislikes your views. Folks should copy and paste just to be safe.

        • He’s hoping you’ll respond and link to his site. This is how he generates traffic by attacking popular authors. His tactics are dirty and he will essentially smear you rather than attack you points.

          I would not engage him if I were you. The only people who read him are the ones who are also crazy.

        • I like how he says deficits don’t matter and then goes into an unreadable and insane rant about the quantity theory. MMTers reject the quantity theory you idiot!

          “If ignorant both of your enemy and yourself, you are certain to be in peril.” – Sun Tzu

        • >>(even though headline inflation is in-line with its historical average and core >> inflation is running well below average)

          I guess you don’t buy gasoline, bread, milk, motor oil?

            • Denninger is both a deflationist and inflationist. He’ll go from one to the other whenever it serves his purpose. He is the cherry pickers cherry picker. What few followers he has left at his forum are no better. That place is a mere shadow of its former self. All the independent thinkers have left in a mass exodus. No one with any self respect participates there. He even threatened to sue people who copied and linked news articles there, even though he encouraged that behavior for years. Heck there was a person who pasted full Barron’s articles there for eons yet Denninger did nothing about it until he caught wind of the Righthaven lawsuits. The man is truly disturbed.

            • No, he’s “cherry-picking” the stuff that people need to live. We don’t need “core” things such as iWhatevers, but bread, milk, and gas are kinda necessary.

              (BTW – 4% yearly inflation is a RIDICULOUS number – leave it to the american skool system to not teach anyone anything about an “exponent”, or what it can do to you…)

              (BTWx2: Once J6Ps get priced out of that “non-important non-core cherry picked stuff”, we’ll be way, way worse off than Greece. Hungry people aren’t happy people)

              • If you’re going to cherry pick items then maybe I’ll do the same thing. How about the 4% deflation YoY in housing? That’s an important item, right? The roof over your head? The BLS doesn’t even account for housing prices. They just track everything to owners equivalent rent. If you just used the BLS data you wouldn’t even think the largest monthly expense for homeowners has taken a 30%+ plus tumble in the last few years. They peg the housing component at 42% of CPI. And still we’re at a historically average level. If you’re going to cherry pick items then at least be fair about it and account for the facts…..

                • “How about the 4% deflation YoY in housing? That’s an important item, right?”

                  Huh? I must have missed the part where EVERYBODY IN THE US sold and then re-bought a house in the last year, and do that every year.

                  The only people I can think of that would catch that benefit are those who jingle-mailed and re-bought, or maybe those who were renting through the bubble and bought after, but that group can’t be a very large percentage of the nation. It’s certainly substantially less than the percentage that buys bread, milk, and gas.

                  • Hmm – what part of “stable prices” (i.e., in the Fed’s charter) is congruent with “4% inflation”?

                    I don’t care what the average is – the target should be 0% (or less), with the penalty clause of the Coinage Act of 1834 re-established.
                    http://en.wikipedia.org/wiki/Coinage_Act_of_1792

                    (Search for the word “penalty”, and notice the word “debased” in that description. 4% inflation certainly counts as debasement…)

                    • Ah, you’re a fan of the 1800′s. Yes, what a glorious century. We only had SIX depressions in that century. I am sure it was fun to live back then. Meanwhile, since the dreaded Fed was created in 1913 we’ve experienced the greatest explosion in household wealth and standards of living that man kind has ever witnessed. All while people like you quote facts about the dollar losing 95% of its value while your fluffy golden retriever sticks his head outside of your 4 door SUV while you drive back from your vacation home to your McMansion in your quaint Arizona town. What an awful country. I can’t believe our govt has played a role in subjecting you to the greatest wealth gains in human history! Oh the injustice.

                      10 years of “tough” times and Americans act as though they’ve been forced to resort to living in caves. I fully understand that things aren’t great, but you’re just slightly exaggerating how tough Americans have it in general….

                  • *boggle*

                    Where did THAT come from? *shakes head*

                    *sigh*

                    Look, all I said was to bring back the death penalty for money-forgers. Nothing more, nothing less. Not sure where you got ANY of the rest of that from.

                    The great leaps in standard of living have been due to the individual brilliance and efforts of people like Nikola Tesla, Henry Ford, and Dennis Ritchie, not due to the Federal Reserve, JP Morgan, or Goldman Sachs.

                    • Jabari,

                      I doubt we’re as far apart as you believe. I know the last 10 years have not been great. And I know that the financial industry has raped and pillaged this economy. I have done an enormous amount of work on this. But I also don’t think it’s the end of the world. We’ll get through this and when the country realizes that it can’t rely on the banks to leverage themselves up then this economy will get back to some semblance of normalcy. I am not saying we’re there yet, but we’re also not on the fast track to becoming third world…..

                      I hope you didn’t take anything I said personally. I am just trying to offer a broader perspective (even if you don’t fully agree with it).

                      Best,

                      Cullen

            • >> 4% is the historical average. We’re supposed to believe that this is high just because you cherry pick the non-core items?

              If you’ll sell me food and fuel at 4% over last year’s prices, I’ll take all you can deliver. Tell me where to send the check.

              • Only under one condition. I get to pick a location in San Diego where you’ll agree to purchase and then sell me a home for last year’s prices. Deal?

                • So it doesn’t matter that diesel is up 17% year over year nationwide, because there is one neighborhood in San Diego where housing prices are up 71% yoy?

                  • The average national house price is down 4% vs last year according to Case Shiller. Housing is 40% of monthly costs according to the BLS while Gasoline is 5%. That means the deflation in housing has been TWICE as impactful to the household balance sheet as the inflation in gasoline…..My point is that you need to represent the full picture in a broader manner rather than just cherry picking the non-core items that people like to focus on just because we see them every day…..

        • Cullen,

          First time poster and (now) student of MMT, just wanted to say thank you for taking the time to produce the massive body of material comprising PragCap. I’ve been reading through your articles and papers for the last 24 hours and am admittedly embarrassed for having embraced so many Austrian theories as gospel for as long as I did. That’s not to say that I came to your site as an Austrian; rather, I began migrating away from the school as its anachronistic characteristics became apparent to me mid last year. I knew that I was missing something in my understanding of the conundrum that is our modern economy, and the content found here is the missing piece of this fantastic puzzle. I hope to post in the future as I continue to enhance my understanding of MMT and its contemporary implications. All the best, and thank you,

          - Rob T

          P.S. – Despite gold not having a role in our monetary system, and given the fact that hyperinflation in the U.S. is beyond a remote likelihood, how do you explain the rise over the last decade? Gold bugs were omnipresent from 1980-2000, so that can’t be the primary driver; gold’s been around for forever, as have the hyperinflationist fear mongers and clever marketeers, so it can’t be another bogus promotion. As for foreign demand, and this is what I’m trying to get at, wouldn’t the fear of Chinese inflation coupled with the country’s growing middle class consumption prompt massive gold accumulation? Obviously the greatest driver behind its appreciation is central bank accumulation as opposed to divestiture, but I have to wonder why this is the case. Even though the risks of hyperinflation or public debt crises in the U.S. are either remote or impossible, the fact that such outcomes are possibilities (and potentially probabilities) in so many other countries seems – to me at least – to be the principle driver behind gold’s price appreciation. It may be a relic in our great nation, but developing nations flush with dollars furnished by our trade deficit seem to be treating it as an asset worthy of portfolio allocation as do numerous other mature nations. Your thoughts would be appreciated, and I apologize if I’m asking you to repeat yourself. Thanks in advance.

          • Gold is a commodity with a currency component. So the laws of supply and demand still apply to it. I’ve actually been quite bullish about gold for the last several years, but my take is slightly different from a mainstream bullish story on the metal. My thinking has been simple. Demand from Asia combined with a misunderstanding of the Eurozone crisis would generate enormous demand for gold as investors misinterpret the Euro crisis as a failing in fiat money. There’s much more to my thinking on gold. You might review the following pieces:

            http://pragcap.com/reflections-on-gold-as-an-asset-class

            http://pragcap.com/3-trends-driving-gold-prices-higher

            And welcome to the site. Feel free to ask questions any time. There are tons of smart people here and we’re all pretty much on the same page about trying to help people better understand the monetary system. The state of the world is too crappy for people not to better understand all of this….

            • Thanks! I’ve been bullish on gold based on the CB demand and developing nation retail demand alone; I am happy to say that I no longer embrace the relic as any sort of insurance against a (un)likely hyperinflation.

            • Speaking of gold, Mish Shedlock is running on about a gold standard. I like Mish but the Austrians have led him astray.

              How about debunking him, Cullen?

              • The 8000 tons of gold in Fort Knox is tail event insurance against that day sometime in the hazy future when a big reset becomes necessary; fiat currencies are faith based systems at their core. The US holds that gold in its portfolio for the same reason private investors in the West hold it in their portfolios–tail insurance.

                • fiat currencies are faith based systems at their core. JWG

                  The only “faith” needed with fiat is that taxes will continue to be collected in it. I recall a saying about “death and taxes”.

                  Gold is the true “faith-based money”. And unless it is remonetized by government fiat (intentional irony) then why should not its value eventually fall to its mere commodity value adjusted for inflation?

                  • “then why should not its value eventually fall to its mere commodity value adjusted for inflation?”

                    That is where it should rationally trade Bear but since when did Gold trade rationally.

                    Gold is trading A) Based on fear
                    B) Like a stock moving up on anticipated earnings it is moving up on the anticipation of a fast devaluation of the Dollar and most currency for that matter. If and when inflation hits the fan there would very likely be a major run out of fiat currencies and in to gold. You could always convert your Gold in to paper to pay your taxes but in a devaluation you could not do the opposite with out suffering a loss of your purchasing power.

                    This is the so called rational of Gold holding and purchases.
                    Whether it is justified or not that answer will be known in the not so distant future.

                    One thing is certain ether way if any one is long or short it will soon make there heart beat faster.

                    Buy Gold with a long Put or sell Gold with a long call.

                • Actually the US government is in a catch 22 with gold. Gold is a real asset with real resource value. In our highly monetized world why would they “sell” gold they’d just end up with dollars that they can already infinately produce. If the US government wanted to unload its gold it should only do it as a real trade for a real asset. Maybe we can buy Canada or something (kidding my Canadian friends)?

                  • In our highly monetized world why would they “sell” gold they’d just end up with dollars that they can already infinately produce. Adam1

                    In order to drain reserves out of the economy to protect the value of the dollar. It would be a joke on the gold-bugs too since their so-called “real money” would drop in price while the price of the dollar would rise.

    • Cullen

      Thinking about this deficits dont matter claim that gets hung on MMT. Do you think it might be more effective to instead say that in fact deficits dont matter…… in and of themselves. They are just a number representing one side of an accounting identity. Knowing the nominal value of the deficit alone is completely worthless. It has to be evaluated in relation to real economic variables like unemployment rate and output gap. Saying deficits alone dont matter as a way of evaluating the economys health is equivalent to saying that temperature alone doesnt matter as way of judging human health. Unlike a human temperature which is known to have a normal level there is no normal level of deficit.

  5. Below is a quote from Karl Deninnger’s above mentioned article.

    “This time, I’m not going to be particularly nice as I’ve about had it with the “MMT” look-alikes running around peddling trivially-provable false impressions through the use of half-statements and arm-waving.

    So I’m going to do exactly that (prove the impression he wants to leave you with false) and in doing so issue a well-deserved smackdown to this author.”

    I would be very interesting to see cullen respond to all of Karl’s points.

    • See here. Denninger is making a number of egregious errors in his understanding of non-convertible fiat currency systems. He even goes so far as to compare us to Greece, which by now, should be clear to everyone, is an absurd comparison. He thinks the USA can run out of money and that bond yields could cause us to suffer the same fate as Greece. He’s just regurgitating a bunch of political points based on his misunderstanding that we reside in a convertible currency system. His comments are so easily refuted that they’re not even worthy of a full post. Honestly, I am shocked he has such a large audience. I guess screaming the loudest is one good way to achieve a following though. http://pragcap.com/discussion-forum?mingleforumaction=viewtopic&t=191

    • I read this but can’t figure it out.

      Karl insults someone then apologizes. This post shows how much of a D$$$ he is?

      Am I right?

      Anyway…I just went to his site…Cullen what are you doing with this guy?
      I havn’t seen a site like his since I stumbled into my computer lab at university back in 1994. I think he’s using the first porn portal. I mean did anyone see his typewriter on side with a light flasingh behind it.

      At least smack down some equals Cullen…to that…I offer your next opponent…Ben Bernanke. you should take him in the first minute of round one.

      • I’ve seen the way Karl likes to kick sand in people’s eyes and attack them personally. I thought about writing a post on this, but we’ve gotten a taste of what that would turn into. It’s not a productive endeavor. If people want to believe Karl’s analysis then short some govt bonds and USA CDS and pray to yourself that we turn out like Greece. But this comment is the last time you’ll hear me mention the man…..It’s not conducive to educational or productive debate.

        Sorry I even entertained it for 1 second….

  6. KARL!

    Please stop visiting the internet! I want to help you.

    These evil people know you are mentally behind, and preying on your mental state every single day for LULZ.

    People, please be more passionate to a mentally challenged person such as Karl, he is not to be toyed with, like Igor Frankenstein.

    Please Karl, hide under your mattress and play with your batgirl toys.

    • Ok..I think your view is clear on this guy.

      I know nothing of him…just felt dirty when I went to his site. It’ so old the virus that would have attacked me from the computer no longer lives.

  7. You can disagree with Ron Paul and still donate to his moneybomb

    Black This Out Moneybomb is now a 3 day event.

    October 19 – 21 , 2011

    blackthisout.com

  8. Meanwhile, since the dreaded Fed was created in 1913 we’ve experienced the greatest explosion in household wealth and standards of living that man kind has ever witnessed. Cullen Roche

    To be fair, the Fed funded US involvement in WWI and caused the Great Depression, both of which led to WWII and 50-86 million dead. And now we may be in GD II to be followed by who knows what.

    Plus, please explain why banking should not be a purely private business instead of a government backed cartel?

      • The main causes of World War II were nationalistic tensions, unresolved issues, and resentments resulting from the World War I and the interwar period in Europe, plus the effects of the Great Depression in the 1930s. from http://en.wikipedia.org/wiki/Causes_of_World_War_II [bold added]

        Plus you have not explained why so-called “free market capitalism” requires government privileges for the banking system. Is the free market incompetent to create good money solutions?

  9. Karl Denninger’s site is entertaining in the same manner as a demolition derby is entertaining, but you wouldn’t go to a demolition derby for driving lessons. His economic school of thought is best described as synthesis of Austrian and Martian, and he repeats the same canards about MMT as all of the other yahoos. However, his mathematical concerns about compounding of debt burdens, long term trends and unsustainability are well founded. If he would only stop yelling.

    The long term average of 4% inflation in the US that TPC finds acceptable results in a doubling of price levels every 18 years; incomes are not keeping pace in the US and the result will be declining living standards for a majority of Americans and the death of the American dream. The Fed must rethink its belief that inflation is a socioeconomic positive if it is going to allow 4% inflation per year. 2% inflation per year results in a doubling of price levels every 36 years; American society can handle that, but that is NOT what the Fed has actually been delivering over the long term.

    Let’s not confuse correlation (the Fed’s reign since 1913 has coincided with long term growth in the US economy) with causation. It is quite possible that if the Fed had kept prices truly stable since 1913 as our economy grew, our economy would have grown far more in real terms and we would all be better off today. That is the counterfactual that should be considered. If inflation is MMT’s recognized constraint on money creation via deficit spending, then what is the long term record on inflation telling us? It is telling us that the Fed and the Treasury have been facilitating excessive money creation since 1913. Score one for Ron Paul on the MMT scoreboard.

    • I’m pretty sure Cullen doesn’t think 4% inflation is ok. But it’s not something to panic over.

      • Right. I have never said 4% inflation in the current environment is good. But as you said, it’s also not catastrophic or even remotely close to the hyperinflation that austrians have long predicted.

    • If inflation is MMT’s recognized constraint on money creation via deficit spending, then what is the long term record on inflation telling us? It is telling us that the Fed and the Treasury have been facilitating excessive money creation since 1913. Score one for Ron Paul on the MMT scoreboard. JWG

      Your logic appears irrefutable.

  10. There will be a time to short treasuries.
    It has happened in the past and it will happen again.
    It is correct to say that its not possible to go against the fed but that is only until consumers price inflation shows up. We ain’t there yet but it will be a hell of a trade even if Bernanke says he wont take rate higher any time soon.
    He was wrong on rates in 2008 will be wrong again.

    • There will be a time to short treasuries. first

      Why? The US Gov has no need to borrow in the first place. And if price inflation becomes a problem, can’t the government reign in the banks without having to drain reserves by say raising capital requirements? In fact, couldn’t the US Gov greatly increase its ability to spend without price inflation if it just banned credit creation by the banks altogether?

      Not that I propose a permanent ban on credit creation. That would not be ethical. But a temporary one is justified till say the entire population is bailed out of all debt to the counterfeiting cartel.

      • Bear.

        I agree with you on many things but I don’t invest on what should happen but on what it is they do. I have learn a long time ago that what they do is not in my best interest so I act accordingly. We are not sacrificial animals It’s our duty to protect our hard earned assets.

  11. could you please explain again why it is that you dont want to
    address the points made by mr denninger- please tell me it isnt that you dont
    want sand kicked in your face- maybe its simply this you cant refute his
    points- anyone who defends the fed in my humble opinion has no credibility
    the fed under alan greenspan was one of the primary causes of the housing bubble
    alan greenspan ignored brooksley bornes warnings on derivatives and leverage
    and the result was a financial meltdown- ben bernanke has been proven to
    be an incompetant buffon who didnt see the housing bubble or the results
    of its exploding- yet he is going to determine what interest rates should be
    REALLY? thats who you have your trust in? REALLY I suggest you watch
    the academy award winning documentary INSIDE JOB then tell us again why
    we should listen to ECONOMISTS who also didnt see the housing bubble
    until it had exploded that is- funny that the great depression occured about 10 years after the creation of the federal reserve- I guess that was just a coincidence – dude get a friggin clue

    • funny that the great depression occured about 10 years after the creation of the federal reserve- I guess that was just a coincidence – johnny rotten

      Actually, it was about 15 years and Ben Bernanke admitted it was the Fed’s fault.

      Btw, Greenspan said that the boom-bust cycle was necessary for progress. I guess he had the reciprocating engine in mind? Too bad he didn’t think of turbines, eh?

    • Johnny Rotten–gone but not forgotten.

      Denninger is right on some things and wrong on others. There are plenty of conservatives–and liberals–on this site. If you want to understand how the world of money and banking actually works so that you can think for yourself and cut through all of the BS and nonsense, take the time to grasp MMT.

  12. As far as I am aware Karl accepts insurance of FDIC deposits – but these are credit deposits – they are a product of leverage & would not exist without credit.

    Yet he refuses to decrease the leverage without dramatically cutting the money supply which as seen in Ireland & Greece cuts production & not just consumption & in reality actualy increases leverage (private sector debt in Ireland relative to GDP is only decreasing marginally despite all the cuts and I beleive household debt is rising relative to wealth)
    http://www.irisheconomy.ie/…/oleary-and-walshe-on-debt-deleveraging-an...

    IF they issue a dollar of Goverment money you can only lose a max of dollar 1 dollar in the system if malinvested.
    However commercial banks can lose many multiples through leverage.

    His stance only makes sense if he wants to go to a full money system Tommorow without any credit in the system which he has advocated before.

  13. Sorry about the link – just google Irish economy blog and continue down a few recent posts until you get to debt deleverging by oleary & walshe.
    A interesting PDF document awaits.

  14. Ron Paul may not understand MMT but….
    Whether its the treasury that issue the currency, the US being the reserve currency printings there own accepted paper and that it can’t default does not really matter.

    Is basic objection are still very valid and that is that in a free market economy money valuation and rates are a function of markets and not a Central Planing System. Central Planing worked well for the elites in the USSR and its appears to be working well for the Banksters Elite in the US and Europe.

    How is hell can Ben Bernanke talk of money trading freely when rates are control ? That like saying the price of candies fluctuates freely according to demand but we control the price of sugar.

    As for is position on Gold I think he is mistaken.

  15. Your responses to Ron Paul are full of straw man arguments I am afraid to say.

    Demminger shows a graph that explains what caused the financial crisis:

    http://market-ticker.org/akcs-www?get_gallerynr=2244

    The root of the problem was IMO the trade deficit. The rest and in particularly MMT are red herrings. You don’t have to be an economist or even educated at all to understand that when money continuously flows out of a country due to excessive trade deficit and these monies come back as credit to finance further consumption with the party you run trade deficits with then eventually the system will break down and an infusion of cash or more credit will be needed (QE).

    The secondary effects are a decrease in purchasing power due to a falling currency and the resulting re-pricing of commodities against it.

    Thus, the real issue, not the red herrings, is the running of deficits on top of trade deficits. Because trade deficits by themselves mean little and government deficits by themselves mean little but when combines they mean disaster.

    Why don’t you address the real issue then? I apologize in advance if you have already done so.

    P.S. I hope you understand that expansion through credit leads to leverage and excessive leverage eventually leads to collapse. This is what Ron Paul worries about. Your counterarguments using theory are a straw man.

  16. Boring. You simply create a false conclusion i.e entrenched views, to diminish the opposition while throwing a few meaningless bones of agreement on minor points.
    Your so-called rational analysis does the same old boring thing.You use your parameters to define the problem. Minimal consideration is given to the human factor that actually directs the life of the society and emphasis is on the abstract perceptions that never move anything but only react and analyze after the fact (like a monday morning quartergback).
    The tenacious fact of individualism will continue to ignore and dismiss you and your government is OK philosophy