The Gold Standard is not Synonymous with Freedom

A lot of people didn’t like my recent article about fiat money.  That was to be expected.  And the usual arguments were trotted out.  The old “it takes two people to support a family”.  And then the “fiat is synonymous with corrupt governments”.  First of all, those statements aren’t totally false.  But let me elaborate.

If you really wanted to live like you’re in the 1950’s you could most likely survive very easily on one salary.  Try this.  Get rid of your McMansion and move into a cottage with no AC, no heat, no microwave, etc.  (okay, that’s extreme, but you get the point hopefully – we live in suped up houses these days where the technologies are far superior to those of the 50s).  Then massively downsize your home and add an extra occupant.  Then get rid of your flat screen TVs, cell phones, cars, computers and technological items that you love.   Okay, some of that is unnecessary, but you get the point.  The reason why we need two salaries to survive in today’s world is because we demand that much more from our lives.  We want all the best toys, the best educations, the best roof over our head.  These things aren’t free obviously.  And as a result of two working heads of household, we are able to provide much better living standards to our families than we did in 1950.  Don’t trust me?  Seriously, live the 1950’s lifestyle and let me know if you can get by.  You probably won’t last a week.

The other common retort is that gold standards are somehow synonymous with freedom because they reduce the government’s ability to manipulate the money supply.  Okay, that’s true to some degree.  But this also misses another important point about the gold standard.  The quantity and value of gold in today’s world is largely determined by foreign governments and guys with shovels.  In other words, its value and quantity is mostly determined by a small group of people incentivized to corrupt its value.  We read endless stories these days about how Chinese and Indian central bankers are buying gold or digging it out of the ground.  Is that “freedom” for the USA?  Is it wise for the USA’s money supply to be essentially pegged to dictators or foreigners digging the earth up?  Yes, we will put the US government in check, but why don’t we just let foreigners run the whole damn US economy while we’re at it since they’re going to be determining our money supply indirectly.  And this doesn’t even touch on the gold standard’s primary flaw which is the natural trade imbalances that will result from it….Freedom?  Not even close.  This is more like voluntarily gagging yourself, wearing a straight jacket and begging everyone to beat you with a baseball bat.

Fiat money is not perfect by any means.  And if the government is allowed to corrupt it then the system will surely fail.  But the power of the American system lies not in fiat, but in the fact that the people determine the government thereby determining whether the government is corrupt.  And more importantly, it is the people who ultimately determine the value of the currency via their ability to produce output that makes this tool of exchange valuable in the first place.   This is why it’s so important to actually understand the market based design of our monetary system.  The quantity of money is not determined by the central bank or by the government (or at least only very loosely).  It is primarily determined by the market place via the quantity of loans that are made based on the demand for credit (we reside in a credit based money system where almost all money exists in the form of bank deposits that result from loans issued by private banks on a demand basis).  If anything, it is the market that determines the quantity of money in the US economy via the private banking system and competitive market based system for loan issuance.

In the right type of system, fiat money is perfectly synonymous with freedom.

* Slightly edited the 1950’s example as it was admittedly over the top….Hopefully you get the point.  

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.

More Posts - Website

Follow Me:
TwitterLinkedIn

  • LVG

    I hate it when you trot out the facts!

  • Stephen

    Good article, no argument here…but can’t you still advocate gold as a long-term monetary inflation hedge (in terms of M2)?

  • http://www.orcamgroup.com Cullen Roche

    As an asset or as the foundation of a monetary system? I think gold is a perfectly fine hedge as an asset in a portfolio, but a terrible thing to design a monetary system around.

  • Dismayed

    Facts? This is a total misrepresentation of how people lived in the 1950’s. Most families had a car (all that was needed with only one person commuting to work), refrigerator, and closthes washer. And the kids went to high-quality public schools.

  • whatisgoingon

    Cullen very good summary. One thing gold bugs may mention is how as Greenspan talks about Gold’s relation to economic freedom is:
    “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation…This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

    I think what is up for debate is Greenspan’s inherent assumption that government deficit spending will be “unproductive” rather than leading to real sustainable economic and wage growth.

  • Dismayed

    I though a ‘founding axiom’ of MMR was that people values free time. Seems like you have a paradox – your hypothesis is contradicted by observation.

  • http://Avondaleam.com Scott Krisiloff

    ARRGGHHH! SO. ANGRY. GOLD-BUG-HULK-SMASH!

    We went back and forth a bit in the last post, but I just want to highlight that deposit money (bank created) is different from base money (Fed created). Deposit money is definitely market driven and in a normalized environment base money would be too. (The Fed would just be increasing the base money supply to help facilitate transactions). However, in our current environment, the Fed is subjectively elevating the money supply because it thinks that’s what “should” be done, which is the exact opposite of a market based system. While deposit money and base money are definitionally equal in value, the most important property difference is that base money can multiply while deposit money can’t. This fundamental difference is why I would argue that base money is the only true form of “money” while deposits are an “asset” like a building or an share of equity (with slightly different characteristics). Base money primarily facilitates transactions while assets primarily shift savings between time periods. Base money value defines deposit value, not necessarily the other way around.

    Also, an important point that people miss when they argue for a gold standard is that what they’re really arguing for is just fixed price convertibility of money to gold. I think we agree that there are all sorts of problems with a strictly pegged convertible gold standard. However, in order to measure whether or not the currency is falling in value, over the long term a dollar should maintain its value relative to gold and a fixed price band should develop. We should strive for such a relationship because that is indicating to us that the currency is holding its value. If the government cannot be trusted to be a steward of that relationship, then the market will do it for them. That’s why you see investors who are trying to store value migrate to gold over dollars. Empirically I can convert my dollars into gold today, but at a declining value of dollars/gold. As long as my freedom to convert is maintained, no one should be concerned with whether the currency is on a “gold standard” or not. They should simply vote with their wallets by abandoning a disfunctional currency.

  • Stephen

    Strictly as an asset. I don’t understand why gold bugs complain so much about the inflationary impact of a fiat monetary system. Why not just buy gold and shut up? Seems like a win-win to me.

  • http://www.orcamgroup.com Cullen Roche

    Actually, only 60% of households owned a car. The average house was 2.66X smaller despite having 1 more average occupant. And lets not even get started with the technology. Anyone who says the 50s were better is just clinging to the past….I think my point was pretty clear though admittedly extreme.

  • http://www.orcamgroup.com Cullen Roche

    Not sure where “free time” ever came into the ideas by MR. And why do people call it MMR? Is that mocking it or something? There’s only one M in it. No one has called it MMR in almost a year….Your question and reference to the wrong name makes me wonder if you’ve even taken the time to know what it is we’ve been discussing all this time? I know you’re an MMT advocate, but come on….If you’re gonna poke holes at least do some homework. I surely did before criticizing MMT.

  • http://www.orcamgroup.com Cullen Roche

    No, the money multiplier is totally wrong. Banks do not “multiply” base money. They make loans and find reserves later if necessary. Base money only serves to facilitate and support inside money or bank money. Inside money is the dominant money in our economy. Neoclassicals and even some heterodox schools get this totally wrong by trying to claim that our market based money system is somehow controlled by the govt. That’s totally wrong. The system is controlled by a private banking oligopoly. The recent credit crisis should make this pretty clear.

  • http://www.orcamgroup.com Cullen Roche

    Agreed. :-)

  • Cowpoke

    It’s not the fiat currency in and of itself that is the problem. It is with those that have the power to create it where potential bad issues arise.
    This perhaps could be looked at.
    I recall a Florida guy running for office wanting to create state banks for the sole purpose of lending for homes at 2% Flat rate no gimmics.

  • Stephen

    It’s amazing how many people comment on your articles that have not read ANY of your previous work. The fact that you have to explain your basic premise (with regards to how the monetary system works) in every post is comical.

    As a follow up — can you point me in the direction of 3rd party research (Fed, IMF, BIS, etc.) that validates your views?

  • http://www.avondaleam.com Scott Krisiloff

    I’m not sure how you can claim that base money doesn’t get multiplied. Seems to me like you’re confusing money with every other type of liquid asset in the economy. If I deposit cash at bank that bank can only get my money back into the economy by lending it or giving it back to another depositor (i.e. Multiplying it or shrinking it’s balance sheet). It can lend my money and then repo it’s loan for more money but then again it’s using it’s ASSETS (sorry for the caps just trying to emphasize) to procure MONEY.

    By the way, wrote that on an iPad and it was as bad as I imagined :)…totally useless, just like gold.

  • LVG

    Are you trying to claim that life was better in the 50s? You’re talking to me on a computer. Why don’t you start your 1950s lifestyle by getting rid of your computer. Then get rid of all the other things like computers that make your life a whole lot better than it was in the 50s. After you’ve taken the train to travel to where I live we can discuss whether you’re happy or not.

  • Stephen

    Scott — if you’re going to critique and challenge Cullin’s views, the least you can do is read his work. Link below:

    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625

  • http://www.orcamgroup.com Cullen Roche
  • Johnny Evers

    Just to be contrarian:
    While it’s true that we have more stuff today, I’m not sure it equates to a higher standard of living. TV used to be free, after you bought the set. Now I know people who pay up to $100 a month to watch cable. However, I doubt the guy watching Iron Chef today gets any more pleasure from it than the guy watching the Ed Sullivan show back then.
    The median income of $5,000 in the 1950s, translates to about $25,000 today.
    But while a family in the 1950s could own a house in a decent town or suburb on that salary back then, now you’re living a crime-ridden area with poor schools.
    In 1950, 80 percent of men had jobs, and you could get one just by knocking on a few doors. Today, 65 percent of men work.
    Somebody mentioned the value of time, above. In the 1950s, a mother at home was spending more time with her children. A father who worked in the neighborhood might be coming home for lunch.
    As Cullen suggest, you could probably live somewhat of a 50s lifestyle today, but you’d have trouble buying a house, and while you could save on entertainment and consumer goods, you can’t avoid paying more for taxes and education. Back in the 50s, somebody like Jack Kerouac could bum some work in the summer and then pay for Columbia in the fall.
    Probably the biggest advantage the 50s had is that the living standard was rising, whereas today it’s stagnating. A man will feel fine about renting if he knows someday he can own a home, but today so many of us are going backwards.

  • http://www.orcamgroup.com Cullen Roche

    I agree with LVG above. I do find some humor in the fact that people use computers to tell everyone how their lives are so much worse than they used to be.

    Maybe you should try a 1950s technology like the megaphone. :-)

  • http://www.orcamgroup.com Cullen Roche

    Maybe watch this before criticizing my point. :-)

    http://www.youtube.com/watch?v=KpUNA2nutbk

  • http://www.avondaleam.com Scott Krisiloff

    Note just because I said that base money CAN multiply does not mean that it has or is multiplying. It just means that it has different properties.

    I was just about to write that I agree that the increased base hasn’t multiplied but in writing that I just realized that in fact I do believe it has, just not in traditional bank loan channels. It has primarily found it’s way into assisting a growing treasury market. When debt markets are growing it means that definitionally money is multiplying (in my definition at least). And to date aggregate US non financial debt has not contracted.

    Stephen. Thanks for your input. I’ve read Cullen’s stuff and like it but just happen to disagree with some of it. I think he’s a lucky guy to have people like you swoop to his defense even though he seems quite capable of defending himself.

  • Jay

    Yo Johnny, TV is just as free today as it was in 1950. Get your rabbit ears out and you can watch network TV free of charge. People shell out $100+/month for little luxuries like HD, 200+ channels, sports packages, movie packages, on-demand programming etc.

  • http://www.orcamgroup.com Cullen Roche

    No, base money CANNOT multiply. The Fed could shovel the banking system full of base money and if there is no demand for loans it will not matter ONE BIT. The evidence of this following QE is now crystal clear. These are no longer theories. It is fact.

  • http://www.avondaleam.com Scott Krisiloff

    I completely agree that money can NOT multiply if there is no demand for loans but that doesn’t change the fact that it CAN and does if there is. Of course if you shovel money into a system that has no loan demand it will not multiply.

    Base money still has different characteristics than deposit money, which is just a balance sheet entry.

  • http://www.orcamgroup.com Cullen Roche

    No, banks don’t use their reserves to lend. They use reserves to settle payments and meet reserve requirements (which don’t even exist in all modern banking systems).

  • Johnny Evers

    :)
    My TV is ‘free’ because I don’t watch any of it, just borrow good programs or movies from the library.
    So I guess I don’t consider 705 channels to be a luxury that adds to quality of life, but rather a waste of time.
    I guess I’m making more of a commentary on our values today. We spend money on things that don’t add to our quality of life and we have an economy that is based on everybody buying more junk.
    There are people today who are living more simple lives, especially young people that are tapping into movements like Slow Growth — investing locally, buying food grown locally, etc.

  • Stephen

    I don’t understand the point of this argument. There are only 1 of 2 possibilities:

    1) Reserves create deposits
    2) Deposits create reserves

    One of these statements must be a fundamental truth, the other a misconception. If you both agree on one or the other, there is nothing to discuss. If you disagree, then some one is entirely right and some one is entirely wrong.

    Continue debate.

  • SS

    Reserves are primarily used to settle payments in the interbank market. If the reserves don’t exist the Fed lends them. But reserves play no real role in allowing banks to make the loans first.

  • SS

    Actually, a well managed banking system doesn’t even need much in terms of reserves.

  • Detroit Dan

    Buy gold then. No need to have the government impose a gold standard.

    I happen to believe it’s total hogwash and that investors in gold are fools, but they are certainly free to put their money where there mouth is…

  • KC

    I think the technological advancement leads to more spending argument is weak. Yes, we have much more technology to spend on than we did in the 50s. But the 50s were advanced in comparison to the 30s, the 30s to the 10s, and so on. It really just been since the 70s that we’ve seen extreme asset price appreciation and consumer spending in relation to income. Why? The growth of credit, which would have been much more difficult if money still had any to gold.

  • http://www.orcamgroup.com Cullen Roche

    What technology does is give us more time by making us more productive. The genius of the internet is that it allows me to communicate with people far more efficiently than mail for instance. This allows me to transact business in a much more efficient manner. Ie, I have more time to consume or produce other goods and services. This creates more demand. This is why the “jobs creator” argument is wrong from BOTH sides of the aisle. Not only are consumers important, but technological advancement and improvements (by producers) create more future production and consumption.

    Maybe read this piece. http://pragcap.com/the-role-of-the-entrepreneur-in-a-capitalist-economy

  • Tom

    Cullen, I always wondered this too. Ive heard it somwehere but never put thought into it.

    But could the stagnant wage issue also be attributed somewhat to women entering the workforce in large numbers?

    In the 1950s you get the image of one father working in a car plant or something supporting his family of four comfortably.

    Women enter the workforce in large numbers, increase the labor pool (and at the same time, labor is becoming less needed because of technology). The demand for labor went down while the supply of labor went up. Stagnant wages and this impression of a price squeeze?

    Other than that I agree with your post mos definitely.

  • http://www.orcamgroup.com Cullen Roche

    Hi Tom,

    I am not even sure where the media gets their median wages data because it’s certainly not from the govt. According to Social Security the median wage in the USA has almost doubled since 1990 from $14.5K to $26.9K. So I even find this “stagnant wages” argument to be suspect….This is coming straight from the W-2 filings with the govt….

    http://www.ssa.gov/cgi-bin/netcomp.cgi?year=2011

  • Johnny Evers

    Gold bugs worry that the government will confiscate gold or place new taxes on ownership or attempt to fix prices … all of which have been done in the past.

  • http://www.orcamgroup.com Cullen Roche

    Which is also a funny thing to be worried about because if the govt ever does that they’ll confiscate it at the price they hold it on their books. A whopping $42.50. So even that argument is silly. Not that the govt will ever do that, but hey….Just goes to show how out of touch some people are with the whole argument here….

  • Joseph Browning

    Are those values accounting for inflation?

  • http://www.orcamgroup.com Cullen Roche

    No. Real wages are up 14% since 1990. Not great, but totally expected given the tendency for inflation and wages to be highly correlated. Thing is, wages aren’t going backwards in real terms like so many claim (incorrectly).

  • Johnny Evers

    1933.

  • Joseph Browning

    I do agree that they’re not going backwards, but I think stagnant is an apt description of 14% growth over 22 years. At least I know I wouldn’t want to hold any investment instrument with such a return. I’d also be interested in seeing a comparison between the growth of wages vs. the growth of income from non-wage sources during the similar period. I suspect that non-labor-related income has increased at a faster pace.

    And thanks for the site. Enjoy reading it.

  • Jay

    Cullen, what are your thoughts after seeing this chart?
    Thanks in advance for any commentary.

    http://s9.postimage.org/o2ka2fz1b/wages.png

  • Johnny Evers

    So wages are up 3 percent annually over the past 21 years.
    That is more than price inflation.

  • Stephen

    Investors in gold are foolish? If some one was fortunate enough to buy gold at around $250 in the late 90’s, is their near 600% return foolish?

    How has your portfolio fared since then? If only we could all be that foolish….

  • Don Levit

    Cullen:
    Further up, you said something like inflation adjusted incomes are up 14% since 1990.
    If you are including the top 10% of wage earners, that may be true.
    But, median household income has not risen since the mid 1990s, for 90% of households.
    In addition, regarding the 1950s, one wage earner could raise 4 kids, while it takes 2 wage earners today to raise 2 kids.

    I like how you tie in the fiat currency with the productivity of the American people.
    That is what full faith and credit of the U.S. is based on. To even think that faith and credit is based on the ability to print money at will is silly.
    Don Levit

  • Johnny Evers

    Oops, meant to say *less* in the comment below.
    Wages are rising at 3 percent annually, but price inflation is higher.

  • http://www.orcamgroup.com Cullen Roche

    The PCE is not adjusted for inflation whereas the wages appear to be. It’s apples and oranges, isn’t it?

  • http://www.orcamgroup.com Cullen Roche

    The SSA data IS the median.

  • http://www.orcamgroup.com Cullen Roche

    No, real wages are not going backwards. That 14% figure is adjusted for inflation. Nominal wages are up 86% since 1990.

  • Dennis

    Cullen, I think you made an excellent statement about where fiat money comes from:

    “The quantity of money is not determined by the central bank or by the government (or at least only very loosely). It is primarily determined by the market place via the quantity of loans that are made based on the demand for credit (we reside in a credit based money system where almost all money exists in the form of bank deposits that result from loans issued by private banks on a demand basis). If anything, it is the market that determines the quantity of money in the US economy via the private banking system and competitive market based system for loan issuance.”

    Since this is true in the whole world, the most important thing the central banks of the world need to do is control credit (e.g. fiat money creation), on the part of the banks. They can control excess credit creation by raising interest rates (which probably contributes to inflation more than anything else), but they have a hard time trying to create credit demand.

    When the assets that back up the credit goes up in smoke, we have a real problem. Trillions of fiat dollars just vanish from the economy. (You know all this stuff of course) I don’t understand why folks will not read what the Keynesian economics was all about instead of saying: “Keynes stands for priming the pump and thus diluting our currency and that’s all”.

    Keynesian Economics asserts that markets can fail to self-correct, and investment can dry up in response to a perceived long-term lack of demand and lead to persistent high levels of unemployment. [http://www.nextnewdeal.net/rediscovering-government/defending-krugman-importance-keynesian-economics]

  • Johnny Evers

    What inflation rate are you using for the past 21 years?
    Less than 3 percent?

  • DanH

    Cullen, off topic, but a recent article mentioned that you had turned near-term cautious before the big market declines in recent days. Is that based on your algo and is that available in Orcam’s research?

  • GreenAB

    it had a great run. like many commodities after BRICs explosion.

    what gives you the confidence that it won´t fall in the future?

  • http://www.orcamgroup.com Cullen Roche

    Yes.

  • http://Avondaleam.com Scott Krisiloff

    Actually I don’t think you defined the argument correctly Stephen. We both agree that banks don’t directly lend off of their reserves, they lend off of their deposits. They settle all transactions in base “reserve” money though. Everyone agrees, everyone is happy.

    The discussion is over whether or not reserve/currency = “base” money is fundamentally different from deposits because it is the unit of settlement and therefore it can be transferred from one economic actor to the other without having to adjust an offsetting balance sheet item. If it is transferred in the form of a loan it has “multiplied” in that now it has created a new balance sheet entry within the economy.

    My argument is that the balance sheet entry (i.e. deposits, money market fund holding, loan, corporate debt holding, equity, etc.) is not MONEY and therefore does not have a direct effect on the value of money itself. The value of the Money (ceteris paribus) defines the value of the ASSET, not vice versa. So when supply and demand of the money market is affected, it can affect the value of the money, which effects the value of the assets that the money prices. Deposits are a fixed convertible asset to money at a price of 1 to 1. Our deposits are on a “dollar standard” you might say.

  • JJTV

    It’s surprising how contentious of a point this is in economics. As a buy-side investment analyst who works with banks I can attest that it is impossible for the banks to lend their reserve balances. I was on the phone with head of lending for UMB in Kansas City and the lady answered my questions in this manner:

    “Can you lend out the bank’s reserve balances”

    Answer:

    “No, the reserves are used to settle payments in the overnight market and to meet required reserve ratios”.

    Question:
    “Is it accurate to say that loans drive deposits”

    Answer:

    “Yes, that would be accurate”

    Question:

    “Is your lending ever constrained by reserves”

    Answer:

    “As I said earlier, reserves cannot be loaned. We will make a good loan regardless of our reserve position and will settle up later, if necessary…sometimes up to the last second.” “The quantity of reserves never matters but the price makes a difference to us, though we rarely care”.

    I think people confuse reserve balances (balance sheet transaction between the Fed and Bank) and bank reserves(coins and vault cash).

  • http://www.orcamgroup.com Cullen Roche

    This is what everyone does when they try to make this point. They try to somehow claim that bank deposits aren’t “real” money. Sorry, but that’s just total nonsense. If anything, it’s base money that isn’t “real”. No one uses base money for actual transactions (except cash, but I touch on that below). They only serve one purpose – to settle interbank payments. Let’s step back. What we have in the USA is a system of money designed entirely around inside money or bank money. That is, banks issue all of the money in the form of deposits. And yes, that is real money. When you take out a mortgage you really use that money to buy the house. When you obtain bank deposits via direct deposit you really use those bank deposits to buy food, cars, etc. It’s the absolute most real form of money we have today. The only purpose outside money serves is to facilitate the use of inside money. So, outside money (what you’re calling base money) is used to create a cohesive banking system. How does that work? The Fed System creates one settlement market where banks must hold a percentage of deposits on reserve. This is where they settle payments. So, rather than having a bunch of banks who don’t trust eachother trying to settle payments, we have a Fed interbank system where the Fed oversees all payment settlement. But make no mistake. This is not some special or “real” form of money. It’s just an interbank market that facilitates the use of inside money for every day transactions. And cash is just a form of outside money that allows a depositor to draw from his inside money for transactions. Again, this is a facilitating feature.

    Outside money is the fake money. Inside money is the real money. Everyone gets this totally backwards in an attempt to attribute some sort of weird special powers to the Fed or the govt or to cash. It’s wrong!

  • Marc S.

    I can’t help but to think about how much time we spend discussing “freedom” without ever discussing what we mean by freedom. It is one of those grand words whose use is malleable and meaning open to interpretation.

    In some sense, complete anarchy is total freedom. And yet it can be the antithesis of freedom if it devolves into chaotic bloodletting amongst people with no social restraints.

    I think the issue is more that we cannot agree what “freedom” itself is – precisely because it is something that is purely subjective that we discuss as if it’s objective.

    Anyway, just my two cents.

  • Greg

    So half the households are making 13.50$/hr or less and you consider that not stagnating? Try living on 13.50/hr and see what you can get .

  • Windchaser

    But reserve requirements are a requirement for lending, no? So insufficient reserves -> less lending -> smaller M3.

    Of course, reserves don’t meaningful restrict lending, as reserves are freely available (at a price).. however, it’s also not incorrect to say that banks multiply the money supply, from reserves -> M3.

    When most people say “money multiplier”, that’s what they’re referring to: That commercial bank money > central bank money.

    It’s the *implications* of this that are usually misunderstood: I.e., whether lending is meaningfully restrained to some value of the multiplier, or not. But there’s no arguing that the multiplier exists in a strict mathematical sense.

  • jaymaster

    Health insurance is a huge factor here too. It has grown MUCH faster than inflation (medical costs in general have, as well).

    For example, in my part of the company I work for, health insurance is going up about 20% next year. We (the employer) will cover all of this.

    And to put that into perspective, it’s going up from about $1000 a month for a typical employee, to $1200 a month. And a typical employee makes about $75k a year.

    So these people are effectively getting a 3.2% raise, without even knowing it.

  • http://www.orcamgroup.com Cullen Roche

    Banks make loans, find reserves later. So, if the bank can’t find the reserves in the interbank market it borrows from the Fed.

  • http://www.orcamgroup.com Cullen Roche

    Not quite Greg. Median wage is 27K per year. Average is 42K. That’s using their net compensation calculation so I am not positive what they’re excluding (I guess all deferred contribution plan payments) so it’s actually a bit higher. As you noted, it’s probably not easy to live on, but it’s not going backwards like so many people like to claim.

  • Colin, S.Toe

    I don’t own a TV, and live in an area (South Toe Valley of W. NC) where a community of people have been choosing to live relatively simpler lives for more than a generation (and in recent years, interest in this lifestyle among young people has clearly been increasing). One of the advantages of this lifestyle is clearly ‘quality’ time – with other people, animals, the outdoors.

    The problem is that without a community that supports such values, it is hard to pursue them without feeling ‘poor’, powerless, inadequate, etc. Even within such a community, it can be particularly hard to persuade children exposed to the lure of the mainstream lifestyle (diet, entertainment, ‘stuff’) of the value of a simpler one.

  • http://None Midas II

    A problem showing up is the increase in robot workers displacing human employment. This hurts by reducing consumption. It is not a sustainable sate of affairs, even if hairdressers, nurses, etc. are hard to replicate. And Japan, with a shrinking birthrate, shortage of workers, majority of retirees, faces limits with all their robots. Anyone with a crystal ball?

  • http://None Midas II

    Sorry if my comment is off topic, but it does relate to future lifestyle. Now back to Gold again.

  • http://www.orcamgroup.com Cullen Roche

    You know, they’ve been saying that for decades. Japan is about as automated a place as there is. And they have 4% unemployment. The automation excuse is a lazy one for more govt spending on jobs in my opinion. It’s literally been trotted out by left wing groups for 100 years. Not that I don’t sympathize with govt spending on certain things for jobs, but the automation argument doesn’t pass the common sense test in my opinion.

  • http://Avondaleam.com Scott Krisiloff

    Cullen if Deposits are money then where does the line of money start and stop? Does anything that I can use to purchase anything else qualify as “money.” If I can negotiate with someone to use 1000 iPhones to buy a house, did that just make my iPhone “money.” I don’t think so because money is a specialized unit of measurement within the economy and it derives its base value from the market value of supply and demand at a centralized authority which is the Fed.

    It’s no different from a foot being a unit of measurement that was at one time equal to the length of a monarch’s physical proportions. You can change the value of a foot and in turn change the value of the length of a room, but you have not made the room any larger in doing so. Deposits are simply an expression of the number of “feet” of money that you have saved. The central authority allows me to convert my ledger savings back into “feet” of savings at 1-1 but that does not mean my deposits are in and of themselves money. I can do the same thing with my AAPL shares or even physical iPhone at a market determined price by selling it. That is the difference between money and an ASSET.

    In a normalized monetary environment there is a MARKET for reserves at the Fed, and therefore a price and market derived value of reserves. So reserves are not just some infinitely available security solely to facilitate payment settlements (although I agree, the Fed does usually take its queues from the economy and not the other way around). They are also used to provide specific price signals to the economy. They can be used to incentivize economic participants to do specific things and are the central form (I would argue the only form) of MONEY.

    As an aside, deposits are not even the primary form of asset based saving or spending in our economy today. The majority of household assets are held in securities markets and as physical homes, and the majority of purchases are made via credit cards or cash (not check or debit cards). And many credit purchases are not even funded by deposits, a significant portion of bank liabilities are non-deposit liabilities. Deposits are anachronistic. Base money is still integral to our financial system. Which is the true determinant of the value of a dollar?

  • http://www.orcamgroup.com Cullen Roche

    Depends on your definition of “money”. Technically, almost anything can be money. But the problem with money is getting other people to accept it. Dollars are something that are widely accepted because they’re protected by laws and other such protections that primarily come from the govt. MR calls this “acceptance value”. It is the value given to a certain form of money primarily via a strong govt which is an extension of society. Banks in the USA have the express ability to issue deposits denominated in USD. In other words, the US govt has outsourced the creation of its money to private banks. So, deposits are the primary form of “money” in our society. You can use lots of things as money. You could use your phone or gold or your own pieces of paper or promises or whatever. They could all serve as a medium of exchange. But none of these things will compare to the deposits in your bank accounts because nothing is more widely accepted and protected than US dollar denominated money.

  • whatisgoingon

    I think you are avoiding the point I made by poking fun at gold bugs.

    Governments don’t have to confiscate private gold or excessively tax it because with fiat they can simply steal wealth via deficit spending (at least when it is unproductive).

    The real problem (I believe) is governments are incompetent when it comes to productive deficit spending that leads to real economic/wage growth. Gold bugs solution is a gold standard to keep the government from spending unproductively.

    I have yet to hear a solution from the non gold bugs or even if this is a real problem. Maybe the answer is, the current way governments deficit spend is not perfect but still some unproductive spending is better than a restrictive gold standard. Then again I’m not certain what you are saying besides that gold bugs are irrational.

  • http://ingloriousinvestor.com Inglorious Investor

    Agree with most of what you said.

    But…
    • Governments always corrupt currency whether it is gold-backed or fiat
    • Jim Rickards and other gold standard advocates address the trade imbalance issue
    • I disagree that people determine the government as much as perhaps you suggest. This is especially true vis-a-vis the corruption of money. All governments bestow privileges unto themselves (all pigs are created equal, but…) It’s human nature. Greed. Power. Even honest people succumb given enough time, because in their world it’s not wrong, it’s just normal. I see it everyday. I’m sure you do too.

  • http://www.orcamgroup.com Cullen Roche

    Thanks for this. Is there a good summary somewhere of Jim’s explanation of the trade imbalance issue? Thanks.

  • SS

    One of the sample notes actually has a good summary of his market call using the algo. Cullen, why don’t you run a fund using this algo? I swear it seems to be spot-on all the time.

    http://orcamgroup.com/wp-content/uploads/2012/10/QD_Update1.pdf

  • http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation Jason H

    yep, Japan’s unemployment rate is about 4% ..and China/Australia’s unemployment is at 5% because they both had huge stimulus programs for their size (so did China) –Japan’s stimulus package was $716 Billion despite being half the size & population of the US so it would be the equivalent of a $1.4 trillion stimulus in the US comparatively..

    so Japan was rewarded with 4% unemployment rate. Note that despite Japans’s deficit/debt level of 200% for the past 15+ years, they have been mostly conservative & their deficit spending has been too little/too late & are quagmired by deficit-hawks there just like in the US between their leftwing/rightwing too.

    Note that Japan accomplishes this 4% to 5% unemployment as part of it’s deficit spending (‘gov money creation’) in that the gov subsidizes/pays for the salaries of workers that would normally be laid off or not hired (ie, gov pays/subsidizes hiring the unemployed/laid off)

    Note that Australia helps also by legally requiring at least 4 weeks paid vacation (some companies give out as much as 10 weeks paid vacation like my ex-girlfriend’s sister’s company) & 35-37 hours per work week for full-time pay (Finland is now experimenting with 6 hour work days & bringing it’s unemployment rate down to a 3 year low) so that the population has more quality time & more employees are hired to share the work load & keep production up.

    http://www.globalhrnews.com/story.asp?sid=958 -“Because “at will” employment is not recognized in Japan, hiring the right employees is a key concern. Companies need to understand that they are hiring for the long term. In the United States, employers may hire employees to test them out, and then fire them if they do not work out. In Japan, restrictions against terminations prevent this practice from being effective.”

    http://factsanddetails.com/japan.php?itemid=908&catid=24&subcatid=156

    “JAPANESE WORKERS AND THEIR COMPANIES

    Japanese companies have traditionally put the welfare of their employees over making profits and regarded creating secure jobs for their employees as being more important that paying dividends to their shareholders.

    Companies are often resistant to making changes that sacrifice the well-being of employees in the name of increased efficiency.

    Many workers work for one company their entire life. Japanese firms traditionally invested large amounts of money training their workers, which is one reason why they demand company loyalty.

    There has traditionally been a strong social stigma attached to job-changing.

    Corporate life in Japan includes subsidized dormitories [$80/month in rent in areas where rent is normally $5,000/month] and shared bathrooms for single employees, company-sponsored drinking binges and corporate outings and visits to the company founder’s ancestral grave. There are even company-sponsored sports festivals with dodge ball and rope skipping.

    Many workers have little other identity other than the company they work for.

    Soshikiryoku is a term used to describe team spirit and togetherness that Japanese corporations try to foster and promote to motivate employees, get them to work together and keep morale high.

    This contrasts with the individualistic, dog-eat-dog competition and merit-based pay promoted in Westerner corporations.

    Companies are regarded as social organizations not just a collection of financial and physical assets.

    The company is regarded as something that belongs to the employees not the shareholders. Bosses make personal visits to employees families.

    They take care of hospital arrangements for sick workers.

    Directors and managers usually come from within a company rather than outside it.”

  • http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation Jason H

    gold is fine is an investment/hedge as part of a diversified portfolio

    While you’re with gold back in the 1990s, why not buy Intel or Google stock instead & get even bigger profits?

    Why not compare to buying Microsoft/Apple stock too?

    They had greater gains & in shorter time periods too

    btw, gold crashed if you bought at it’s height in the 1980s & then sold at it’s bottom in the 1990s

  • http://Avondaleam.com Scott Krisiloff

    Look, deposits are absolutely not the primary form of saving in our society, and I think we can empirically agree on that. I’d argue that this excludes them from being called the primary form of money, but I get what you’re saying.

    What I think you’re really getting at is: where is value stored and is wherever that is stored a more relevant determinant to aggregate price levels than the value of money as a security? And part of me agrees with you that it may be, but that doesn’t exclude the fact that money has some sort of intrinsic value, which is what can decline in an inflationary environment driven by increased supply of money, base money.

    I think each of our viewpoints ultimately need to be reconciled because there’s value in both and yet both lead to some dead ends. One is a top down view and the other is a bottom up view of money. But I think what we’re both pondering is what is the value of money?

    If I understand it correctly, at its most fundamental level, your framework takes price and works backward, where my framework takes money and works forward. Let me clarify.

    I’m building from the most basic building block which is reserves/currency=base money, which I hope you’ll agree is what facilitates deposit creation at a basic level. Deposits to me are assets (as I’ve said ad nauseam), not much different from other liquid securities. These may be labeled money in that they have purchasing power but I would argue that the fact that all transactions ultimately clear through base or “outside” money means that they are not actually money.

    You did acknowledge that a phone or a brick or anything can be money–I disagree with the semantics but agree with the spirit of what you’re saying–they have purchasing power. BUT by acknowledging that any of that can be money, you also acknowledge that there are separate pricing markets for separate types of money. That is, the phone has a hedonic value outside of its dollar value–so does any other object that can be bartered. Money is used to describe the object’s value (as price), but the money must have a value itself as the frame of measurement (going back to the monarch’s foot example). I would argue that base money has an intrinsic value just like the object, which is set by supply and demand. Therefore deposit dollars have a value as well, which I would argue is a passthrough value that is set in the market for liquid settlement money i.e. base or outside money ONLY because the banks maintain a fixed convertibility to base money. The true value of a bank’s deposits are determined by the quality of the bank’s assets. If loans deteriorate, the bank cannot make good on its liabilities and there is a bank run because the fixed convertibility allows the depositor to receive more value in cash than the value of the deposit.

    I would argue that your framework doesn’t do a very good job of describing how this intrinsic value of the currency is set because of its focus on the deposit which is not a unit of settlement. The reason I say that you work backwards from price is that the value that you assign to the deposit is really a statement of its purchasing power. You measure its value primarily in relationship to other goods. And I must admit that your framework does explain observed prices better. But that does not necessarily mean that it is the correct framework to describe the value of money, only that elements of it are correct.

    My framework actually doesn’t do as good of a job at describing observed prices, and I think that’s because the intrinsic value of the currency is only one component of the value of the good that is being priced. The other component is the hedonic intrinsic value of the good. The final price of the good is better described as the derivative of an auction process where the winner is the highest bidder. In formulating a bid, a person’s maximum ability to pay is obviously more related to their level of savings, which means drawing on deposits, securities holdings, etc. This is why your framework works well because it sees price as a derivative of all assets at one’s disposal, not just settlement money. My framework tries to force price into a framework derived from the intrinsic value of the currency, which breaks down because it ignores the intrinsic hedonic component of a good’s price.

    Although, now that I am writing this I think that the correct framework really lies in a reconciliation of the two…

  • http://www.orcamgroup.com Cullen Roche

    I think there’s a lot that’s fundamentally wrong there. First of all, if a bank has a loan and the deposit is then made at the same bank then there is no “settlement” in base money. The bank’s reserve position is unchanged. If the banking system were just one big national bank there would be no need for a reserve system at all. This causes big problems for your thinking since it’s clearly wrong to say that “all transactions ultimately clear through base or “outside” money”. That’s just not how the banking system works and that statement is completely wrong. So clearly, deposits are the unit of settlement in the banking system at times even if it doesn’t always appear as though they are. Aside from interbank settlement and setting monetary policy there’s really no need for outside money. Its existence is totally secondary in necessity to inside money which dominates almost all transactions that occur in the modern monetary system. If we were to set the FFR at 0% permanently, eliminate reserve requirements and stop using cash (all things that are totally in the realm of possibility) outside money would be almost totally extinct. We’d then have a pure inside money system aside from some reserves set aside to manage interbank settlements.

    But like most neoclassicals and even some heterodox schools you’re attributing this special role to base money even though the only reason base money even exists is to support inside money. After all, if you study the history of the Fed you’ll discover that the Fed’s ENTIRE existence revolves around supporting private banking. Ie, the Fed was created to facilitate how banks create inside money, the dominant and most important form of money in our economy. This is what a lot of people don’t get about MR that is so unique. We flip this all on its head and point out how the private banking system plays the dominant role in the money system and not the Fed or the govt as so many like to think.

    All the reserve system does is create a cohesiveness between private banks. There’s nothing special about base money except in how it facilitates and supports inside money.

  • LVG

    “deposits are absolutely not the primary form of saving in our society”

    What? Do you have any bank accounts. Do they have any deposits in them? Do you not count that in your saving?

  • whatisgoingon

    This is a recent paper suggesting gold has bubble like qualities.
    http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2166636

  • Mikael Olsson

    Cullen: Oh, come on. Automation is a lazy excuse?

    We are more productive than ever. I know you agree with this. Unemployment has been on the rise for the past half century.

    There are basically two things that would cause this:
    1. Automation
    2. Too much profits exiting the economy to sustain demand

    Pick one or both. I’m in the “both” camp myself.

    Am I saying “Arrrgh de robots tewk arr jerbs!”? Not really. I don’t mind automation of repetetive or dangerous tasks; they are ultimately beneficial to humankind. But economically, surely, you have to agree that it is having funny effects on demand when we can’t invent new jobs fast enough? The IT boom was awesome. When is the next thing? Is it coming at all?

  • Mikael Olsson

    Whyever would one need to hedge against M2 expanding? Isn’t price levels what matters?

    http://research.stlouisfed.org/fred2/graph/?g=cE1
    http://research.stlouisfed.org/fredgraph.png?g=cE1

    That’s not exactly what I’d call a correlation.

  • Mikael Olsson

    And yes I think CPI is a valid measurement to use in this case.

  • Mikael Olsson

    It is true that banks have to maintain reserves. But they are not reserve constrained!
    Step 1: Make loan
    Step 2: Find reserves

    If reserves are low, they find new reserves, they do not stop loaning. Really.

  • Stephen

    GreenAB:

    I’m a firm believer in the price of gold mirroring global aggregate M2 levels. I’m also a firm believer in the concept of the necessary continuous expansion of aggregate credit levels to maintain the status quo — a concept entirely feasible in a global fiat monetary system.

    Can the price of gold tank? Sure it can. But for the price of gold to sink back to $250 per ounce, there would have to be unprecedented depression-like deflationary forces at work (massive credit contraction, massive defaults/writedowns, etc.). Do you foresee politicians and central bankers allowing this to happen, when it is entirely within their power to prevent it?

    I personally do not.

  • Stephen

    Jason H:

    You can’t compare gold to stocks — apples to oranges analysis. Why not own both?

  • http://www.nowandfutures.com bart

    Indeed. Gold was confiscated at market price.

  • http://www.nowandfutures.com bart

    Hourly earnings have been roughly level since the 70s, when using the bogus CPI-U.

    http://www.nowandfutures.com/images/hourly_earnings_cpi_lies1964on.png

  • http://www.nowandfutures.com bart
  • Johnny Evers

    True, but then the price went up.
    The larger point is that there is precedent for gold being confiscated.
    I don’t think it will happen, but things that are possible tend to have a higher probablility than we are willing to believe.

  • http://www.nowandfutures.com bart

    An ounce of gold buys about the same amount of oil ever since 1970.

    Paper currencies… not so much.

  • http://www.orcamgroup.com Cullen Roche

    Allocating your saving into stocks has absolutely crushed gold over the long-term. Again, you don’t seem to understand the difference between investment, saving and how different assets play different roles in portfolio construction. The idea that gold is a good long-term investment is just completely wrong.

    http://teammcgruer.ca/blog/wp-content/uploads/2009/12/total-real-return-chart-to-end-of-2010.jpg

  • http://www.nowandfutures.com bart

    “Probably the biggest advantage the 50s had is that the living standard was rising, whereas today it’s stagnating.”

    Indeed, although I wish the comparison was with the 70s. That poeriod is a lot easier to show the changes and declines in full standards of living.

    You’re also somewhat addressing the irrational exuberant that can’t get along without being connected to the ‘net for 5 minutes.

  • http://www.nowandfutures.com bart

    Totally bogus assumption, although true on the very long term, since it assumes buy & hold forever. As Keynes partially noted, in the very long run we’re all dead.

    And your assumption that I think that gold is a good long term investment is both wrong and offensive.

    You don’t understand real investing if you actually believe that stocks (or *whatever*) always win or that changing asset allocations isn’t wise *in actual practice*.

    The proof is there very obviously since 2000 – US stocks have sucked. Hard assets like gold or apparent and safe havens like treasuries have totally creamed them. That has been true for many many decades – sometimes paper assets are best and sometimes hard assets are best.

    And it’s still true that an ounce of gold buys about the same amount of oil ever since 1970 – and before. If one’s approach or ideology or whatever can’t explain that, then I submit that it’s at least partially and perhaps severely faulty.

  • http://www.nowandfutures.com bart

    A partial example of how *real* standards of living have declined…

    bueller?…

  • http://www.orcamgroup.com Cullen Roche

    Sure, you can cherry pick bad 10 year periods. But as the chart I provided clearly shows, stocks trounce gold over the long-term. And not by a small amount. They crush them. To smithereens. Never bet against human ingenuity over the long-term. And no, collecting rocks is not innovative.

    And no, I never said stocks “always win”. That’s just ridiculous.

  • Mikael Olsson

    I threw my TV out in 2005 and have led a happier life ever since.

    I have a small PC connected to a projector that I watch DVDs and online TV on whenever I feel like. No commercials driving my blood pressure up.

  • Mikael Olsson

    I’d totally be on board with this. Have said so in the past.

    Banks earning money on their right to create money from nothing just so we can live in a home is just… wrong. I’d rather we were sending the money in the direction of the state so we can cut some taxes.

    Am I saying “abolish banks”? Heck no. I’m just talking about your private home.

  • http://ingloriousinvestor.com Inglorious Investor

    His book: Currency Wars, I believe it’s called. Read it a while back.

  • http://www.nowandfutures.com bart

    I noted that about stocks ‘always win’ in hopes that you would perhaps see that gold doesn’t always lose, and may even be a valid investment (by the primary measure that matters – substantial profit).

    Fascinating that you use the term ‘cherry picking’ but fail to acknowledge the many many periods since 1900 where stocks got creamed and gold and/or hard assets won and blew stocks almost into another universe… in other words, that seems like reverse cherry picking or just plain ignoring inconvenient facts… and, in your words, ridiculous.

    Am I to assume that you don’t believe in asset allocation?

    Did gold and other hard assets totally blow stocks into the weeds since 2000 or not??

    I can easily provide many charts that show and prove it if needed, and the same during the 1966 to 1980 period too.

    I’m also, in one sense, not betting against human ingenuity – in this case, the wanton debt and money creation and failure to follow the rule of law equally, etc.

    And again, you imply or make a rash (and insulting) assumption that I’m betting against human ingenuity on the long term.

    I am a gold and hard asset etc. *bull*, not a gold bull (who are roughly equivalent to the dot com BTFD folk who got creamed).
    I owned and ran a medium sized photo lab in the 70s, and sold all its silver and most of the gold in Jan 1980, about a week before the peak.

    Still true:
    And it’s still true that an ounce of gold buys about the same amount of oil ever since 1970 – and before. If one’s approach or ideology or whatever can’t explain that, then I submit that it’s at least partially and perhaps severely faulty.

  • Anton

    Private fiat money fetters. The financial machine does indeed work the way you (MR) describe it. And that is the problem. When taken to the extreme scenario, which is where we are now, a financial system based on inside private bank money is not that different to a gold standard. Because the only way you can create inside money is if you also can create a loan (debt), there is a natural limit to the (inside) money supply. That limit is hit (in 2008 or thereabouts), when the economy reaches the saturation point in terms of level of private debt (end of the so called private debt supercycle). If there is no demand for new loans regardless of the level of interest rates or prospects for the economy then the inside money supply stops growing. When private households start deleveraging, inside money supply starts to contract. Base money is not necessarily outside money either, i.e. the only way it can become part of the money supply is if demand for loans goes up. At the moment all the base money created by the Fed sits as extra reserves at the Fed and has no effect on the money supply. If demand for loans grows, private inside money is created and some of the extra reserves base money moves to required reserves. Money supply goes up. Neither inside money nor base money can increase the money supply unless demand for loans goes up.  So, the way our financial system is set up (MR) even under fiat money, we are still limited in terms of money supply – we are in the private fiat money shackles as opposed to the golden shackles of the 1930s. When you are at the end of the private debt supercycle (balance sheet recession) as we are now, the only way we can increase the money supply is through government spending/creation of money as an asset only, without the corresponding need to book a debt on the other side. The government is the only entity that can exchange new money for goods and services. It is the ultimate helicopter money – the only difference is that Ben is not allowed by law to fly that helicopter (the Fed just like any other bank can only exchange money  for other financial assets). Obama is now in the driver’s seat. He is the only one that can break these private money fetters.

  • Greg

    13.50/hr translates to 27,000$ yr, take the hourly wage double it and multiply by 1000 to get the full time wage. (50 wks x 40 hrs a week) The median is the 50% point by definition, the average is, in many ways, a flawed number. If you have ten earners and one makes a million and the other nine make 10,000 the “average” salary of the group is 190,000 yet 90% of the people dont come close to the average. It may not be going backwards, (although if you consider health care, housing and other things NOT in CPI….) but it aint going forward fast enough to keep up with debt servicing. Maybe things werent good in 1990 either.

    BTW you really are on a roll with this gold standard stuff I think.

  • http://www.nowandfutures.com bart

    Would someone please point me to anything in MR (or MMT or MMR for that matter) that states that the only valid investments are the ones that produce cash flow?

  • http://www.orcamgroup.com Cullen Roche

    If you look at the long-term, there is not even a competition between gold and stocks.

  • http://www.orcamgroup.com Cullen Roche

    Gotcha Greg. Sorry. Totally agree.

  • http://www.orcamgroup.com Cullen Roche

    MR doesn’t say anything about investing. MR is a description of the monetary system. My opinion about gold as it pertains to portfolios is just my opinion. And I have no idea why everyone keeps mentioning MMT here. I am really baffled by all the recent MMT comments. I haven’t followed or posted MMT content in a full year. We started MR because of our disagreements with MMT.

    This site has ZERO affiliation with MMT and does not represent MMT views.

  • Mikael Olsson

    I’d buy shares!

  • Mikael Olsson

    I could make a badge for you to stick at the top of the site saying “This site is not about MMT.”

  • http://www.orcamgroup.com Cullen Roche

    Gosh, it seems like I might need it, huh? Where did this sudden swarm of people come from who think I am an MMTer? It’s been almost a year since we started MR and had the MMT debates….

  • http://www.nowandfutures.com bart

    If you don’t look at the full picture, no close to correct conclusions can occur.

    My (original work/research) paper vs hard asset cycle since 1900 show much more of the full picture.

    http://www.nowandfutures.com/images/dow_gold_oil_crb1900-current.png

  • http://www.orcamgroup.com Cullen Roche

    Bart,

    This is a 210 year comparison of the two asset classes. Stocks don’t just beat gold. They demolish gold.

    http://teammcgruer.ca/blog/wp-content/uploads/2009/12/total-real-return-chart-to-end-of-2010.jpg

    What’s not complete about that?

  • Mikael Olsson

    Salient. Agree fully.

  • http://www.nowandfutures.com bart

    Thanks. I needed to ask about cash flow precisely to find out if it was part of the economic school or not. Google was not helpful.

    And I only noted MMT as an aside and in parantheses, I do know that it’s relative ancient history. Various schools have odd views, like one that states money in an MMF isn’t part of the money supply but if it’s transferred into a checking account, it suddenly becomes part of the money supply.

    And the internet has a very long memory. I’ve had many inquiries on my site from things I said many years ago that I thought had been forgotten.

  • http://www.nowandfutures.com bart

    I repeat a few of the questions that remain unanswered and show something you can’t or haven’t admitted. Other things besides stocks do very well when stocks go into the gutter and then into the sewer for periods as long as 15-20 years. Gold is one, and it blew stocks completely away from 1966-1980 – they went nowhere and gold went up ~25x.

    Yes, that’s another way to say incomplete.

    Am I to assume that you don’t believe in asset allocation or sector rotation?

    Is the primary goal of investing to make a profit or not? Note that I in no way am implying that there aren’t other goals.

    Did gold and other hard assets totally blow stocks into the weeds since 2000 or not??

    I can easily provide many charts that show and prove it if needed, and the same during the 1966 to 1980 period too.
    This is one and I have it back to 1800 too, and the cycle remains.
    http://www.nowandfutures.com/images/dow_gold_oil_crb1900-current.png

    I don’t care if anyone else here buys or invests or hedges with gold or not.
    It’s just almost silly that gold is so anathema and produces such high emotion comments here after going up over 5X so far, and has gone up every year since 2001 when measured normally with EoY prices.

    Yes, there are gold bulls who get pretty ridiculous to me, but the anti-gold contingent here reminds me greatly of them – they’re both almost literally religious (in the broad definition) views.

  • http://www.nowandfutures.com bart

    Oh drat… should have been”

    I am a gold and hard asset etc. *bull*, not a gold **BUG** (who are roughly equivalent to the dot com BTFD folk who got creamed).

  • http://Avondaleam.com Scott Krisiloff

    LVG, ~10% of my net worth is held as deposits. Sorry for you if you like to tie your assets up in a non-diversified credit that yields 0.

  • http://www.deltafinancials.com Delta Financials

    Cullen, I sense your frustration with the Gold standard argument is largely tied to the relative arbitrariness of Gold as a suitable referee or what money supply should be. Of course, improvement tied to technology and the issue of what our houses would have looked like with a Gold standard aren’t really something anyone can claim to have an answer to. You can’t have a monopoly on a hypothetical.
    But, I often wonder if you’re familiar with Milton Friedman’s take on this whole issue. He was for abolishing the Fed as an institution, while continuing with FIAT currency under a simple formula for consistent M1 growth at 2 or 3%. He viewed the depression as being aided by the collapse in narrow money. That seems closer to a predictable system that you’re looking for. Any thoughts on Friedman’s thoughts about monetary policy?

  • Colin, S.Toe

    Friedman, the apostle of ‘neoliberalism surprises on occasion.

    Make the currency ‘debt free’, have the increase match real growth growth in production over the longer term, and force banks to compete in a real market for capital/savings on which to make loans – sounds good.

  • Mikael Olsson

    A consistent M1 growth does not take into account growing inequality. More efficient production = more profits. And good luck consuming for it all.

  • Greg

    Johnny

    Gold would not need to be confiscated if the govt didnt need gold to maintain a peg to gold. If the govt isnt on a gold standard/peg there is no reason for it to ever confiscate gold.

  • http://thundereyez.blogspot.com Bosscauser

    I grew up in the 50’s and you can keep the black and white TV, my heart attack 2 years ago was a death sentence then, cancer wiped out everyone it touched, when you wanted a loan you had to beg for it. I used to have to hide under my school desk because the REDS WERE COMING! My black friends couldn’t use the toilet or eat in a restaurant with me, sexual assault in the work place was the norm, millions of people didn’t have indoor toilets, you had to take loyalty oaths to get a government job, and anyone could pollute and did.

    Great music though, but go back there? NOT!

  • http://eminiwizard.com Dennis Parmelee

    If the Gold standard is not synonymous with freedom, what is?

    Some great posts on both sides of the aisle.

    Born in 45, I grew up in the 50’s, love the Music as Boss says. Life was simpler, if memory serves me correctly, (it doesn’t always), but values were different. We had meals together, had a sense of optimism, and were totally naive until the mid 60’s.

    Time and money are the currency of the new rich according to Tim Ferriss, and as we age time probably more so.

    Accepting each day as a gift and embracing short term momentum plays in appreciating assets seems to be as valid as buy and hold.

    Stocks may “crush” any other asset class may be true, but during recessions/depressions it is hard to see how those struggling to make ends meet can afford to take advantage of that opportunity.

    We are not richer because we have all this “stuff”, but technology does allow us to be more productive, and from anywhere.

    This website is a great example of collaboration, allowing all of us to more rapidly grow by learning through the experiences of others.

  • http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation Jason H

    right, both are fine.. own stocks as a real investment since it gives cash flow/dividends in addition to higher selling price (700%+ return in Google’s case in 7+ years), which is better than golds 500%-600% return in 10-20 years

    Gold is just a commodity that gives no cash flow, no dividends, & might sell higher in the future just like your comic book collection (which might be Superman #1) or baseball card (which might be Babe Ruth) –good as an inflation hedge but like all commmodties, it’ll go up & down without giving you dividends (while Google will)

    But as an inflation hedge, gold is a good hedge