Skip to comments.Rand Paul: Paper is paper; money is money
Posted on 07/22/2020 5:16:49 PM PDT by RandFan
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In effect, the dollar has this role because it is superior to both gold and to any competing fiat currency. Not only does the US have the world's largest economy, but the US is trusted to keep honest account books, is powerful enough to keep the peace, and manages an orderly, consensus-based system of international rules for trade, banking, and finance.
To accommodate the demand for dollars around the world, the US must pump out enough dollars and dollar denominated federal debt to keep the international economy running. For example, early this year, the Fed intervened in the financial markets and made massive sums available for reverse repo transactions. This prevented the markets from seizing up and caused some sharp comment about the Fed's motives. Only months later did it become clear that the international financial system was coming under severe strain from China because of the early effects of the coronavirus.
The Fed's role in actively managing dollar and dollar debt liquidity in key markets is deeply troubling to hard money advocates, which includes the Austrian school and Rand Paul. Yet neither seem to want to recognize that the defects of gold as a monetary base contributed in a major way to the severity of the Depression. Unintentionally, the gold accumulation policies of the US and France caused a devastating global contraction of the world's monetary base.
If it were possible to go back to gold as the world's monetary base, the problem of managing the supply of monetary gold would recur in new form. Gold production and monetary use and accumulation in non-monetary reserves would have to be controlled. This would require the cooperation of the world's major gold producers.
Since China and Russia are number one and three on that list, I see no end of trouble from them if we went back on gold. They would inevitably use their large gold production and holdings to menace the world economy and set the terms of economic and financial exchange to benefit themselves and disadvantage the US and other free nations.
I was long ago reconciled to this line of argument having thin appeal against the attractiveness of gold and the fundamentalist style of argument. People with little knowledge of economics and history can be easily convinced that gold is the only real money and that saying otherwise is akin to denying the divinity of Jesus Christ.
In the modern era, dollars and all other functional fiat currencies are just accounting entries that reflect the availability of things and services for purchase. New currency can be created, but unless it is in balance with the supply of goods and services, every new unit of currency diminishes the value of all other currency.
In the end, there is no escaping the need for work. Unless people are willing to work to produce and sell goods and services, a sack of gold coins or a stack of hundred dollar bills have no worth. This can be brought home to the slow learners by passing out wads of Monopoly money and telling them that they are now rich if they can find people willing to sell them anything in return for it.
Nothing cryptic about it - money used to be backed by something of actual value and paper and coin was a representation of that commodity - today it is an illusion.
Money is simply data about energy use. Gold can be used to represent this data because it requires a fairly stable amount of indirect energy consumption to mine, therefore gold energy data is portable across all borders and economies. The exact same applies to Bitcoin.
Energy consumption is roughly the same thing as GDP, just from a different perspective. The USA consumes 24% of the world's energy and by no small coincidence creates exactly 24% of the world's GDP. Quality of life in any country is proportional to the government taxed and regulated price of energy in that country.
Socialism primarily fails because some things are priced far below the energy needed to provide them. That creates a financial short-circuit that leads to economic meltdown.
It's important to understand the close relationship between money data and energy use because pollution is roughly proportional to energy consumption. If wind and solar power drive up electricity rates, simply follow the money to find out where they cause more pollution than before. It becomes obvious that most renewable energy as well as recycling programs make no rational sense.
and you do?
More so than Rand Paul. I was reading economics texts when he was trying to memorize his multiplication tables in elementary school.
Perhaps you can reflect on the Fed printing an additional FOUR TRILLION DOLLARS of fiat money in the last two months without any corresponding increase in goods available to buy with that money. Please consider the following in your reply.
As bad as US public finances are, other developed nation economies are in worse shape with higher levels of indebtedness. If hyperinflation is in the offing, they will suffer it first, with the dollar actually benefitting.
Gold is nicer to look at than paper currency but it is harder to carry and break down into smaller units. And just when did the country last endure a crisis that made gold preferable to paper currency in ordinary transactions? One could live a long time -- many lifetimes -- without ever needing gold for the sake of survival. And if things ever get that bad, guns, ammo, and food will be more sought after than gold.
My objection to Rand Paul's account is that it offers a niave rationale that seems to originate more in fundamentalist style teaching than an understanding of economics. Eventually, as with too much fundamentalist preaching, the mind may rebel in favor of more substantial fare.
I asked for some rational discussion of the recent four trillion dollar wealth transfer from the working public's earnings and savings to the Emperor's lackeys, through the process of printing $4 Trillion new fiat money coincident with a massive reduction in goods available for purchase by that money. (Note: I'm pretty sure even Keynes would not approve of that)
By the way, you are right about other nations being in worse shape, but that just means the debt crisis at the root of this is worldwide, and because they are all so intertwined with the dollar, it will be a worldwide collapse, including the dollar, instead of nation by nation, and it will cascade very rapidly once it starts.
Even massive deficit spending need not create new money if it is financed by borrowing or asset sales. And, when economic conditions permit, the Fed and the Treasury can withdraw money by selling financial assets. The assets go back into private hands and the money that paid for them goes onto the government books.
The larger issue of course is not the specifics of Fed money creation but how long the US can run chronic deficits. No one knows, and it is all too plausible that, like Weimar Germany or Zimbaubwe, the US might try money creation as a way to finance its deficits. There is no law of economics though that makes that inevitable, no matter what Rand Paul thinks.
For example, in an era of abundant gold and silver coinage, ancient Rome developed a form of credit that became paper money of a sort. After all, for a large transaction like the purchase of an elite level house in Rome, who wanted to lug several tons of coin to the closing?
Eventually, it became possible in ancient Rome to transact business by bank account book entries and credit assignments, with written notes showing a particular sum on deposit becoming a form of credit and checking account. Moreover, loans could be transferred, which made the flow of payments valuable like commercial paper is today. In effect, in addition to banks, ancient Rome had developed other rudiments of modern finance.
This could result in consumer credit situations that we moderns easily recognize. As posted by the New York Federal Reserve Bank:
Imagine yourself a Roman citizen in the 1st Century B.C. Youve gone shopping with your partner, whos trying to convince you to buy a particular item. The things pretty expensive, and you demur because youre short of cash. You may think that back then such an excuse would get you off scot-free. What else can you possibly do: Write a check? Well, yes, writes the poet Ovid in his Ars Amatoria, Book I. And since your partner knows it, you have no way out (the example below shows some gender bias on Ovids part. Fortunately, a few things have changed over the past 2,000 years):
But when she has her purchase in her eye, She hugs thee close, and kisses thee to buy; Tis what I want, and tis a penorth too; In many years I will not trouble you. If you complain you have no ready coin, No matter, tis but writing of a line; A little bill, not to be paid at sight: (Now curse the time when thou wert taught to write.)
Not only today, but even in ancient Rome, when your beloved wants a pricey bauble, you commonly paid for it by credit instead of by plopping down gold and silver.
Moreover, if one looks at the development of the US, for most of our history different parts of the country wanted different types of banks and different economic and monetary policies. In the early Republic, the most settled areas of the US around Boston, New York, and Philadelphia wanted hard money policies and saw gold on deposit as the linchpin of commerce and credit.
Of course, outside of those areas where people wore silk stockings and knee britches, people found it hard to get gold and silver coin. This made it difficult to transact business and to convert agricultural produce into money that could be used to pay for other things.
For many decades, US states and the federal government had competing banking charter systems, with state charters easier to get, and with easier capital reuirements and looser credit policies. This gave states eager to grow the ability to mobilize credit money by granting more bank charters.
These examples could be greatly multiplied, but I think that I have made my point: even in the era of the gold standard, various forms of paper money and credit were essential to commerce and development. That being so, paper money is real money and no less so than gold or silver. And in the modern era, just like with gold and silver coin of the realm, the issuance of fiat money is reserved to the government.
In effect, governments, banks, and finance companies are all part of a vast system of interlocking account books. That is where the modern monetary base resides, with paper currency as a minor convenience. And it would be that way even under a gold standard, but with added complications and limitations due to requiring gold on physical deposit in the national treasury before currency and gold credits can be issued.
And, under a gold standard, the worldwide trade, transfer, and accumulation of gold would have to be regulated and controlled to prevent the system from being gamed. It is hard to imagine that working well given human nature and the world's fault-lines and power rivalries.
You seem to be unwilling as a matter of ideology to recognize the usefulness and value of fiat money dollars. They may seem to be backed by nothing, but they are legal tender backed by the US legal system and are recognized and accepted as valuable throughout the world.
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