Topic: What if a Country go back to Gold (bitcoin) standard? - page 2. (Read 3911 times)

I agree. For a country to from from a traditional fiat currency to a gold based currency would simply make it so the subject country would lose too much control over their economy. The only exception to this would be a country that has experienced a true economic crash that was not felt throughout the rest of the world (and corresponding currency crash)

I am sure you can find better critisisms of this proposition in the literature, but let me try:

There is a fundamental error, and there are errors in the predicted consequence of saving. The fundamental error is that it does not matter. Every individual can do with his money as he sees fit, including saving them for later. The effect on the economy, or the greater good, is of no relevance to rights. A right to dispose of your property trumps everything, that is why it is a right. So the fact that it can have adverse effect on others, is of no importance. What Keynes here says, is that somebody else can better take care of your money using monetary intervention, that means taking away rights, and declaring that there are two sets of people, those who are masters, and those who are serfs.

The remaining arguments are the effects. These are secondary, due to the fundamental rights proposition, nevertheless there are effects. Every economic decision you make and act on, affects every aspect of the rest of the economy, albeit marginally. So if someone saves, that does not make a whole lot of difference, and if someone else spends, or reduces his savings, to the same degree, the effect of the total is even smaller, but not nil. This is normally the case, because saving is tied to the different stages in life that everybody goes through. The interesting question is when a large portion of the actors starts to save more at the same time.

There are different effects depending on the availability of sound money, and if the form of the saving is in money or in investments.

If we have sound money, and a large portion of actors starts to save more in money, the first effect is that the value of the money increases because they are bid up, which is the same as prices of goods goes down. This is really the same thing. The savers reduce their consumption, that is what saving is and that is why they accumulate money. The prices of goods will not all go down at the same rate, the consumer goods will go down first, and capital goods least, which is ok because point of the saving is to spend later, and the businesses will focus on producing for the future, so capital will go to the earlier stages. Since consumer prices go down, the non-savers can consume more.

If we have sound money as before, but most of the saved money goes to investments, or indirectly to deposits in savings and loans institutions (old fashioned banks), the interest rate will go down and the investments can increase, so the effect on the capital structure is increased investment in general, and a change of the capital structure to the earlier stages. This means a capital structure well adapted to the expected later consumption, plus general increase of investment which increases productivity and therefore the ability for all to consume more. This will be the normal situation, because the savers will first secure their position with the safest asset (the money), after that they will invest or lend to get profits or interest. You see that saving generally is positive both for the saver, who acts in his own interest, and everybody else. In fact, saving is a precondition for a prosperous society.

What the monetarist will do in this situation, is to expand the money volume either directly or through lending out money they don't have. They will expand the consumption in the government, and they will reduce the interest rate down from its natural level (expanding money supply and reducing interest rate depend on each other). The adverse effects of this are plenty, everybody knows the transfer of wealth from the savers to the spenders. Somebody gets the new money first, the cronies, it's bad in itself. There is also waste in government spending. They can not spend the money as well as individuals in the free market, due to lack of pricing information. Government spending is a negative sum game. The worst effect, is the wrong signal the low interest rate gives to the market. It signals to the public to spend, to loan more for spending or postpone downpayments of loans. The public will bid up the consumer prices. The low interest rate, as before, will signal to the capitalists to invest in the stages of production most remote from consumption, like oil rigs and surveying for minerals, which is supposed to return way out in the future, while the spenders consume now. So everybody is happy for the new money, while savings halt, and therefore capital is eaten up, and the wrong investments are started. This leads to destruction of value down the road, and crashes in market, the new word for that being turmoil.

Basically, to intervene in savings using monetary politics, is wrong on all accounts.

So let me parse than


So in another words : recession => saving => less consumption => bankrupt => no paycheck => less saving => less consumption => bigger bankrupt ....
Two solutions from Keynes to break the vicious circle : Prevent saving in the first place (by devaluating the money, or with taxation) and make it possible for companies to still give the paycheck (deficit spending, subsidies).
So going back to gold will prevent both from happening, and apocalypse follows.

First, it should be noted that "recession" does not come from cosmic forces, but caused by money expansion in the first place.
Also, when consumption falls, prices fall. This transfer wealth from debtors -the state being the biggest- to creditors and savers.
Savers and creditors, with this new earned wealth will then spend again enjoying small prices, causing a break in the loop.

Keynes just say that this cycle is bad for the state. (And this is true, since he is the biggest debtor)
But this is not bad for individuals.
"The state is us" some will claim, expecting to make us think that anything that is bad for the state is bad for the citizen.
But this is clearly false when we consider the state and the citizen as separate entities.

So, by keeping in mind that I don't consider the shrink of the State caused by its economic problems as relevant to the wealth of the country, I keep my analogy.

If 2 cars comes in the country (or family), and 1 goes out, with a trade balance at 0, the country is richer. (Not necessarily the state, which is a separate entity)
As a country or family, if you import more goods into your life than export, you accumulate true wealth.

Here you go from the start of the wikipedia on it:

The paradox of thrift (or paradox of saving) is a paradox of economics, popularized by John Maynard Keynes, though it had been stated as early as 1714 in The Fable of the Bees,[1] and similar sentiments date to antiquity.[2][3] The paradox states that if everyone tries to save more money during times of economic recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy.[4] Both the narrow and broad claims are paradoxical within the assumption underlying the fallacy of composition, namely that what is true of the parts must be true of the whole. The narrow claim transparently contradicts this assumption, and the broad one does so by implication, because while individual thrift is generally averred to be good for the economy, the paradox of thrift holds that collective thrift may be bad for the economy.

So this is a good example of how national economics is different from family economics.

current crypto currency is on the rise, compared to gold, when gold tends to stabilize the exchange rate and increase each year, crypto currencies like bitcoin, the exchange rate fluctuated up and down, depending on how the market atmosphere of the market, when many buy bitcoin then the price exchange rate will be higher, whereas when many are selling bitcoin exchange, the price will fall, in contrast to bitcoin gold, but both can be used as a future investment ... 

Not a single country will return to gold. Sorry. Sooner crypto, but I would not bet on it.

I think this is where we don't understand each other.
I said : you are exporting less goods than importing.
Whereas you are comparing accounting value of export and import.

I agree that if you count Time and Work in your accounting, you will deduce that you are not better off than before. But this is only true from the accounting point of view.
But not in term of goods.
And I say that this is what really matter : the acquisition of goods. (In the sense explained by Friedman https://www.youtube.com/watch?v=c9STBcacDIM)
Not the acquisition of money, but the acquisition of goods.

So from the wealth perspective, in my car example, you still have imported more goods than exported.
You earned a car.

You can argue that you loss time and work to earn it, so you are not better off.  
But I say this does not matter since material wealth has increased.

Accountants value everything is term of money, which is the right way to calculate taxes, get a general idea about where money flows, predict and prevent liquidity problems.
But this is not the right tool for measuring value. (As Mises pointed out by the way)

Having higher import in terms of good than export is the meaning of wealth. (Without running on deficit)

I like this extract from the Richest Man in Babylon, which does not explain our import/export problem, but why money flow does help measuring wealth.

The problem is a problem of accounting:
1) You import two untuned cars + stuff needed to tune one of them for 2100$
2) You work on a car, consume the stuff to tune it, EXPEND some time and efforts, and successfully tune it
3) You export the tuned car for 2100$

The balance is: one untuned car in exchange for some time and efforts.

You could have simplified the problem stating it differently:
1) You work for a foreigner and he give you a job: you tune a car, he give  you the stuff to tune it and it give you an untuned car in exchange for the work done successfully

The exchange is one untuned car for your efforts and time.

The difference in this example is who take the risks of the job:
1) you take them all in the first,
2) you risk your time and efforts and the foreigner risk the stuff to tune the car in the second

Suppose both example are a success and their end state is the same: Are you better off?

It is no sure, because you have to evaluate the value of the untuned car and the value of the efforts and time expended to obtain it for you.
In fact you are exporting your work and time (call it "service") in exchange for the untuned car.
You have not an infinite quantity of time or efforts to export, so more you export less you have for yourself.

The marginal value theorem imply, even in this case, you will find the value of the car you import decreasing and the value of the effort and time you spend increasing (because more you spend less you have left).

So you can not say you are exporting less than you are importing, you are just exporting something you value less at the time (time and efforts) in exchange of something you value more at the time (the untuned car). The same is doing the other guy on the other side. As he give away untuned cars, his subjective value for untuned cars increase and its subjective value of the service he is buying decrease.

If you use gold instead of bartering, because it is a more efficient medium of exchange,
You just export gold in exchange for service or goods and import gold in exchange of good  and services.
If you import gold you just value gold more than what you are exporting. If you export gold, you just value gold less than what you are importing.
It is just a matter of preferences at the time of the exchange: Do you want more gold? more stuff? more leisure time?

Amen

A state that went with gold, would have to have relatively free markets and a small government. That would be good for all, except for the government, which means that you probably will not see it.

Beware of different levels of gold standards. Private money, which would be gold coins produced by multiple businesses, and private paper media denominated in grams, and banks which are not in any way guaranteed by the public, could work. A gold standard money denominated in something else, backed by gold, but monopolistically produced by a government,will ultimately fail and lead us back to where we are now.

Can you show it to me ? What is the paradox of thrift ? Here is your counter argument : https://www.youtube.com/watch?v=c9STBcacDIM
Gives me arguments not dogmas.

They would have to fix the price of their currency in gold very carefully.  This is always the hard part, especially if you are going alone.

Assuming they got that part right, their currency would generally be strong.  This would result in lower inflation for their citizens as imports would be relatively inexpensive but potentially hurt their exports as their goods would be more expensive in the marketplace.  This is the irony of strong currencies, countries often don't want them as they hurt exports, hence China's capital controls and very tight management of the RMB.

Also, countries are in no way like families.  It's counter intuitive but has been shown many times, e.g. paradox of thrift.

in few yrs to come
guess many countries will go back to gold.

Yes, I agree, by reading again what I said about the farmer, I confused myself. For the farmer, the corn is worth less than the furniture.

However, I don't understand your reasoning on the car.


Where the added value appear of the work appear ?
Your work, the work that tuned the car and could sell it at higher price, increased your material wealth of 1 unturned car (the second that you kept for you) despite having a trade balance at 0.
In term of goods, you have more goods now than after. You imported more good in your possession than exported.

Why are you thinking that you are not wealthier now that before ?
Do you disagree with the fact that you just imported more than exported ?
If you agree with it, then why do you disagree with the fact that maximizing good import over export is what make you wealthy ?

The problem for your line or reasoning is simple:
you measure different things with the same meter.

When you write:
If you buy 2 cars + some raw material for tuning for 1200$.
Tune one of the cars and sell it for 1200$, then your trade balance is balanced.
However your wealth improved of one car. You imported more goods than exporting and keep a favorable trade balance.

The one untuned car he buy is different from the tuned car he sell.
You can not say his wealth improved of one car, because is the car tuned or untuned. The work of tuning the cars is free? NO.
The work to tune the car have a cost, so you must add it to your accounting.

This is even more evident with the other example you give:
Still, we may take the example of a farmer selling its produce on a local market. If he wants to buy furniture for his home (or a car),the value of the produce he sells on the market will have to higher than the cost of what he wants to buy. The situation will be even more difficult than for a country, since a country can run a budget deficit whereas banks won't allow that to happen in a small farm.


If the farmer want to buy furniture and sell corn it is evident he is selling something he value less (the corn) for something he value more (the furniture).
On the other side, the woodworker selling the furniture evidently value less the forniture he is selling than the corn he is receiving in exchange of it.
No one sell what  is worth (for him) more in exchange of something is worth less (for him). It would be a loss. Every voluntary exchange is a positive value exchange for both parties. Every time. At least ex-ante (before and when it happen). Someone could change its mind after, but this do not matter.

You mix the value (subjective) of the corn and of the furnitures for the woodworker, attribute it a objective value and then use these values to compute the profit of the farmer.
And it obviously it have no sense at all.

I could add to this, you must compute the trade balance in some common terms. Money (be it USD, gold, bitcoins, whatever). More stable is the value of the money used easier is to compute it.
If you talk about cars, apples, peas, massages, etc. You can not build a serious balance:
1) You balance every individual item (in effect import and export the same stuff)
2) You must decide the ratio between cars and peas, massages and apple, etc. And track them as they change. No minimally developed economy can do it. This is because money was developed naturally. As you have a minimally deep production line you MUST have a common denominator enabling you to calculate if the costs of a work are lower or higher of the possible price you foresee.

Money is just the common denominator for all other goods and services. Money being a good itself in a way or another. Just a good never used but only acquired to be exchanged at a later time for what you really want.

http://www.zerohedge.com/news/2014-10-28/things-make-you-go-hmmm-swiss-gold-status-quo-showdown

Seems one might just try.

With an established standard like gold or bitcoin I would assume that banking, stocks, bonds, insurances as we know it would cease to be and they would transform into something else. Could be catastrophic on the short run since that country might get shunned, but maybe it could work if it's a very slow transition over many years.

You don't understand my point, but again, maybe I'm not explaining well, I sugget you take a look at https://www.youtube.com/watch?v=c9STBcacDIM.


I'm not advocating having a deficit trade balance. (Even if, as Friedman explain, for a country, it is a good thing since nobody can print cheaper the green piece of money than you)
I'm advocating having more goods imported than goods exported. And it is important to not measure them in term of dollar.

Like I said :
If you buy 2 cars + some raw material for tuning for 1200$.
Tune one of the cars and sell it for 1200$, then your trade balance is balanced.
However your wealth improved of one car. You imported more goods than exporting and keep a favorable trade balance.

Where does their paycheck comes from ? Is it not for importing more goods in their lives ?

The comparison between a country and a family is a difficult one, because the average family doesn't produce anything.

Still, we may take the example of a farmer selling its produce on a local market. If he wants to buy furniture for his home (or a car),the value of the produce he sells on the market will have to higher than the cost of what he wants to buy. The situation will be even more difficult than for a country, since a country can run a budget deficit whereas banks won't allow that to happen in a small farm.

In the third world, where people don't have bank accounts, having a balanced budget and selling more than what you buy isn't a choice. There's just no other way around.

Back to the case of Switzerland, this is old people versus the young. The older folks want to play safe with solid gold stored at home.

NO.

The gold the country keep in reserve it is called savings. It is needed just in case something don't go as planned.
Your reasoning is like the people telling others like they should be lean and fit, like the people on a BodyBuilding magazine cover, the only problem being with too low fat you are at risk of a lot of physical/health problems.

If you had no savings, just spent everything you earn in consumption and investments, you have no way to pay easily if something go wrong: you must liquidate your investments at any price you can get i n a short time. If your check delay, if your refrigerator break and you food rot, and you have nothing in reserve, no money, no other reserve of food, etc. You must go out and sell that beautiful car just to eat. Or ask a loan to someone.
Sometimes others have extra capacity available and your loans will cost little more BUT think about the case you refrigerator stop working:
it was just your refrigerator or every refrigerator in the county?
Did your refrigerator fail or was the power lines?
In the first case you just go out and politely ask to your neighbour if he could loan you some bread and ham. But if was the power lines, your neighbours is in the same situation.
Then the idiot of a prepper (the one you called lunatics, paranoid, etc.) with autonomous power for his refrigerator can ask you and your neighbours to be paid to sell some of his 6 months reserve of food (payback time bitches).
Your neighbour have some money and can pay for the food immediately, a backup generators and fuel in the next few days, until thing improve some week later.
You, without savings available, can just liquidate what? What you have your prepper neighbour want? Your fine car? Now you must liquidate something worth 100 at 10 or less (food, a spare generator and enough fuel), because you would starve otherwise. Then the lack of savings will cost you ten times what would cost you to save something in a sensible form (like gold, silver, cash, bitcoin).

The same is true for countries.
When a recession come, all people will be short of cash, so all of them must liquidate what they have for what they can get to obtain what they need.
And it is not pretty.

A few weeks of savings often are a life saving. Few months savings are a real cushion in case of problems.
Wealthier you are, more saving you need.