[e-gold-list] Re: A recipe for stagflation

2001-03-18 Thread Bob

David Hillary wrote:
 
 Bob wrote:
 
  David Hillary wrote:
  
   Bob wrote:
   
David Hillary wrote:

 Claude Cormier wrote:
 
  A recipe for stagflation
 
  http://www.goldeconomy.com/thepriceofgold_08.htm

 why oh why do 'goldbugs' seemingly always seem to predict a large rise
 in the price of gold in the medium term?

 The price of gold in terms of US dollars has been enaything but stable
 in the last few decades, whereas, the widespread (near universal) use of
 USD in the $10 trillion US economy, makes the price of USD stable in
 terms of goods and services, at least in the short term.
   
You are comparing "last few decades" to "short term". You may be
comparing apples to oranges here. I can't say though as I don't know
how long (or short) "short term" is.
  
   quarter by quarter, the USD buys about 1% more or less (usually less) US
   goods. At bad times the USD might by 3% less than it did before, of
   domestic goods.
 
  Ok. Looking at charts I can't see calling gold "anything but stable",
  and this is pricing gold in USD, if you want to compare apples to
  apples (quarter by quarter).
 
 
 Sorry bob I can't follow that statement at all. [wasn't gold worth
 $800/oz in the late 80s? 

Right. I really short quick spike up and down.

If so the purchasing power of gold in the USA
 would have fallen by around two thirds in a dacade. 

Right. That's *government* for you. 

The purchasing power
 of the USD in the same time would have only fallen by 15% or so in the
 decade. 

Right. But funny you picked the highest really short tempory spike gold 
ever made in purchasing power since 1913 for comparison purposes to make 
your point. Now you're grasping at straws to make your point.


seems to me that inflationary fears, as they subside and ignite,
 can drive the price of gold in terms of US purchasing power, on one hell
 of a roller coaster.]

Hmmm you're picking a specific tiny 10 year period to make a
comparison
and a point without considering or mentioning that the government caused
it.
*Now* do you see why government shouldn't have anything to do with money
or
currencies?

And another thing about that tiny time period spike up in gold's
purchasing 
power:

It was a *gain*, not a *loss*.

Aren't you concerned about *what* caused those inflationary fears? Don't
you
want to see that eliminated?


From AIER's Chart Book (The updated one is now available):

Purchasing Power in the US of Gold and Selected Currencies from
1913-1997:
1913 = 1.0, (the year they started the US Fed and this income tax)
The chart ends about 1997.
Purchasing power calculated from the implicit price deflator for US GDP
and the exchange rates of foreign currencies for US dollars.
Compared money:

Gold
German Mark
Reichsmark
Deutsche Mark
(hey, what can I say? they were having a problem organizing a 
dozen of donuts in Germany for a while)
Japanese Yen
French Franc
British Pound
Swiss Franc
US Dollar

Dude, I'm looking at this chart and gold wins hands down. The USD is 
a miserable loser. About 5% of it's original value to go! Hell, some
of this fiat stuff doesn't even have continuous lines. Ain't no break
in gold's line. Gold doesn't just _disappear_ like some government
fiats.

On top of that, gold's purchasing power on the right hand side of the
chart is now *above* 1.0. And I think you can guess well enough where 
the USD's purchasing power is on the chart. No . lower. No 
lower ... keep going . keep going  now you're getting close.
ok, a little lower .. ok, close enough.

In terms of overall *steadyness* of purchasing power gold wins hands
down over *all* the fiat currencies. The Swiss Franc being the best
government fiat currency.

Just what part of this do you not understand?


   However over 5 years inflation could be high low, zero or negative.
   Currency could buy 25% less or 25% more. This magnitude of adjustment is
   as much as would be required to adjust the price level of an economy, if
   macro-economic shocks required it. The price level cannot jump 10%
   overnight or fall 10% overnight. It takes time and dis-equilibrium in
   many markets to force price changes. This is why it matters that the USD
   is 'attached' to a $10 trillion a year economy -- this economy prices
   USD by offering goods and services for USD with inflexible prices.
  
   
 Variable inflation of this currency attached to the economic giant makes
 the price of gold, an inflation hedge, makes for wild changes in the
 real price of gold, as expected inflation changes.
   
Maybe, maybe not. It depends on what country you're living/working
in. The _*real*_ price of gold would be gold priced in coffee
(hopefully Capulin, I've been spoiled for ever) or other things
that have intrinsic value.
  
 
   The real price of gold is the quantity of goods and services that can be
   exchange for it. The prices of goods and 

[e-gold-list] Re: A recipe for stagflation

2001-03-13 Thread David Hillary



Vincent Youngs wrote:
 
  If (USD) inflation fears and inflation are ignighted, say between March
  and May 2001, the price level in the USA might rise say 4%. But if this
  inflation is expected to persist, the price of gold will rise a hell of
  a lot more than 4%! Perhaps 30%. Thus the real price of gold in terms of
  US perchasing power has increased by more than one quarter, as has the
  real effective exchange rate of the gold for money SOE. Like the stock
  market, the price of gold is determined by *expected* events, the
  outlook for the future, which can change drastically in a matter of
  months given a few political events, a few statistics, a few
  bankruptcies and a speech by the Fed chairman. The price level, however
  takes a few years (at least) to adjust to an economic shock when the
  nominal exchange rate is fixed, requiring a price level adjustment. The
  cause of this difference is price rigidities particularly in the labour
  market, property rental market and supply contracts. (By contrast stock
  and commodity prices are perfectly flexible.)
 
 
 This is a good point you make about price rigidities in labour markets,
 rental markets and supply contracts.  If the price rigidities in these
 markets were loosened, the purchasing power of gold in these other markets
 would be less volatile.  These price rigidities are mostly the result of
 State interference with a free market.
 

I do support the gold standard for small open economies, and I believe
that macro-economic policy should primarily focus on a) removing state
impediments to price flexibility and efficient price adjustment, b)
ensuring that the government, in its role in the economy (e.g. setting
of punishments/fines/restitutions for crimes), enables for efficient
price adjustment, where state sets prices, c) encouragement of or
support for (e.g. sponsoring academic research) to voluntary adoption of
pre-defined automatic (default) price adjustments to markets which would
otherwise suffer inefficiency from price rigitities and finally d)
removing state distortions to the price of land and capital (e.g.
taxation of nominal interest income) within the economy, and, in the
case of land, the avoidance of the creation of high price rent ratio
volitile assets by land allocation institutions.

Current state regulation of labour and property rental markets increase
transaction costs of negotiating prices and thereby reduces the ability
of transactors to minimise transaction costs by providing for price
adjustments. In the labour market, the provision of unemployment
benefits reduce the cost of unemployment on transactors, and thus the
incentive for transactors to negotiate prices and price adjustment
proceedures which minimise the social costs of unemployment. These
factors foster price regidities and associated inefficiencies when the
economy is hit by shocks. If the markets were fully liberalised, and
unemployment benefits and other distortions removed (or reduced), then
transactors would negotiate transaction cost minimising prices and price
adjustment proceedures and thus enable macro-economic shocks to impact
with a smaller dis-equilibrium in markets. Government could encourge
this sort of development by, for example, sponsoring academic research
on which forms of contracts and adjustment proceedures etc. minimise
transaction costs, or by funding statistics which could be used to
assist information flows for efficient price adjustments, e.g. automatic
price adjustments, indexation etc. These expenses could be justified as
public goods if the effects of dis-equilibrium in particular markets
imposes significant costs on participants in other markets.

Yes, deflation and inflation, when the nominal interest rate is fixed at
the world interest rate or a large economy currency interest rate, has
very large effects on asset prices. If the demand for fixed assets is
expected to grow in nominal terms by 5% p.a. along with inflation and
replacement costs, and the nominal interest rate is 5%, the that is the
same as a zero discount rate with price stability. An asset expected to
last 20 years will be worth 20 times the current annual hire. If the
interest rate stays at 5% but price stability is expected, the asset
falls to 13.09 years hire. If the price level is expected to fall 5%
p.a., the asset falls to 9.08 years hire. I guarantee that the property
market will crash in Ireland when the inflation ends and the deflation
starts and the nominal interest rate is about the same. Inflation and
deflation have consequences.
   
  
   What do you mean by "annual hire"?  How do you arrive at these figures of
   20, 13.09, and 9.08 years hire?
 
  annual hire is just the 'rental' value of the building, which is the
  'rent' of the property less the ground rent of the land.
 
  The figures are calculates as follows:
  P=sum{n=1 to 20):(((H1*(1+g)^(n-1))/((1+d)^(n-1)))
  where P is the market 

[e-gold-list] Re: A recipe for stagflation

2001-03-10 Thread Vincent Youngs

 If (USD) inflation fears and inflation are ignighted, say between March
 and May 2001, the price level in the USA might rise say 4%. But if this
 inflation is expected to persist, the price of gold will rise a hell of
 a lot more than 4%! Perhaps 30%. Thus the real price of gold in terms of
 US perchasing power has increased by more than one quarter, as has the
 real effective exchange rate of the gold for money SOE. Like the stock
 market, the price of gold is determined by *expected* events, the
 outlook for the future, which can change drastically in a matter of
 months given a few political events, a few statistics, a few
 bankruptcies and a speech by the Fed chairman. The price level, however
 takes a few years (at least) to adjust to an economic shock when the
 nominal exchange rate is fixed, requiring a price level adjustment. The
 cause of this difference is price rigidities particularly in the labour
 market, property rental market and supply contracts. (By contrast stock
 and commodity prices are perfectly flexible.) 
 

This is a good point you make about price rigidities in labour markets,
rental markets and supply contracts.  If the price rigidities in these
markets were loosened, the purchasing power of gold in these other markets
would be less volatile.  These price rigidities are mostly the result of
State interference with a free market.


   Yes, deflation and inflation, when the nominal interest rate is fixed at
   the world interest rate or a large economy currency interest rate, has
   very large effects on asset prices. If the demand for fixed assets is
   expected to grow in nominal terms by 5% p.a. along with inflation and
   replacement costs, and the nominal interest rate is 5%, the that is the
   same as a zero discount rate with price stability. An asset expected to
   last 20 years will be worth 20 times the current annual hire. If the
   interest rate stays at 5% but price stability is expected, the asset
   falls to 13.09 years hire. If the price level is expected to fall 5%
   p.a., the asset falls to 9.08 years hire. I guarantee that the property
   market will crash in Ireland when the inflation ends and the deflation
   starts and the nominal interest rate is about the same. Inflation and
   deflation have consequences.
  
  
  What do you mean by "annual hire"?  How do you arrive at these figures of
  20, 13.09, and 9.08 years hire?
 
 annual hire is just the 'rental' value of the building, which is the
 'rent' of the property less the ground rent of the land. 
 
 The figures are calculates as follows:
 P=sum{n=1 to 20):(((H1*(1+g)^(n-1))/((1+d)^(n-1)))
 where P is the market price of the asset, n is the year, H1 is the Hire
 vaue in year 1, g is the Hire growth rate, and d is the discound rate.
 
 This simplifies to 
 P=sum{n=1 to 20):(H1*((1+g)/(1+d))^(n-1))
 
 where d=g=0.05 the answer is simply: 
 P=sum{n=1 to 20):(H1)
  =20
 
 Where d=0.05 and g=0 the answer is:
 P=sum{n=1 to 20):(H1*(1/1.05)^(n-1))
  =13.09
 
 where d=0.05 and g=-0.05 the answer is
 P=sum{n=1 to 20):(H1*(0.95/1.05)^(n-1))
  =9.08
 
 The easiest way to calculate these values is to use a spreadsheet.


Thank you for explaining the method of calculation of asset values.  The
discount rate is the interest rate, I assume.  Interest rates are higher
for higher risk investments.  If the price of gold denominated assets is
seen as volatile, then lenders will charge a higher interest rate to
compensate themselves for the risk of default.  The higher interest rate
should lower the price of the assets, and the volatility in their price as
well.  You suggested that a high property tax would stabilize property
prices.  The higher interest that lenders would charge achieves the same
thing by a free market mechanism without the use of State coercion.


 Its less costly to change the clocks and time one hour than it is to
 reschedule every activity by an hour. The nominal exchange rate is the
 clock, the activities scheduled are the prices in the domestic economy.
 Changing one commodity price is much less than changing the price of
 every good, service, wage and property rental. However, nominal exchange
 rate volitility has its own cost. 

Is it really lest costly?  The enforced time change is a big disruption to
a lot of people and businesses that have no need to synchronize their
working hours with the availability of sunlight.  Why should the State be
involved in the setting of clocks at all?  If time standards were left to
a free market, a standard would evolve without State coercion that would
work at least as well as the State's solution, but probably much better.

The same applies to money.  The coercive State should get out of the money
business altogether and leave it to the free market.  In any case, unless
the use of e-gold is prevented coercively, e-gold or a variant will
replace all fiat money.  In the absense of coercion, Gresham's law is
reversed.  Good money will drive out bad.

~ Vincent

---

[e-gold-list] Re: A recipe for stagflation

2001-03-08 Thread Bob

David Hillary wrote:
 
 Bob wrote:
 
  One more thing. The US at one time was a SOE.
 
  About 1800 in the US a dollar bill (a note, not what it is
  today) bought the same about 100 years later. This was a
  gold standard era. It had no Fed!
 
 and in the next 100 years after that the income tax was introduced, with
 rates of up to 70%, the Federal Reserve was introduced, the New Deal
 welfare state was introduced,  The currency went off gold,  lots of regulations and 
tariffs were passed,
 drugs were prohibited (including liquor for a while), the environment
 was regulated etc. etc. and the standard of living rose so dramatically
 more than in the previous 100 years that no one could have predicted it
 in 1900.

Right. And those things above did not all start in 1900. The
first income tax was 1913 at about a 1% rate on about 1% of the
population (the richest of the rich). Socialist America didn't 
get a real start until the '30s. And by 1950s most of the big 
increases of the US's standard of living had been acheived. 
Todays environmental scam started later than the '50s.

A lot of those increases had to do with what was going on 
during the 1800's due to a large amount of freedom and
relative price and interest rate smoothness. (ex: cotton 
gin, which was about to make slavery unprofitable, but 
Lincoln couldn't wait as he had a 2 year old war that had 
come to a stalemate and needed a new reason to keep it going).

Side note:

 deposit
 insurance was introduced,

If you're talking about FDR and the federal government, deposit
insurance was not introduced and to this day there is no federal
bank account insurance, and never has been. The FDIC (Federal 
Deposit Insurance Corporation) does not provide insurance. It's 
one of the three biggest legalized government frauds going just 
like US Social Security and the US SEC (Securities and Exchange 
Commission). 

 Under the gold standard there were periods of inflation and deflation.
 Also I understand the USD was fixed to gold AND silver, a bimetalic
 standard, where the metal of lower value could be used to redeem
 currency (some economists are now advocating bi-currency backed currency
 boards, so that the value of the currency would be worth the lesser
 valued of the two backing currencies, e.g. a currency board issuing
 currency redeemable for either 1 USD or 1 euro).

Sure, it wasn't 100 years of perfect smoothness (but generally,
yes). But if you look, you'll find short periods of price and 
interest rate volatility caused by government. Like the localized 
(a few states), so called "Wild Cat Banking Era". 

  Today in the US both interest rates and inflation are higher,
  with the Fed (started in 1913, the same year they started
  the income tax).
 
 Growth is much higher also. Are nominal variables more important than
 real variables?

Real variables. How much of the US's GDP growth rate, in the last
10 years, is real wealth being created? I don't know but it's not
100%. Time will tell. A lot of what's going on right now in the
US is plain 'ol consumption provided by debt. Taking on debt to
create more wealth is one thing. Taking it on to consume is another.

 David Hillary
 p.s. nothing here to advocate government intervention such as income tax
 or fiat currency!

Ok.

Bob

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[e-gold-list] Re: A recipe for stagflation

2001-03-08 Thread David Hillary

Bob wrote:
 
 David Hillary wrote:
 
  Bob wrote:
  
   One more thing. The US at one time was a SOE.

  
   About 1800 in the US a dollar bill (a note, not what it is
   today) bought the same about 100 years later. This was a
   gold standard era. It had no Fed!
 
  and in the next 100 years after that the income tax was introduced, with
  rates of up to 70%, the Federal Reserve was introduced, the New Deal
  welfare state was introduced,  The currency went off gold,  lots of regulations 
and tariffs were passed,
  drugs were prohibited (including liquor for a while), the environment
  was regulated etc. etc. and the standard of living rose so dramatically
  more than in the previous 100 years that no one could have predicted it
  in 1900.
 
 Right. And those things above did not all start in 1900. The
 first income tax was 1913 at about a 1% rate on about 1% of the
 population (the richest of the rich). Socialist America didn't
 get a real start until the '30s. And by 1950s most of the big
 increases of the US's standard of living had been acheived.
 Todays environmental scam started later than the '50s.
 
 A lot of those increases had to do with what was going on
 during the 1800's due to a large amount of freedom and
 relative price and interest rate smoothness. (ex: cotton
 gin, which was about to make slavery unprofitable, but
 Lincoln couldn't wait as he had a 2 year old war that had
 come to a stalemate and needed a new reason to keep it going).

Can you back up your claims about growth with official statistics?

 
 Side note:
 
  deposit
  insurance was introduced,
 
 If you're talking about FDR and the federal government, deposit
 insurance was not introduced and to this day there is no federal
 bank account insurance, and never has been. The FDIC (Federal
 Deposit Insurance Corporation) does not provide insurance. It's
 one of the three biggest legalized government frauds going just
 like US Social Security and the US SEC (Securities and Exchange
 Commission).

I see names like Federal Deposit Insurance Coproration and assume it
means the US Federal government has established an entity to insure bank
deposits. I will have to do some homework and find out what this entity
is and does.

 
  Under the gold standard there were periods of inflation and deflation.
  Also I understand the USD was fixed to gold AND silver, a bimetalic
  standard, where the metal of lower value could be used to redeem
  currency (some economists are now advocating bi-currency backed currency
  boards, so that the value of the currency would be worth the lesser
  valued of the two backing currencies, e.g. a currency board issuing
  currency redeemable for either 1 USD or 1 euro).
 
 Sure, it wasn't 100 years of perfect smoothness (but generally,
 yes). But if you look, you'll find short periods of price and
 interest rate volatility caused by government. Like the localized
 (a few states), so called "Wild Cat Banking Era".
 
   Today in the US both interest rates and inflation are higher,
   with the Fed (started in 1913, the same year they started
   the income tax).
 
  Growth is much higher also. Are nominal variables more important than
  real variables?
 
 Real variables. How much of the US's GDP growth rate, in the last
 10 years, is real wealth being created? I don't know but it's not
 100%. Time will tell. A lot of what's going on right now in the
 US is plain 'ol consumption provided by debt. Taking on debt to
 create more wealth is one thing. Taking it on to consume is another.

To the extent that output growth has occured by an increase in the
capacity utilisation, the growth is less a growth in supply and more a
growth in demand. In the last decade the US unemployment rate has fallen
substantially and capacity utilisation has increased. But over a decade
this effect is not major. Most economists think that the sustainable
real GDP growth rate of the USA is at least 4% p.a. All GDP growth is
actual growth of production, but not all of it is sustainable. This
implies that growth must ease back to avoid aggregate demand growing
faster than aggregate supply and generating (or increasing the rate of)
inflation. 

david

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[e-gold-list] Re: A recipe for stagflation

2001-03-07 Thread David Hillary

Vincent Youngs wrote:
 
 David,
 Thank you for explaining some tricky foreign exchange issues.  My
 questions and comments are below.
 ~ Vincent
as are my replies
 
  
   David Hillary wrote:
 
 
  gold for money fixes the nominal exchange rate with other economies to
  the price of gold, in terms of their currencies. If inflation fears are
  ignighted in a large open economy, the price of gold will rise, as will
  the nominal exchange rate of the SOE. This exchange rate movement has
  almost nothing to do with the factors that equilibriate international
  trade and finance for the SOE. Thus the appreciation of the nominal
  exchange rate leads to downward pressure on domestic prices (deflation).
  Thus the real effective exchange rate is arbitrarily jacked up,
  exporters and import competitors go broke, deflation drives the real
  interest rate in the SOE sharply upward, asset prices crash and a
  recession is likely to occur.
 
 But if inflation is occuring in the other countries, wouldn't it be likely
 that the other countries' inflation for prices of products the SOE exports
 might match their inflation for the price of gold, thus causing the SOE
 exporters to receive the same amount of gold in exchange for their exports
 as before?  I can see your point if the price of gold rises speculatively
 out of proportion to other products, but speculative rises in gold's price
 don't seem to last all that long.

If (USD) inflation fears and inflation are ignighted, say between March
and May 2001, the price level in the USA might rise say 4%. But if this
inflation is expected to persist, the price of gold will rise a hell of
a lot more than 4%! Perhaps 30%. Thus the real price of gold in terms of
US perchasing power has increased by more than one quarter, as has the
real effective exchange rate of the gold for money SOE. Like the stock
market, the price of gold is determined by *expected* events, the
outlook for the future, which can change drastically in a matter of
months given a few political events, a few statistics, a few
bankruptcies and a speech by the Fed chairman. The price level, however
takes a few years (at least) to adjust to an economic shock when the
nominal exchange rate is fixed, requiring a price level adjustment. The
cause of this difference is price rigidities particularly in the labour
market, property rental market and supply contracts. (By contrast stock
and commodity prices are perfectly flexible.) 



 
  Yes, deflation and inflation, when the nominal interest rate is fixed at
  the world interest rate or a large economy currency interest rate, has
  very large effects on asset prices. If the demand for fixed assets is
  expected to grow in nominal terms by 5% p.a. along with inflation and
  replacement costs, and the nominal interest rate is 5%, the that is the
  same as a zero discount rate with price stability. An asset expected to
  last 20 years will be worth 20 times the current annual hire. If the
  interest rate stays at 5% but price stability is expected, the asset
  falls to 13.09 years hire. If the price level is expected to fall 5%
  p.a., the asset falls to 9.08 years hire. I guarantee that the property
  market will crash in Ireland when the inflation ends and the deflation
  starts and the nominal interest rate is about the same. Inflation and
  deflation have consequences.
 
 
 What do you mean by "annual hire"?  How do you arrive at these figures of
 20, 13.09, and 9.08 years hire?

annual hire is just the 'rental' value of the building, which is the
'rent' of the property less the ground rent of the land. 

The figures are calculates as follows:
P=sum{n=1 to 20):(((H1*(1+g)^(n-1))/((1+d)^(n-1)))
where P is the market price of the asset, n is the year, H1 is the Hire
vaue in year 1, g is the Hire growth rate, and d is the discound rate.

This simplifies to 
P=sum{n=1 to 20):(H1*((1+g)/(1+d))^(n-1))

where d=g=0.05 the answer is simply: 
P=sum{n=1 to 20):(H1)
 =20

Where d=0.05 and g=0 the answer is:
P=sum{n=1 to 20):(H1*(1/1.05)^(n-1))
 =13.09

where d=0.05 and g=-0.05 the answer is
P=sum{n=1 to 20):(H1*(0.95/1.05)^(n-1))
 =9.08

The easiest way to calculate these values is to use a spreadsheet.


 
  
   The
inflation and deflation in a SOE that used gold would be significant and
arbitrary, and cause asset prices in the SOE to be highly volitile.
  
   No.
 
  If the price of gold in terms of other currencies rises and falls
  substantially, as it does now, a gold economy will suffer appreciations
  and depreciations of its exchange rate which will force price level
  adjustments to occur. Price level adjustments will inflate or deflate
  asset prices.
 
 The asset prices themselves might be volatile, but at any given point in
 time, wouldn't the amount of goods that the asset can be traded for still
 be the same, because the prices of the goods also rises and falls along
 with the asset prices?

The asset prices, in terms of gold will be volitile. The price 

[e-gold-list] Re: A recipe for stagflation

2001-03-06 Thread Bob

David Hillary wrote:
 
 Claude Cormier wrote:
 
  A recipe for stagflation
 
  http://www.goldeconomy.com/thepriceofgold_08.htm
 
 why oh why do 'goldbugs' seemingly always seem to predict a large rise
 in the price of gold in the medium term?
 
 The price of gold in terms of US dollars has been enaything but stable
 in the last few decades, whereas, the widespread (near universal) use of
 USD in the $10 trillion US economy, makes the price of USD stable in
 terms of goods and services, at least in the short term.

You are comparing "last few decades" to "short term". You may be
comparing apples to oranges here. I can't say though as I don't know 
how long (or short) "short term" is.

 Variable inflation of this currency attached to the economic giant makes
 the price of gold, an inflation hedge, makes for wild changes in the
 real price of gold, as expected inflation changes. 

Maybe, maybe not. It depends on what country you're living/working
in. The _*real*_ price of gold would be gold priced in coffee 
(hopefully Capulin, I've been spoiled for ever) or other things
that have intrinsic value.

The emergence of
 inflation when nominal interest payments are heavily taxed, can easily
 make the real return on savings less than zero, in which case savers

 look for alternative stores of value. Combined with economic uncertinty
 over the direction of stockmarkets and the real economy, and gold
 becomes a very good investment, a stocks become risky and poor
 investments.
 
 This makes gold a poor currency for a small open economy to adopt, and
 makes gold a poor unit of account, measure of value and store of value.
 If gold were the general means of exchange in a large open economy or in
 a closed economy, its performance as a unit of account, measure of value
 and store of value would be much better.

I don't see how size has anything to do with it.


 The adjustment required of a small open economy that adopted gold as
 money  would be difficult and painful. If US inflation and inflation
 fears were ignighted, the real exchange rate of the SOE would rise very
 sharply, and require downward adjustment of wages and prices in the SOE.

Huh?

The price in gold (priced in USD) wouldn't affect local business within
the SOE (small open economy) that is using gold as money. Who cares
what the price of gold in USD is if locally I'm getting paid in
gold and spending gold. If there's an inflation problem in the US,
and the SOE wants to buy some US goods or services, that's not much
of a problem. The money of the SOE (gold) has been buying more
USD to be able to buy the US's goods and services, as the prices of 
goods and services have been going up (in USD, not gold) in the US. 

On top of that, if the SOE has been using gold for .. say 2 decades,
it's probably got a hopping, maybe screaming economy because it
has been attracting capital (including brains) because of it's more 
stable prices, businesses are able to do better (compared to the 
US) planning because of more stable local prices.

 This deflation would cause land and building prices to collapse. 

No.

The
 inflation and deflation in a SOE that used gold would be significant and
 arbitrary, and cause asset prices in the SOE to be highly volitile. 

No.

The
 situation would be similar to SOE such as Hong Kong, where the currency
 is fixed to the USD. 

No.

Property prices fell by around 40% in 1998 in Hong
 Kong as inflation turned to deflation. Unemployment rose from about 2%
 to over 6%, real GDP fell by over 5%. By contrast Taiwan and Australia,
 both highly exposed to the Asian Crisis, continued to register
 significant growth and asset prices did not crash and unemployment did
 not rise. This is largely because their nominal exchange rates fell,
 reducing the need for adjustment and the extent to which sticky prices
 cost output.

I can't say one way or another about the above.

Bob

"We assume that the currency which is in all our hands is fixed, 
 and that the price of bullion moves; whereas in truth, it is the 
 currency of each nation that moves [i.e., loses purchasing power], 
 and it is bullion which is the more fixed [i.e., maintains
 purchasing power]." - Henry Thornton, An Enquiry Into the Nature 
 and Effects of the Paper Credit of Great Britain, 1802. 


-- 
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Use gold as money. It's easy. Create a free e-gold account here:
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Fingerprint:
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[e-gold-list] Re: A recipe for stagflation

2001-03-06 Thread Bob

David Hillary wrote:

 This makes gold a poor currency for a small open economy to adopt, and
 makes gold a poor unit of account, measure of value and store of value.

Consider what Charles Evans once said about that:

 Subject: 
Re: e-gold: The Real euro
   Date: 
Wed, 7 Jul 1999 07:59:41 -0400
   From: 
"Charles W. Evans" [EMAIL PROTECTED]
 To: 
[EMAIL PROTECTED]
CC: 
e-gold list [EMAIL PROTECTED]
 References: 
1
 
 
 Bob Nugent wrote:
 
 I could really use the argument on why a country should use e-gold
 to back a national currency.
 
 It has been several years since I calculated the estimates, so I don't have
 usable numbers at hand, but there are many countries with national incomes
 smaller than the largest corporations.
 
 If memory serves, I found two dozen countries with GDPs that were lower
 than the annual income of the New York Times.  Disney Dollars
 notwithstanding, large corporations do not normally have their own
 currencies; it makes no sense for small national economies to have their
 own currencies.  (In fact, the only reason that governments of any size get
 involved with currency issuance is to fund schemes that would be impossible
 otherwise, including social welfare systems, wars, and make-work programs.)
 
 It makes as much sense for the govenment of a small or poor nation to
 undertake all the steps involved in managing a currency as it does for each
 one to have a steel mill and a national airline.
 
 Generally, there are two categories of alternatives: "currency boards" and
 "dollarization."
 
 By "currency boards" I mean, very broadly, any mechanism whereby local
 currency is issued only if there are equivalent reserves (precious metal,
 US$, deutschmarks, etc.) to back it.
 
 By "dollarization" I mean the official abandonment of the local currency
 for a single foreign currency.  For example, in many Caribbean countries
 the US$ is the official currency and the Swiss franc is the official
 currency in Liechtenstein.
 
 In a genuinely free place, there would be no official currency.  People
 would use whatever medium of exchange they chose.  However, one expects
 that it would be a relatively hard sell to get any government to abandon
 the notion of its having an "official" currency altogether.  Granted, this
 is possible, and perhaps someone on this list knows of at least one
 real-world example, but it is not the sort of thing that would have
 universal or even wide appeal worldwide.
 
 So, we have a situation where, for example, Steve Hanke -- who has made his
 name in economic policy advocating and designing currency boards -- is now
 calling for widspread dollarization.  His "dollars" of choice are the US$,
 Japanese yen, and the euro.  Occasionally, he'll mention gold favorably in
 a parenthetical, but then dismiss it gently without further analysis.
 
 In recent years, we've seen turmoil in the yen, and commentator Deroy
 Murdock has referred to the euro at "the white man's peso" in recent
 articles.  With the massive debt overhang and unfunded obligations on the
 US$, we might be looking at three-out-of-three weak currencies.
 
 Asking the people of Argentina, Mexico, and Cuba to trust the US Federal
 Reserve more than they trust their own Finance Ministries might make sense
 in incrementally, but it merely pushes the problem out of the living room
 and onto the lawn.  It never really goes away.
 
 There will never be a perfect money.  This is because markets are chaotic,
 and relative values change constantly.  Asking for a perfect money is like
 asking for a wave-free ocean.  We might want to minimize the incidence of
 tidal waves storm surges, but we will never get rid of the business cycle
 (tides) or the fortunes of individual economic agents (waves).
 
 Given that there cannot be a perfect money, we must choose among available
 options.  The 'usual suspects' are US$, Japanese yen, euro, and gold.
 (Some people advocate managed baskets of commodities or paper backed by
 market index funds, but these are vulnerable to all the information
 problems of fiat currencies and they subject monetary authorities to higher
 storage and delivery costs than precious metals.)
 
 In the same way that e-gold is the optimal mechanism for a company to adopt
 precious metal as its money of choice, e-gold can serve small national
 economies more effectively than any other existing system.
 
 At its root, e-gold is title to precious metal.  In this way, it is
 precisely the same as holding metal in reserve.  However, e-gold is much
 more useful that physical metal in exchange.  For instance, it is very
 difficult to buy a cup of coffee with gold and get correct change.
 
 Soon, an announcement will be made to this list and to the media at large
 about a product based on e-gold that will have no agio ('storage fee') or
 transaction processing fee.  The government of a small or poor nation 

[e-gold-list] Re: A recipe for stagflation

2001-03-06 Thread Claude Cormier

On 7 Mar 2001, at 9:19, David Hillary wrote:

 why oh why do 'goldbugs' seemingly always seem to predict a large rise
 in the price of gold in the medium term?

For sure there is almost always one goldbug somewhere that is 
suggesting much higher prices ahead. I agree with you on that. 
But, in the same way,  you will  always find  equity bulls and new-
era economists that are there to suggest that stock prices will be 
higher in the years to come.

But if you take these individuals one by one, you will find that they 
change their opinions from time to time. Like many goldugs, I've 
been bearish in the past on occasion.  
 
 The price of gold in terms of US dollars has been enaything but stable
 in the last few decades.

Of course you are right. However its supply has been at a constant 
2% or so per year. A charracteristic that is enviable for a medium 
of exchange.

So the question is why, since 1970, have gold exchange rates  been
 so unstable and volatile. It is like a pendulum, once you put it in motion,
 you must wait many cycles before it stabilize.The movement was
 initiated in 1971 when the USD went off the gold standard. Until 
gold is again the standard, there will continue to be controlling forces
 that will prevent the true equilibrium level to be reached. 

Thanks to gold high divisibility as a unit of account and a fantastic 
network that allows immediate transfer of the smallest fraction of a 
gold bar, gold can again regain its role as the standard of money.

 USD in the $10 trillion US economy, makes the price of USD stable in
 terms of goods and services, at least in the short term. 

You said it, In the short term. True for now. But gold stability is 
notable in the long term. I can still buy a small bungalow with 
10,000 grams like I could in 1950. 

The USD economy is a US$10 trillion economy... Well I think it is 
more than that.. but anyway.. I agree with you... the gold economy 
looks small at 1 trillion USD. But that is no big deal... all we need 
is gold at $3000 USD and we have parity. g 
 
Such an exchange rate with the USD most certainly make sense 
when you compare gold current rate with the price of a few other 
resources that you can find on the planet. In terms of rarity, gold 
should be at least USD$1000 when compared to a basket of other 
metals. 

It is a matter of time. Gold will impose its discipline

Claude

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