Post-Y2K economy discussiongreenspun.com : LUSENET : TimeBomb 2000 (Y2000) : One Thread
I'm wondering if Y2k might give the government an opportunity to develope a currency backed by a gold standard. Here's my thinking.
Yordon predicts a year of disruptions and a decade of depression. Y2K could lead to many business bankrupcies, personal bankrupcies, a depressied stock market, and little tax revenue to service federal FDIC deposit guarantees, debt interest obligaion, social security and medicare obligations.
Rather than government default, I'd imagine much reassurance that all obligations would be met...eventually. Then, in the face of little tax revenue, when currency printing is again up and running they would print their way out of their obligations. That would lead to rampant inflation, soaring gold prices and an outcry by the public to "do something".
I am wondering about the competion potential between the gold-backed Euro and the dollar. The government might stabilize rampant inflation with a new gold-backed currency once it had printed itself out of it's obligations. With gold prices soaring the Federal Reserve and Central Bank gold reserves would be much more valuable. And perhaps an alliance of nations, in order to stabilize their economies and hyper-inflated currencies would agree to join the new gold-backed currency. And then the gold-backed currency would be in a position to better compete with a gold-backed Euro.
It seems the government would win by paying obligations with inflated dollars, would win by having gold reserves worth more, and would win by having Y2K be the reason for a new gold-backed currency to compete with the Euro.
Questions; is this a plausible possibility? How likely is it? Would anyone share an alternative possibility? Thoughts? Comments? Please no flaming or trolls. This is a serious idea I've been mulling over and wish to discuss with some of the folks on this forum whose ideas I have come to respect over time.
-- Leslie (***@***.net), April 28, 1999
The short answer is "no." The world will not return to a gold standard. There are many reasons this will not happen... some very geeky economist reasons, some political reasons and some just rational. It is early and I am just checking my email... so forgive me if I decline to write the first chapter of a book on the subject this moment. A return to the gold standard does have fans, particularly among those who loathe the Federal Reserve system. But no central government will return to a system where the ability to use monetary policy is vastly diminished. Nor is there enough available gold on the plant to support the liquidity needs of the modern global economy. If you want, I can recommend some texts that are far more authoritative than me. Now, where my coffee?
-- Mr. Decker (firstname.lastname@example.org), April 28, 1999.
I thoink Mr. Decker hit the salient points. No rational government nowadays, having seen how well their economies respond to money policy intervention, will readily give up the handle on their econmomy.
And when you look at the level of inter-national-bank transactions (not terribly gramatical but it parses out OK), you can see that there might be some problems in terms of setting world gold standards. Simply doing the international balancing currency to currency would prety much take all the gold available, even at highly inflated value rates. Yes, the Euro is gold backed, but NOT to the extent that most nostalgic Americans think of when they talk about gold backed currencies. I believe the Euro is about 25% gold backed.
Hopefully, Mr. Decker will list some sources, as I would LOVE to expand my understanding here.
-- chuck, a Night Driver (email@example.com), April 28, 1999.
Leslie: I believe the concept of currency will change, but never return to any natural-resource backed form. Some changes within the next 2 years will contribute to exchange rate stabilization and that will be beneficial to all...except hedge funds (which we could do without anyway).
-- PNG (firstname.lastname@example.org), April 28, 1999.
At the risk of soundin trite. I wish Mr. Decker would show me one government on ths planet which has been logical in the recent past. Or for that matter the present. I for one. do not barr any possibility of any thing when it comes to gov.org.
None of them so far has displayed a lick of fiscal sence The Dutchman
-- Dutchman (Electric@Shock.owee), April 28, 1999.
Leslie & all - a hidden assumption lies behind this thread so far: Govs & Business & Banking (of some sort) still able to function on a natl and intl level. Given this hidden assumption, one could assume a low probability for a gold standard. (Check out the essays at Gold Eagle, the forums there and at Kitco - lots of info [not going to say a gold mine's worth ;-) ] ).
imho this thread's hidden assumption is not well thought through. Using Gartner's assessments of various natl govts readiness, it appears to me that a very many natl govts as they are presently enacted day to day, just won't make it. One can make a case, which would be argued into the ground, that all the G7 govts might be in this boat. State, provincial, county, & city govts, of all stripe and hue appear, as a class, to be woefully unprepared, having a high probability of failure in their currently constituted bureaucratic form.
Using Gartner's assessments regarding the state of SMB's (small & medium sized businesses), one can project a profound change in the national employment landscape, a change toward massive unemployment.
Using Gartner's assessment of Big Business, it is not a far reach to assume that some common brand names and products will disappear.
These scenarios will affect, apparently, at least the G20 nations, and fallout will probably extend down the ladder.
This is the context which appears to me to be a much more realistic one in which post-y2k currency should be discussed.
imo, if the current large scale governing bodies and currency creation bodies are unable to maintain, a popular response will be the continued use of that particular nation's paper and metal currencies until the paper wears out. One might also assume that the buying power of these currencies will probably vary from region to region. One can also assume that there will also be a world-wide proliferation of regional competing currencies issued by those holders of large amounts of gold and silver - these could range from very wealthy individuals, to banks, to big businesses, to regional govts.
imo, the one thing that we shouldn't assume about the post-y2k world, unless y2k be truely the "bump in the road", is that it will resemble, other than in a casual fashion, our present world.
-- Mitchell Barnes (email@example.com), April 28, 1999.
I guess my question includes how confidence in currency when banks and the government either default of the mountain of debt they possess or the government prints its way out. Might not a new alliance currency similar to the Euro, perhaps only partially gold- backed be plausible? After Y2K might there not be a "crisis in cofidence" regarding money policy that would need to be overcome to stabilize and jump start the economy? Mr. Decker, any books you could recommended would be appreciated. Comments?
-- Leslie (***@***.net), April 28, 1999.
Perhaps the current condition of Russia suggests one possible mode of response to failure of a national economy.
-- Tom Carey (firstname.lastname@example.org), April 28, 1999.
I found my coffee. Dutchman, I never said governments were logical... just self interested. How many governments have knowingly given away power? Monetary policy is an incredibly powerful tool and I think they plan on keeping it (complete with the Federal Reserve system).
Forgive me, but I have not found time to develop a reading list. I want to suggest texts of interest to those outside the field of monetary economics. Even Milton Friedman admitted that while he understood the concepts, the esoterics of monetary theory had moved beyond him. Monetary theory is one of the most quantative areas of economics... and not my personal favorite. I will be back after I check the big bookshelf.
If you wish, you can find a large number of articles written by "gold bugs." Remember, dealers in bullion and coins are participating in the free market system for the profit... not as a public service. Alarmists like Gary North have been advocating owning gold for 20 years. I should note that this investment strategy has been far from successful.
If you are worried about inflation (and you might be given the injection of liquidity provided by the Federal Reserve) you might think more broadly than gold. The definition of inflation is broadly increasing prices. This means all real assets increase in "value," not just precious metals.
You might consider assets that have "use" value, not just "transaction" value. For example, I own a large tract of raw land. It has transaction value because I can sell it. As prices rise, so does the value of the land (in general terms). It also provides copious amounts of firewood and a wonderful place to work on a quiet weekend. Unlike gold, it cannot be stolen from a safe. It produces value just by the growth of the harvestable trees while gold produces nothing.
First, I will wager (and give odds) that we will not return to a gold standard, nor will we come into a time where gold serves as a medium of exchange. If economic times were truly apocalyptic, people will seek real assets that have use value.
-- Mr. Decker (email@example.com), April 28, 1999.
The reality is the economic shakeout of y2k is not very easy to predict, in other words assume nothing and learn from the past.
At a minimum gold has always had recognized intrinsic value, it maintains the majority of its value and in times of turmoil it appreciates against other "currencies". In summary it is at least insurance and at most an opportunity to capitilize. Am I wrong?
-- Will (firstname.lastname@example.org), April 29, 1999.
There are two concepts here.
The first is currency (paper money) backed by gold. I believe that it will happen in the US if that's what people want to do business with.
Who will print the money and back it with gold? A private concern such as American Express. Paper money is more easily portable than gold, so people will accept in trade an American Express traveller's check if they know they can exchange it for gold at the local AmEx office.
The second concept is legal tender laws. "Legal tender" means that the government has designated an item, such as its own dollar, to be legally acceptable as payment for a debt. Should the creditor refuse to accept the legal tender, the debt is considered paid anyway.
The government can outlaw (refuse to enforce) contracts calling for payment in something other than legal tender. But the government cannot prevent barter of a gold-backed currency in exchange for goods and services between consenting adults.
-- GA Russell (email@example.com), April 29, 1999.
The only way to revert to the sanity of a gold standard is to shut down the unConstitutional central bank, reset the dollar to a fixed amount of gold or silver such that all money once again represents a store of wealth rather than an unConstitutional, depreciating unit of debt, and place strict and sensible limits on the level of fractional banking employed thereafter.
Y2k might shut the banks down, for a bit; the rest won't happen ever again. Maybe, in some distant, post-nuclear future, mutated mole people will chance upon the same sane monetary arrangement the US once enjoyed.
-- taxstooge (firstname.lastname@example.org), April 29, 1999.
Mr. Decker is very articulate and a number of his points are indisputable.
What is not indisputable is that when we humans must face uncertainty, we tend to turn to those things that we believe to be "more certain." As long as our economic "health and expectations-of- health," remain optimistic in the minds of most of us, the various aspects of our financial "certainties" and their "institutional manifestations" will remain as they are.
Should some event - or series of events cause significant financial uncertainty, then we humans will entertain whatever changes in our financial institutions we believe will bring a return to that state of health we had previously enjoyed. The words of Santyana (sp?) repeatedly come to mind...........
As a closing point: How many of you know that Alan greenspan was once a member of Ayn Rands "inner circle?" During that period of his life (around the time he was a COBOL programmer) he wrote many articles on socio/politial/economic issues. At that time he was an ardent and articulate advocate of many ideas. One of them was the idea that any money must be ultimately based upon a rational and objective standard of value. He has repeatedly pointed out that the time-tested collective judgment of mankind has continually and repeatedly rendered the decision that gold serves this purpose better than does has anything else.
Perhaps Mr. Greenspan has changed his mind with repsect to whether that purpose is best served by gold. I would be willing to wager - with an enthusiasm equal to anyone else's on this forum however, that he has not changed it with respect to his reasoning that underlies why there MUST always be "a gold."
It is like the modern phenomena of "Just-In-Time" inventory. It seems to be working fine. As long as it does it so it is of significant benefit to each of us and all of us. However, the ability of JIT to serve this purpose is predicated on an immense chain of cause and effect relationships. Should this causal chain become disrupted, then to that extent we shall seek a return to our previous "inventory certainty." So too with respect to our current financial system with its "Just-In-Time" financial instruments.................
All thoughtful comments eagerly solicted.
-- Dave Walden (email@example.com), April 29, 1999.
While I await any book recommendations from Mr. Decker, your post reflects some of my thinking. I am aware that Greenspan believes in a gold standard of some level to back currency; it is an easily recognized store of worth, it is a historic store of worth, it has been a dependable store of worth relative to alternatives. It seems to me that the disruption of the banking system, even Senator Robert Bennett acknowledges is problematic internationally, would distroy confidence (think Japan savers, Germany, France, etc..)in paper currencies not backed by ANYTHING.
The Fed Reserve printing "liquidity" for banking is inflationary which would disrupt the stock market and cause a herd "flight to quality"; government bonds. The Japanese, as well as most of the world consider the US the last great "refuge" from their economic woes. Wouldn't they perhaps wish to sell their stocks and bonds come Y2K?? How is the US going to "honor" their debt obligations (bond interest, FDIC insurance)post-Y2k, with reduced tax revenue due to US Y2K business failure and increased unemployment?? The only conclusion I can come up with is reassurance of the herd and turning on the printing presses which would cause rampant inflation.
It seems to me, with Y2K disruptions ongoing through the year 2000, people would eventually demand some value backing of fiat money!! And gold is familiar, historic, dependable as a store of wealth. The idea of a private currency, such as American Express, is intriging. To prevent private currencies from developing, and retaining monetary control, it seems the government might be forced to some level of gold backing for a currency to restore confidence in the monetary system. At least this makes sense to me. Comments appreciated....
-- Leslie (***@***.net), April 29, 1999.
Private currencies are the wave of the future. If you want to look into this further in a brilliant book, go to your library or favorite bookstore and find "THE SOVEREIGN INDIVIDUAL: How to Survive and Prosper During the Collapse of the Welfare State" I believe the author's names are Lord Davidson and Reese-Mogg.
-- Jim the Window Washer (firstname.lastname@example.org), April 29, 1999.
I am ruminating over an evening "toddy" so forgive my errant hand. I was given a computer game recently called Imperialism II. The game covers the period when the Great Power colonized (and exploited) the new world. The game rather accurately captures the mercantilist spirit of the day... the quest for silver and gold. While I am a bit tired for a full recount of the 1500s to Adam Smith, here is how the story turns out....
"More sophisticated proponents of the mercantilist doctrine understood that the real wealth of a nation was not its hoard of precious metals, but its ability to produce. They correctly saw that the influx of gold and silver from a favorable trade balance would serve as a stimulus to economic activity generally, thus enabling the state to levy more taxes and gain more revenue. Only a few states that practiced mercantilism, however, understood this principle." (PEI Research)
We moved beyond a commodities-based economy centuries ago. The coin of the new realm is knowledge... perhaps it always has been. An advantage in technology is worth far more than an stack of inert metals. The new economy (as mentioned in "The Sovereign Individual") is information driven. Aside from some commerical applications, gold is losing relevance. Today's leading enterprises are not those of the last few centuries... mining, timber, railroads, etc. They are the information age companies. How many companies currently have a store of gold? Why not? It is less valuable than other commodities like information, patents and human capital.
Before I ramble on too long, I promised a few books. Before you dive into economics, I suggest a brief overview of the dismal science. "The Worldly Philosophers" by Heilbroner is the classic, but I like the humor of "New Ideas from Dead Economists." "The Armchair Economist" by Landsburg will make you laugh and think... and you can find it in paperback.
After an appetizer, it's time for "Secrets of the Temple," a great Federal Reserve primer. Warning: It is more than a afternoon read. After you polish that off, go back to a historical look at economics with "For Good and Evil : The Impact of Taxes on the Course of Civilization" by Charles Adams. (OK, you can skip it, but it is a great read). Next, "Manias, Panics and Crashes : A History of Financial Crises" by Charles P. Kindleberger. Well, you might want a bit of Galbraith before you tackle the rather dry Kindleberger. Try JKG's "Short History of Financial Euphoria." For something more current, you might read "Back from the Brink: The Greenspan Years" by Stephen K. Beckner. I checked and all of these titles are available from Amazon.com (and most are linked together). Secrets of the Temple is the must read to start with. You have my email, let me know how you find the books.
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-- Mr. Decker (email@example.com), April 29, 1999.
Thanks for taking the time to suggest these books. I've have MS and eyesight problematic but will choose a couple to read under my 200 watt light bulb (while electricity holds). Don't you think public confidence in "information" currencies might be shaken for some time due to computer Y2K disruptions? Your thoughts appreciated.
-- Leslie (***@***.net), April 30, 1999.
Mr. Decker, "Secrets of the Temple" by ?? (Galbraith?)
Thanks. BTW, don't meind the name, etc. Beddy bye time causes alphabet frlu. G'NIght.
-- Tricia the Cancuk (firstname.lastname@example.org), April 30, 1999.
I am sorry to hear of your illness. If you lived nearby, I would offer to read a few pages of economics for you... or at least bore you with economic gibberish. I choose "popular" books, so they should be available through a decent public library system. There might audio versions, but I rather doubt it.
It is possible for a country to lose faith in the currency. Perhaps you might recall the phrase, "Not worth a Continental." Conditions would have to become apocalyptic before a handful of $100 bills was used for lighting fires. Panic is possible, but difficult to sustain. If we have difficult economic times, we may experience some crises in the financial sectors... but, as I said before, I cannot imagine returning to a gold standard.
-- Mr. Decker (email@example.com), April 30, 1999.
Leslie & Mr. Decker: Thank you for your responses. I am somewhat new to the Internet and these posting forums. I want to compose a response that continues some of the issues that you and others have been articuating but at the moment I do not have sufficient time. For the moment:
Leslie: It always helps me to remember that the study of "Economics" on the scale of a nation, state, or within any other collective parameter you can conceive, is ultimately the study of individual human beings and our nature - i.e. those attributes of our generic identity that we each share in common, no matter what our individual differences within that common identity may be....
Mr. Decker: As an example of what I am refering to above consider your point wherein you state (paraphrasing): "I doubt if we would ever get to the point where we would be burning $100 bills to keep warm." Note the following distinction. In the study of economics we all must act in an "economic" way to ensure that we are warm. In that sense each of us will always be "economically predictable" - with scientific precision I might ad. However, while all of us will continually be striving to ensure our warmth, only some of us will be burning our $100 bills to do so. Others will be crumpling them up and inserting them between walls to provide insulation. One value choice will insure warmth but once. The other will serve to continually offer us a greater opportunity to keep warm indefintely.
Thank you for your continuing response. I look forward to continuation of this discussion. For me I have to now try to ensure, with an ever increasing level of probability, that I will continue to remain warm in both the near and distant future.
-- Dave Walden (firstname.lastname@example.org), April 30, 1999.
I am not sure I understand. While the econometricians want us to believe economic behavior can be described through Newtonian mathematics, I disagree. At least until I understand the marginal utility of Furbies or Beanie Babies to me. (laughter)
To borrow a phrase about economics... "People respond to incentives; all else is commentary."
Of course, I find some of the commentary compelling...
-- Mr. Decker (email@example.com), April 30, 1999.