So besides my last post, I also had a status msg on Facebook with my reaction to Ron Paul’s rant about gold. Among others, a friend commented the following:
It’s not magic… money is only money because someone says it is. Fiat or gold/silver standard alike. The problem with a backed currency is that it is difficult to get liquidity as overall value increases. The problem with fiat currency is that the government just prints more money instead of raising taxes. If overall national wealth has not increased, this causes inflation, hurting the poor and working class the most. When a national debt is called in and the government prints it all, hyperinflation happens, wiping out nearly everyone. In the campaign, Ron Paul actually advocated competing currencies (NOT a pure gold standard), where you could buy your bread with a Federal Reserve Note, a euro, or a silver certificate. Keep in mind that FDR actually made it a crime for a private citizen to own gold from 1933 to 1971 (when we went to pure fiat currency), demanding it be turned over to the government. Of course, it’s not like the media or schools will highlight any of this…
“Fiat money” means paper money (or coins, or marbles, or any item used to represent value) that is declared by the government (by “fiat”) to be money.
My friend’s argument is that fiat money exists only as long as everyone agrees that it exists, and thus we’re each always at risk that the system will break down and our bank balance will disappear, wiping out our life savings without a trace. Only by physically possessing something like coins made out of an amount of gold worth their face value can you be sure that your money will survive an economic calamity.
It’s worth thinking about that a little bit. First, even if the only cash in circulation were gold coins, insuring yourself against a banking collapse would still involve keeping money under your mattress. As soon as you bank your gold, you’re right back where you were with paper money because your gold only exists as an IOU from the bank.
Second, and related, the idea of the money supply being controlled by the gold supply is an illusion anyway. If the bank kept every depositor’s full balance in the vault, there wouldn’t be anything available to lend. Of course they don’t keep everyone’s money under a giant mattress, they keep the amount they expect people to actually take out, and lend the rest. So for example, if the bank keeps 50% of all deposits in the vault and lends out the other half, the economy now contains 150% of the original deposits. When the lendees pay back the loans with interest, the money supply goes up even more.
So unless you’re also going to ban moneylending, I don’t see how a gold standard constrains the money supply. As I mentioned last post, though, it would constrain the government from printing money to pay down public debt, which would be a good thing.
More philosophically, fiat money isn’t really money ‘just because someone says it is’. Money – paper or gold – exists for good natural reasons, and people are going to use something as money no matter what else is going on. And whatever money is in circulation is always “backed” by the total value of goods and marketable skills present in the economy. Which goes to what I presume is Clint’s argument in his last comment (“no cash = fascism”) If the government actually denied individuals the right to trade in anything other than government-defined currency (call it “points”) then for good or ill you’ll be forced to use official channels for all your buying and selling.
Of course things like that have been tried from time to time (see “Soviet Union”) and the inevitable result is that, due to the aforementioned natural reasons, a black market always springs up (see “Prohibition”) And that’s why the whole notion of centrally planned economies doesn’t make sense. Economies are a natural phenomenon, exactly like an ecosystem, or a weather pattern. Trying to control it invariably leads to demonstrating that you don’t truly understand it.
So I was listening to C-SPAN Radio this afternoon, and Ron Paul was talking. He started off with a great libertarian take on the GOP’s current situation. Among other things, he said that Obama talked a good game about ending the Iraq war before he was elected, just like Bush talked a good game about ending “nation-building” before he became president and initiated two major nation-building projects. It was a great speech.
Then he launched into a rant about how the Federal Reserve is a plot to take away our freedom, the monetary system can’t possibly work, and justice can’t be restored to the universe until only gold and silver are legal tender.
Gold Standard believers tend to sound like conspiracy theorists, especially when they spin vague conspiracy theories about how central banks and monetary policy are tools of de debbil in his war for our immortal souls. The thing is, if big government is de debbil, then they sort of have a point.
There’s nothing magic about gold. It’s shiny, and as a group we have 4,000 years of social conditioning to believe it’s valuable. And it does have intrinsic value. Gold doesn’t corrode, break, flow down the drain, or evaporate on a hot day. It’s neither flammable nor edible. If you put an ounce of gold under your mattress, in 1,000 years it will still be an ounce of gold, exactly as it was when you put it there. You, meanwhile, will be gone with the wind.
And if that works for one ounce of gold, then it works for two ounces, and three, and ten, and so on. If you have three pieces of gold and I have four, we have a reliable way to compare what we have. And it will be mean the same thing tomorrow, the next day, and any day after that.
To put it another way, gold’s durability makes it an excellent medium for storing information. Better, maybe, than paper – though the stuff they print money on is pretty tough. But how about bits and bytes? The thing is, money is basically a point system, so any reliable way of storing everyone’s point total will do.
That said, there is at least one argument in favor of the gold standard, and it’s an important one because it’s precisely why governments prefer paper money. If gold is the only currency, then the world’s money supply is controlled by exactly one thing – the amount of gold people can dig out of the ground. But if gold isn’t the standard, then the money supply is whatever the people with the printing presses say it is.
He who gets to print money is king, and it’s good to be king. Let’s say you took out a mortgage last year for $500,000. This year, you realize you can’t make the payments. Now, you or I would have a couple of options. We could take a second job, sell some stuff and cut back on other expenses, or sell the house and find a less expensive place to live.
But if you can print money, you have another option. You can print money until there’s twice as much money out there as there was last year when you took out that mortgage. Twice as much money means each dollar is worth half as much, so now your mortgage is effectively just $250,000. Great, right? Except that everything that’s valued in money is also worth half as much. For example, everyone’s salary. And to make matters worse, anything you import from foreign economies now costs twice as much. If you’re the USA, that includes gas and heating oil. Some workers might be able to step up to higher-paying jobs, but most will make minimal gains (if any) and retirees are just going to have to get by with half the real income they had before inflation.
But it works out great for politicians, who can ensure their reelection by running up the public debt to pay for patronage programs (or ‘pork’) and then printing money to pay down that debt. Rinse and repeat. The best part, for them, is that the more the government devalues the currency, the more the people – most of whom don’t quite get how this works – will appreciate the government spending programs. The worse things get, the easier the sell is. We’re from the government, and we’re here to help!
Maybe Ron does have a point…
The new US Treasury Secretary, Tim Geithner, announced his reworked financial-sector bailout plan today, with the main headline being its projected $1 trillion price tag.
In case you’re still keeping track, we are now at a minimum, conservatively, of $2.3 trillion just in the past two months for the various bailout plans.
Now, as Geithner has correctly identified (the first Washington official to do so, as far as I can tell), the root of the problem is the huge mass of so-called toxic mortgage-backed securities*. But his plan, weirdly, doesn’t directly address that connection.
To put the numbers into perspective, let’s do some math. Around 3 million homes were in foreclosure proceedings during 2008, on top of a million or more in 2007. Foreclosure is a process, not an event, and it can take months, so some of those might be double-counts. Still, let’s say we have 3.5 million foreclosures, and that that number is a reasonable proxy for the total value of “toxic” assets in the banking system.
The National Association of Realtors says the current median home price in the US is $200,000. That’s for houses that actually sell, so it’s likely a bit high for a foreclosed property, which on average will have sat vacant for months and need several thousand dollars of repairs to be marketable.
3.5 million X 200,000 = 700 billion
That’s an astronomical number, but it’s still just 1/3 of what we’ve committed to spend sofar to treat the symptoms caused by the toxic assets sitting like a lump of mucus at the bottom of the financial sector’s collective throat. And we shouldn’t need to buy them all. Even half the total should be sufficient to give banks confidence that other banks aren’t going to suddenly collapse tomorrow. And the nice thing about owning real estate is that someday you can sell it and break even – or better. So the ultimate cost to the taxpayer of simply buying toxic mortgage-backed securities could range from a small loss to a small profit. Still, I’m talking about an initial cash outlay in the neighborhood of $500 billion, so let’s go with that number.
Sound better than $2.3 trillion?
UPDATE: Administration officials met with laughter while explaining Geithner’s plan to Congress. At this point, the mere fact of Congress being against something might be a reason to take a closer look, but it seems they were laughing specifically at the idea of “guaranteeing” toxic assets. I probably would, too. Not good.
* Roughly, the problem is that there isn’t a 1:1 correspondence between mortgage-backed securities and actual subprime-financed dwellings, so it’s difficult or impossible to nail down the exact value of the securities. What the big banks do know is that they all own enough of them to turn the bottom line red, and that several formerly respected institutions have already gone under without warning. That’s why the credit markets are “frozen”. You can’t lend money to someone if they might be flat broke or even dead tomorrow.
Reason.tv on the topic of economic stimulus (via Instapundit)
Here’s the thing. The root cause of the economic crisis is the credit crisis (sorry for all the ‘crisis’ – lack of a better word and all that) and the root cause of the credit crisis is mortgage-backed securities, where the mortgages in question are defaulted subprime loans. The answer is and always has been to put the bulk of these junk investments into federal receivership and get them off the banks’ books so they can start to lend to each other again. We didn’t, and don’t, need $1 trillion of pork projects to get the economy rolling again, but it’s easy to see why career politicians want this. Forcing cash to flow without fixing the underlying private credit problem moves the economic engine from the private to the public sector (at least until the expropriated money runs out) and becomes in effect a back door route to socialism. I know how that sounds, but think about it. The private sector remains immobilized and the government is the only entity that can spend money. Does that sound good or sustainable? Really?
Also, this is a government-made problem because the government made the rules that allowed – for the first time ever – mortgage lenders to package loans into securities and resell them. If you’re looking for whom to blame, it’s basically two groups: the mortgage brokers who wrote bad loans, knowing they’d be resold right away and become someone else’s problem (and their bosses who allowed the practice – not every bank partook) and the politicians and regulators who set up the system that allowed the abuses. For example, Chris Dodd and other ‘friends of Angelo’.
* TTAC elevates a reader comment telling Detroit what it has to look forward to as the Big Three become the Big One (or none). It’s not a fun subject to think about, but given Washington’s total failure to analyze and address the financial crisis, we’re all likely to know a lot of people going from good jobs to welfare.
* A collection of quotable quotes from Overcoming Bias. My personal favorites:
People want to think there is some huge conspiracy run by evil geniuses. The reality is actually much more horrifying. The people running the show aren’t evil geniuses. They are just as stupid as the rest of us.”
“Truth is not always popular, but it is always right.”
Clint’s (presumable) favorite:
“Rule of thumb: Be skeptical of things you learned before you could read. E.g., religion.”
— Ben Casnocha
* Elsewhere in the real estate industry, Home Depot will do a moderate (by today’s standards) layoff and close the Expo Design Center chain.
“Even during the housing boom, Expo never reached our financial goals,” Chairman and Chief Executive Frank Blake said during a conference call with investors.
Maybe because it was the most expensive source of house parts I’ve ever personally seen? Even in good times the base of customers who throw money out the door without a care isn’t big, and it dries up suddenly and completely when economic conditions get sporty.
* DCist expresses interest in Bombardier’s PRIMOVE tram system, which appears to use induction to power streetcars with a third rail safely out of sight under pavement. As much as I like trains and streetcars, I think hybrid buses are a better solution. You don’t have to do anything to the street to run them, so you can change or extend the route as needed. And without a doubt, they’d be cheaper to buy and operate.
* And speaking of total government failure, I’m boldly predicting that California will be the first state ever to go into receivership. Why? Surprisingly, direct democracy is a big culprit – certain spending programs and tax caps have been taken out of the legislature’s hands by various referenda over the years, leaving limited options for cost-cutting. Though, not quite as limited as this…
Eliminate Inspection and Maintenance Review Committee — This would result in saving of up to $165,000.
Eliminate Bureau of Naturopathic Medicine — This elimination would result in a savings of up to $130,000.
Eliminate Telephone Medical Advice Services Bureau — This elimination would result in a savings of up to $157,000.
Thing is, they did foresee it – they just didn’t do anything about it.
At the height of the subprime mortgage boom, Citigroup’s CEO, Charles Prince described his position in an interview with the Financial Times – “As long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
That guy saw the bubble – correctly – as a game of musical chairs. What he didn’t see, maybe, is that in this game, all the chairs are still there every round …until the round where they’re all gone.
For my part, I saw the bubble coming …until I stopped seeing it. I’d always known that you can identify a bubble when people with no special knowledge of the market (whatever market it happens to be) believe themselves to be experts because they (and everyone else) are making ridiculous profits. What I learned in this bubble is that the end is in sight when I begin to question that basic wisdom and start thinking maybe it really is “a new world”.
Lesson of 2008: There are no new worlds.
So the $77m parks and park facilities bond referendum passed, 68-32. Let’s see. We’re in a real live recession, complete with revenue shortfalls, rainy day fund withdrawals and negative economic growth last quarter, and the answer is to …rack up another huge debt for something that frankly isn’t critical. Brilliant!
I’ve been too busy to post this week, but here are some of the things I’m looking at:
* Stephen Bainbridge is hinting darkly that we’ll need to keep a close eye on our free speech rights under an Obama administration. The power of blogs: the very first commenter takes him to task for exaggerating the difference between Democrat and Republican smear tactics – and isn’t deleted or banned.
* The ZAP Xebra electric city car (via Instapundit) – I like the discussion of the actual driving regimes and how the electric car meets most of an average person’s mission requirements in spite of its slack 45mph top speed. I did a similar analysis in order to determine that a 200-250cc scooter would meet all my commuting requirements, at twice the mpg of my car. It’s been one of the best large purchases I ever made. It pays to step back and take an open-minded look at how you really do things.
* Jeff Lipshaw at The Conglomerate is praising GM’s board of directors for doing its job and panning the ridiculous idea of merging the General with Chrysler. Yes, upper management really suggested that. Jeff also wonders what kind of government remedy is really appropriate for problems caused by executive stupidity: “But what can we do about “mere” incompetence that imposes severe social costs? As I’ve been telling my corporate law class these last few weeks, current doctrine provides very weak to nonexistent remedies for negligence, no matter how widely its effects are felt.” Well, for starters we could try setting and sticking to a public policy of not socializing the consequences of bad business decisions.
* AutoBlogGreen has video of Audi of America Executive VP Johan Van de Nysschen discussing the “modern diesel engines” Audi is about to introduce in its US models. Vicky, Sean, Larry and I rented a diesel minivan for our trip to France in 2004, and I’d have easily believed it was a gas engine. Smooth, quiet, powerful and no starting problems at all. Roughly, the latest Euro diesel vehicles are getting 40-50mpg with low-sulpher diesel fuel, which is around 25 cents more per gallon than 93-octane gas in the US. That’s a decent business case for a diesel.
* And to go along with that, ABG also has a list of ten diesel vehicles coming stateside in the next couple years. If you can afford them…
* Fairfax County is expecting a revenue shortfall and is planning to make the hard decisions to deal with it. Local governments can’t deficit-spend, which may be something to keep in mind when thinking about what kind of elected office qualifies a person for the White House.
* Howard Wolfson has a ‘premortem’ of the McCain campaign up at The New Republic. What is he missing? The media outright campaigning for Obama, which has to have been worth several percentage points (though probably not the whole election)
* Planetizen is admiring Falls Church’s new urbanist infill development. I drove over to Coleman Powersports Monday and the new apartment blocks going up across the street (next to Elevation Burger) seem to be doing pretty well. The whole Rt 7 corridor has changed a lot in the last few years.
I’m saying it is. Pending home sales up 7% in August. Of course that was before all the recent financial fun, so if you’ve got cash laying around (not that I do) now might be the time to start that house-flipping business you’ve been kicking around in your head.
The exact method is TBD, but the newest economic plan is for the government to put cash directly into the credit markets by buying commercial paper (short-term loans that smooth out businesses’ cashflow) The nice thing about this is that it addresses the real problem without putting taxpayers’ money into the hands of the assholes who made the mess – and it won’t cost anything at the end of the day.
The bad part, of course, is that the other bailout is still going forward. So the engine is getting an oil change just in time to stop it from seizing up, but the drunk driver will still be behind the wheel. Brilliant.