Wednesday, June 9, 2010

Thoughts on how the EMU is akin to the gold standard.

Talking ourselves off the edge of the cliff

And how the US has no creditors, and cannot go bankrupt unless it wants to

Posted by bellwether @ 06:42 PM (1386 views)
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29 thoughts on “Thoughts on how the EMU is akin to the gold standard.

  • If you can’t be bothered reading here is the key quote “Both terms (money printing and debt monetization) are not truly applicable to a monetary system in which the sovereign nation has a monopoly supply of currency in a floating exchange rate system, but believers in the gold standard like to invoke these images because they give the appearance that the government is simply creating money out of thin air and being totally reckless”

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  • Great post bellwether: None of the lead players can go bankrupt because we control the medium of exchange. As long as there is trade, there is no point pulling the plug on anyone. We can cancel debt, forgive debt, alter debt and do anything we please. The odd peripheral player can be hung out to dry but who cares? The only way I would be slightly concerned is if another planet held our debt. I’ve been waiting for this post. Whenever I hear about a billion trillion zillion of derivatives and debt, I think of that Austin Powers scene where he demands a ransom of a few million (he has been away for a while and doesn’t appreciate how trivial his amounts are).

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  • My small brain was a bit surprised by this bit:

    “It’s clear in my mind that the Europeans are already talking (and forcing) themselves into recession because they have failed to grasp the true underlying causes of their own crisis. It’s also clear that the British have allowed themselves to be scared into harsh austerity measures which will substantially increase the odds of a downturn there. The recent austerity measures in California are the first sign of the same occurring here in the states.”

    So did California talk itself into a recession? I thought it just ran out of money. Surely California is not in ‘control of the medium of exchange’?

    @Flashman
    “We can cancel debt, forgive debt, alter debt and do anything we please.”

    I’m not really sure what you mean by that. Would you care to expand on that idea a bit?

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  • The reason why the gold standard is so important, is because it CANNOT be manipulated by different power groups in one or more nations – in that sense it is self controlled & policed. The fact that fiat money is merely controlled by ‘other people’, and is subject to all the political & social forces is the great monetary lie – as this becomes more & more clear the real dash for assets will begin.

    Gold simply has the integrity of not being a ‘plastic’ tool i.e. in that can be controlled and manipulated by those political and social power groups. It also therefore a primary abstraction of wealth, unlike some of the ones referred to in the article; the type of money the fed talks about are abstrations of abstrations of abstractions. Moreover, gold is one of the few stores of wealth that ALL men can agreed upon.

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  • This is like training a puppy. Almost sorry it’ll be interrupted by the world cup – surely not as predictable.

    “years decoys”

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  • ‘It’s also clear that the British have allowed themselves to be scared into harsh austerity measures which will substantially increase the odds of a downturn there. ‘

    @Flashman
    “We can cancel debt, forgive debt, alter debt and do anything we please.”

    I’m not really sure what you mean by that. Would you care to expand on that idea a bit?

    Throughout history, lots & lots of currencies have been abandon – along with the debts too. Nothing new in that, create the money, pay off the debt and BINGO!!!

    Remember when Brown and Mandleson wanted the Euro?
    Bet there will be a new dollar in the not too distant future – let’s call it the Obama dollar.

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  • This is like training a puppy. Almost sorry it’ll be interrupted by the world cup – surely not as predictable.

    drop dead.

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  • stillthinking says:

    I disagree. Paper money has value because it is backed by debt secured on labour or assets. This article is suggesting that people have a transcendental desire for money irrespective of real value, and falsely suggests that supplying money is akin to supplying a commodity.
    Also,
    “Contrary to popular opinion, government must spend before it can tax.”
    This is not true. Individuals take out loans and are immediately taxed. Money growth is not dependent on government spending.

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  • Not you HP. Lol. I agree with you. Abstractions… mathemagics…

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  • 9. rumble said…

    Sorry, that was the recaptcha, I was trying to post this:-

    A currency devaluation is a crisis of confidence. Confidence is a real and tangible product of an economic structure and when the government though their action or inaction causes confidence to falter then the result is a currency devaluation. This is the most dangerous type of inflation. And central bankers fear it more than any other type of crisis.
    The retort is often “What other currency would we use if not the dollar?” My answer is that when a car runs out of gas we find a way to get it going again or we result to desperate measures to keep moving forward.

    aspirant what.

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  • Paper money has value because it is backed by debt secured on labour or assets.

    No – it has confidence – and confidence alone!

    In sunbeam

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  • lol.

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  • stillthinking says:

    Confidence that you get either the labour or the assets.

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  • What….? Paper money only has a value as long as people are willing to hold it! Would you hold Zimbabwean dollars?

    Three years ago there were long queues outside every branch of Northern Rock, because savers had lost confidence in the bank. This year or next there could be long queues outside every TravelEx and every Post Office, because people have lost confidence in the pound. That’s where the danger lies – Zimbabwe.

    The risk for America is smaller, because they are a much bigger country. I don’t know if Britain is big enough to get away with forever printing money.

    The longer sterling falls, the less willing people will be to hold it (never mind buy long term bonds). You can already pay with euros or dollars in shops – just use a debit card linked to a bank account in the appropriate currency. If it were possible to have a bank account in gold, and a linked debit card, that would really twist things around. Sadly the term “gold credit card” has already been appropriated by the banks….

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  • HPW gold can be controlled like everything else. You must accept that.

    Have you ever considered that you are accessing the internet on a computer because the world we live in, a world of fiat currency and a free floating exchange system, has allowed enterprise to flourish and to give us an unprecendented standard of living. Are you scared it will all go wrong? Seriously read the article, read the comments to it, think about the ideas. Don’t become entombed in your views – seriously entombed in was the recap phrase

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  • “gold can be controlled like everything else”

    I’m somewhere between agreeing and disagreeing… would it not cause a bit of a stink? A sterling printing press is a single source, gold mines are numerous, as are existing stashes. I’m thinking controlled like the drug trade…?

    “be toasted”

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  • b/weather : ” HPW…..You must accept that.” Good luck! 🙂

    Captcha : “is torment” 😉

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  • “bulrush action”

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  • HPW gold can be controlled like everything else. You must accept that.

    Of course, Gold is controlled, but the degree of control is relative across asset classes including paper.

    Have you ever considered that you are accessing the internet on a computer because the world we live in, a world of fiat currency and a free floating exchange system, has allowed enterprise to flourish and to give us an unprecendented standard of living.

    Yawn, yawn, yawn. You seem to think you have some higher level of understanding from the rest of us. Just remember that paper currencies are all too easily abused by the political class – not always, but usually and completely….

    Are you scared it will all go wrong? Seriously read the article, read the comments to it, think about the ideas.

    It has all gone wrong – but not in the way you think.

    Don’t become entombed in your views – seriously entombed in was the recap phrase

    You just can’t accept that someone may have a different view to what you perceive as the ”truth”. I’m not forcing anyone to buy gold, in fact I don’t really care. It’s effectively just a tool, but a far better tool than heaps of paper which is dependant on mere ”government” – you believe them at your peril.

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  • “You just can’t accept that someone may have a different view to … you ” – that sounds familiar!! Surely HPW its you that is there with yr fingers in yr ears going la li la li la li la.

    i known “yawn yawn yawn” – or something to do with handbags. As for Gold, take a look at this….. infact why bother, you have made yr mind up. What makes me smile about you HPW aka Mr Soundbite, is that b/weather is actually (and admittedly i could be wrong) trying to help you appreciate a different view. Been there done that dont work.

    I subscrinbe to the “this is what i think but if someone postulates an eloquent argument i may very well change my mind” school whereas you subscribe to the “”this is what i think… and thats it”. I bet you are an absolute dream to live with :-).

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  • Standard cut ‘n’ paste reply from techieman, interlaced with the usual personal attacks.

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  • …but getting back to the article, consider:-

    “…..but believers in the gold standard like to invoke these images because they give the appearance that the government is simply creating money out of thin air and being totally reckless….”

    The gold standard, which of course will never return, does seem to satisfy the universal human need for a more tangible asset store of wealth – why do people buy gold?.
    However, the key point is the degree to which ”money [is simply created] out of thin air”; and – in my view – governments aren’t being especially responsible – not just due to the scale of money creation, the bank bail outs, what’s happening with the bonds and other government spending.

    Though, I accept that the true effects of all this will only be borne out when the economies return to some form of normality.

    man machine

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  • i will take that as a compliment – from the undisputed king of the cut and paste ! Nuff said

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  • mountain goat says:

    The US government is not creating money from thin air but it is being reckless. David Cameron last week claimed that the interest on our debt will reach £7bn annually by 2015 unless there are cuts. There is a cost to being in debt besides having the power to endlessly roll over your debt because you control the currency. Then you need to create more debt just to pay interest on the earlier debt. The US debt to GDP is much worse than ours, as bad as Greece’s. Sure the US, Japan and UK have their debt denominated in there own currency etc etc but this strength has already been stretched to its limit. To believe this insures against default in the future seems foolhardy, conventional thinking, over reliant on past performance. Once a paradigm reaches its limit then things change and the old rules don’t apply any more.

    I am starting to get optimistic about Europe. Whether the Euro survives or not, at least they have had to start addressing these issues. I fear that Japan and the USA will stagger under their huge national debts endlessly, as productive capital goes to waste funding the government debt, while apparently intelligent people write articles like this claiming there is little to fear, just carry on as before.

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  • MG I normally agree with you on most things but I think there is a danger of our viewing sovereign debt like household debt and its just not the same thing.

    Any notional indebtedness of the US or indeed the UK can be paid of tomorrow, both countries control the means of exchange. This would have an impact on exchange rates but not much else and of course a devalued currency has advantages.

    The more I think about it the real problem is household debt and that would be better resovled by slashing taxes than by recaping banks l to make further debt more available. I fear that the Eurozone are repeating the mistakes of the US in the 1930’s, although I think the US are in danger of doing likewise by failing to do enough. M3 is off a cliff and deflation continues to rule. I’d add that my take on this is altering at present, I have always been more in favour of austerity and purge as this suits my nature as someone who works hard and saves.

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  • mountain goat says:

    BW – I too am trying to clarify my views on this. Attitudes are moving from stimulus to austerity not by choice, but fear.

    Japan has been invulnerable to attack mainly because so much gov debt is help domestically. The US is more vulnerable in this because it is held abroad, less vulnerable because the dollar is the reserve currency. But over supply or decline in the value of the dollar means US debt might become less attractive. The Chinese only hold so much US gov debt because it is currently accepted as money. There is a still a huge capacity for US pension funds to take up this debt, it is currently near record lows. Pension funds may be forced to do this by legislation or by choice if interest rates go up. But that means capital removed from other more productive places, like the investments in companies. So that is why I said I expect the USA to stagnate like Japan burdened by the huge gov debt, unless they change their ways.

    Yesterday Icarus posted that someones savings means someone else has to borrow. Although this may be partly true it is like the Marxist idea that all possessions are theft, i.e. there are limited resources, so if I have, someone else must go without. Again this is partly true but mainly I believe wealth is created by productive enterprise of people. So it is not taken from one by another. Likewise with debt and savings. The article Icarus posted showed that in the Clinton years when gov debt went down then debts in the private sector went up. But how many examples are there of years when debts went up in both private and public sector? So I think this view is mainly false.

    Savings = wealth generated from productive enterprise. Debt is leverage, risk taking. Some people and companies can productively take risks, but most can’t. I don’t accept that debt is an essential part of our financial system. It is the risky part of our finance system and that risk is now being exposed.

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  • Thanks for the response MG. What frustrates many on here is that there is a great deal to learn and much of what we start out thinking is wrong. I guess that is what makes the area interesting. I’d recommend the PC site to you when you have some time, there are some very interesting ideas floating around, and some of the discussion is of a high quality.

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  • mountain goat says:

    Thanks BW. I had a look. I liked his articles on gold and the dollar.

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  • I had a look. I liked his articles on gold and the dollar.

    I found his articles predictable and a bit lightweight.

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