One difference is that gold is in limited supply, and cannot be instantly materialized by the State. Its scarcity, beauty and durability make it a natural store of value when the printing presses are running overtime.
Of course the State knows this too. In April 1933, less than one month after taking office, FDR signed an executive order confiscating all the private gold in the country. I wouldn't be surprised to see that happen again some day.
This represents a problem: if the total amount of currency available for use in transactions does not maintain rough parity with the total amount of goods and services available to be exchanged in those transactions, then the imbalance will lead to wild price fluctuations.
I strongly recommend reading "What Has Government Done to Our Money?" by Murray N. Rothbard (http://mises.org/money.asp). It's short---easily read in one sitting. It's also lucid---easily understood in one sitting. You are clearly smart enough to get it, and you obviously care. Reserve the right to change your mind---you just might surprise yourself.
On one side we have a certain amount of goods and services. On the other we have a certain amount of currency which we use as a stand-in. If goods and services outpace currency, you get price swings tending toward deflation. If currency outpaces goods and services, you get price swings tending toward inflation.
Gold is advocated because the supply of it is relatively stable, thus decreasing the chance of serious inflation. The problem with gold is that it creates additional vulnerability of serious deflation.
All of this is so basic that I have a hard time believing anyone could argue with it.
Perhaps there is no real disagreement. What we have here are four concepts masquerading as two. Let's start with inflation, a rise in prices, and deflation, a fall in prices, and introduce the two missing words: expansion, an increase in the money supply, and contraction, a decrease in the money supply.
Now, expansion causes inflation, and contraction causes deflation. Both have harmful effects. But inflation doesn't imply expansion, and deflation doesn't imply contraction. By themselves, inflation and deflation aren't necessarily bad.
With a fixed currency supply, there is neither expansion nor contraction, by definition. Thus, in this case inflation and deflation simply reflect changes in supply, demand, or both. In particular, a rise in the demand for money increases its price (i.e., purchasing power) relative to other goods, which causes lower prices. If you think lower prices are necessarily a problem, I have a $50,000 computer to sell you. :-)
Gold is irrelevant. An emergent property of human psychology is that the bulk of the money supply usually comes from leverage: humans are very willing to treat promise of future payment as assets. Catastrophic changes in the money supply generally result from trust fads, not from production/destruction of the basis asset.
A mineral is only in limited supply when there isn't a rush. (See: 19th century American silver rush and bimetallism). Gold isn't that scarce or that beautiful after all, it's mostly a convention.
The limited supply of gold can also be a hindrance, causing systemic deflation as an economy grows.
The limited supply of gold can also be a hindrance, causing systemic deflation as an economy grows.
Nope. The initial supply isn't what matters. With a fixed-supply currency (well-approximated by gold), the demand for money increases as an economy grows, so (for fixed supply) its price increases as well. Hence, no deflation.
Intuitively, the money supply must increase as an economy grows. Intuitively, clocks tick just as fast at sea level as they do on top of Everest. Intuition is often wrong.
Rothbard isn't the end-all and be-all of monetary economists, and there is historical precedent that contractions in the money supply have caused deflation. Also, economies which have gone back on the gold standard have usually deflated as well.
Rothbard has gaps, but he's light-years past most.
Never trust "historical evidence" when it comes to economics. There are no controlled experiments, and the winners write the books. In this case, there are four concepts masquerading as two. See http://news.ycombinator.com/item?id=1058639.
Evidence in economics is messy---and political. Trust logic instead. Of course monetary contraction causes deflation; you don't need evidence to tell you that when people have less money, ceteris paribus prices will fall.
As far as the "gold standard" goes, beware: most so-called historical "gold standards" are not gold-as-money, but rather some weird bastardized version, such as "paper currency (partially) backed by gold". As I said: messy. This conflation serves the interests of those who benefit from manipulating the money supply. Messy, and political.
I take it you mean Rothbard is "amateur" in the pejorative sense. Have you read Rothbard? He is many things; "amateur" is not one of them.
"Evidence in economics is messy---and political. Trust logic instead."
The problem is, Rothbard's logic is also every bit as political as, say, Marx's logic.
You're talking to someone who was a confirmed libertarian, Austrian sympathizer, and Ayn Rand enthusiast from roughly the age of 16 to maybe 20 or so. I know the arguments and I know inside and outside the kind of thinking they come from, which is simply put, a tendentious effort to justify one particular political ideology over another. That is the exact opposite of what any science should aspire to, even economics. And that is the sin Rothbard is guilty of, a sin he relentlessly accuses others of in order to distract from his own guilt.
This is not to say he in specific, or the Austrians in general, were totally bereft of good ideas--just that their ideas should not be taken as proven unless tested. You're suggesting the scientific equivalent of "the code looks reasonable so there's no need to test it".
I certainly don't agree with everything Rothbard or other Austrians say, and indeed I agree that their greatest errors are driven by ideology. (And despite my general sympathy with Ayn Rand, this goes triple for her and her followers.)
That being said, a substantial subset of economics is analogous not, as you say, to a programmer saying
the code looks reasonable, so there's no need to test it
but rather to a mathematician saying
the proof is correct, so there's no need to test it
That is, what is the point of testing the Pythagorean Theorem? Perhaps we should measure a bunch of triangles? Why would you do that, when you have a proof? And yet, many people seem to believe that, e.g., raising the minimum wage might not (ceteris paribus) raise unemployment. They even sometimes collect "evidence" that it doesn't! (See, e.g., the paper by Card & Krueger showing a rise in employment after a minimum-wage hike, which Bill Clinton used as political cover to get Congress raise the minimum wage.)
Of course, you'd better be double-sure your proof is right, and I agree that the Austrians sometimes fall down on this point (Rand, triply so). But their approach is right: economics, correctly done, is much closer to mathematics than it is to physics.
N.B. I too am a reformed libertarian-Objectivist, and I too know the arguments forward and backward; I could crush a traditional libertarian in a debate, because I know the weaknesses all too well. But it seems that my ultimate parting of ways with them has taken me in the opposite direction from yours. You see, I'm even more radical (or, rather, reactionary) than they are. :-)
Mathematics doesn't deal with the real world, nor does it use induction (in the normal sense of the term--mathematicans use the word "induction" to refer to a type of recursive proof method, but inductive logic is the method of reasoning general rules from particular pieces of evidence). Triangles are an abstract concept that abide to rules that we make up, and if we make up a different set of rules, triangles no longer obey them. That's why simply measuring triangles doesn't work.
Economics does deal with the real world, and like any other science it's subject to the demands of empiricism rather than merely the demands of logic. You can use logical and mathematical reasoning to come to a lot of useful conclusions in physics, for instance, but we're constantly substantiating those by experiment as well, and occasionally we are wrong. (Use Newtonian mechanics to calculate the orbit of Mercury and it won't match.) Do you really think that human behavior is so much more simple than physics that we can model it without evidence at all?
Ah, so we don't really disagree at all---or, at least not much. It's my fault for using a bad analogy, and you hit on a better one. You're right, the axioms, whether in economics or physics, must come from the empirical world. Given the axioms, you can then prove theorems, but of course the axioms might need tweaking---which can dramatically change the theorems. What I see in economics are cases where people implicitly accept particular axioms, and yet reject many of the consequences (i.e., theorems). It's as if they agree that Newton's law of gravitation is correct, but don't believe that two-body orbits are closed.
Though complex in general, there are aspects of human behavior that are consistent and quite simple, and serve as a solid foundation for a study of human action. (You probably recognize this as the Austrian approach of praxeology.) When I read the Austrian argument that any fixed amount of money-stuff (e.g., gold) is sufficient for exchange, I understand the axioms, follows the steps, and accept the conclusion. When I read the Keynesian arguments for the benefits of monetary expansion and "fiscal stimulus", I see---great clouds of fog. Their arguments are often too vague to untangle, but I can see that their conclusions (a) appear to be based on the same axioms I accept and (b) disagree with a theorem. Something doesn't add up.
In sum, the value of empiricism lies in finding the right axioms. If you discover "empirical evidence" that a theorem is wrong, you must either propose a change in the axioms or find a flaw in the proof. Contemporary economists often appear to do neither.
(The Card & Krueger example is again instructive. If you raise the price of labor, people buy less of it, so minimum wage hikes must increase unemployment. And yet, from a contemporary NY Times article (http://bit.ly/5afSyk), we find this:
They [Card & Krueger] surveyed 400 fast food restaurants and found that
those in New Jersey actually added 2.5 workers after the minimum wage went
up. In Pennsylvania restaurants, meanwhile, payrolls shrank.
Why should bosses hire more workers if it's more expensive to do so? The
two economists speculate that any fast-food restaurant typically operates
with a couple of vacancies it can't fill because it doesn't pay enough.
"If you raise the minimum a little," said Professor Card, "teens who are
sitting [at] home go out looking for jobs."
Apparently, these restaurant managers are too stupid to realize they're allowed to pay above the current minimum wage, thereby getting those lazy teens off their couches to fill the vacancies without a minimum wage hike. Truly, it boggles the mind.)
"In sum, the value of empiricism lies in finding the right axioms. If you discover "empirical evidence" that a theorem is wrong, you must either propose a change in the axioms or find a flaw in the proof. Contemporary economists often appear to do neither."
That's not how the real sciences work, though--physics doesn't operate through axioms and theorems, it establishes a few theories and as long as they hold within experimental error, they don't complain too much. When they stop holding, we either postulate extra "stuff" we don't directly observe (most of the outlying planets as well as the Kuiper belt were discovered by measuring their gravitational effects on planets we could directly observe) or use a more refined theory on the edge cases (Mercury's orbit). But all the while physics gathers more and more empirical data, and spends a lot of time trying to make sense of it.
"When I read the Austrian argument that any fixed amount of money-stuff (e.g., gold) is sufficient for exchange, I understand the axioms, follows the steps, and accept the conclusion. When I read the Keynesian arguments for the benefits of monetary expansion and "fiscal stimulus", I see---great clouds of fog."
The other problem I find is that most armchair Austrians take their entire economic understanding from an 80 year old dispute and have no conception of what's happened in the field ever since. Keynes is a dead old man and the field of economics has moved on from his work.
Incidentally, even if you just take the approach of pure reason, it's still pretty fucking easy to debunk the idea of the gold standard.
"Apparently, these restaurant managers are too stupid to realize they're allowed to pay above the current minimum wage, thereby getting those lazy teens off their couches to fill the vacancies without a minimum wage hike. Truly, it boggles the mind.)"
And here you see one of the biggest problems with the field of economics in general, a problem that's only been tackled in recent decades--modeling how actual human beings behave in the real world rather than supposing that each economic actor is fully informed, perfectly rational, and perfectly self-interested. How many 16 year old kids would know whether or not Burger King paid above minimum wage? Of course Burger King only pays minimum wage. It's a cultural expectation. The same thinking applies to the manager--is a fast food manager really going to be fully informed, perfectly rational, and perfectly self-interested? For the most part, his job consists of executing a manual written at the corporate headquarters in a different state which dictates that crew are paid local minimum wage, and quite frankly, the corporate overhead of rewriting the corporate manual to allow wage adjustments to recruit people to work at a fucking Jack in the Box isn't justified.
I've heard arguments to the contrary, for example that deflation encourages people to invest their money under their mattresses. If money you hoard loses value then you feel a stronger need to invest it, which is better for the economy as a whole. Without that incentive once a person reached some level of wealth they would sit on their money instead of putting it into a nice retirement fund that puts it into the stock market.
It could perhaps be restated that deflation causes people to invest their money wisely and weigh the risks and rewards, whereas inflation causes people to chase rewards just to maintain their current wealth or underestimate risk to try and grow their investments.
Inflation fundamentally is just stealing from people by devaluing their earnings, and it hurts the poor and the middle class the most. It encourages people to take on debts, since they will pay back less in the future. It also hurts anyone who gets paid by the hour or salary when they're not tied to inflation.
Unfortunately, the market is no better. The governments allow their central banks to print fake money while the market allows its financial institutions to print fake assets.
Whether it's currencies or CDOs, a bubble is a bubble. Valuation is an art that got lost somewhere in the science.
But the market can't force people to buy their assets. Ultimately of course that is true for money, too (people could go back to bartering or whatever), but it seems a much farther stretch.
I notice the author has nothing to say about the over-valuation of the Yen, which for the past year or two has been crippling Japan's balance of trade by making exports way too expensive on world markets.
I have been wondering for some time why on earth the JCB has been allowing the yen to stay so high. It would seem a no-brainer to sell it down - they have all sorts of incentives. The car companies in particular must be in a state of permanent howling rage about it.
And yet they haven't done it. There must be an awfully good reason for that.
So as someone who has assets in Japan, what can I do to protect myself and maybe profit from the looming financial crisis? (reading those kind of articles makes me realize that I really need to read up on economy)
The basic idea if you believe that a hyperinflationary environment is coming, you borrow money to invest in hard assets and selected stocks. Hyperinflation will cause the value of the currency to fall dramatically, driving up the value of assets relative to that currency. This is why whenever you see countries devalue their currency to reflect rampant inflation (e.g. most recently Venezuela), people run out to buy whatever they can including TVs, disposable goods because these hold value better than cash.
Of course, if you're wrong and the opposite happens (e.g. deflation where currency rises in value but assets fall), you lose money. That said, I'd agree with the general fundamentals Evans-Pritchard describes - but also as he describes, it's basically unknowable when the crash will happen.
(By way of warning, when it comes to applying theory to practice, be careful when playing between various currencies - e.g. http://www.moneyweek.com/investments/what-is-the-carry-trade... - which is basically what happened when the markets started unravelling in North America)
A passive way to protect yourself is to buy commodities like gold, silver and oil. Gold in particular is considered a great hedge against inflation. If JPY begins to inflate, its exchange rate against other currencies will rise and gold prices (as measured in JPY) will increase. You will "profit" in the sense that you can sell your gold to repurchase yen after the inflation stops.
FYI, investing the GLD ETF is the best practical way to buy gold:
That problem is undecidable and bubble is not well defined[1], but you only have to look at the price of gold to see that there's evidence for a claim that gold is in a bubble.
Certainly the idea that gold is immune to inflation, overvalue or a bubble is entirely absurd and outright dangerous to the people who might fall into the trap of believing it.
[1] If someone had such an algorithm Wall Street financial firms would be making untold amounts of money off of it, most trading algorithms are just rough heuristics that happen to work, but rarely work for extensive periods of time or any specific claims.
The US dollar's value is dropping (and will continue to drop) sharply since they are printing them like mad. If the value of the dollar drops, the value of things relative to the dollar rises (like gold). There isn't a gold bubble, there's a dollar devaluation. The dollar may have been stable in the past, but those days are almost certainly over.
None of those claims are backed up by actual evidence. I pointed directly to a graph of the CPI which explicitly shows the dollar is only inflating by a few points each year and most recently (when the largest amount of noise was coming out of people's faces about gold) the dollar was actually in a deflation period and getting more valuable.
There may be flaws with the CPI-U data, but I don't know of a better data source. Feel free to point one out.
Until you do however, the data we've explored in this thread directly contradicts all of your assertions, despite their popularity among some.
Japan's government debt is awfully high. He hasn't made that up. The demographic situation is also real. And he has mentioned that Japan's debt is mostly domestic debt, which is one reason why Japan has not defaulted yet and why any default could be a stealthier thing than what we know from Latin America or Russia. He also said that it could go on like this for years. So I'm not sure what you find so suspicious about what he says in this article.
He blows stuff out of proportion, and writes trollish articles that are popular on link hubs due to their provocativeness. I see a headline predicting doom for any non-British country and a telegraph URL and I know it's him again. His main function seems to be to reassure the Brits that it's much, much worse everywhere else.
Not to mention Yen has been the strongest currency for recent period and Japan is actually fighting deflation. If there is one currency I'd be worried about - it's GBP and less so USD. UK still has not shown any positive fundamentals out of the recession, while others have.
He published a book that claimed Clinton was the head of the Arkansas drug trade, and that the Oklahoma City Bombing was an FBI/DOJ operation.
I'd call him a nutter, but I don't think that's true. I think he's a smart fellow who recognizes that editorials that take extreme stances sell better than ones that don't... and hey, even a stopped clock is right twice a day.
It seems more likely they will blame "the market" and use trouble they created as an excuse to extend their control over their economies.