Is the collapse of the dollar inevitable?

Iriemon said:

Unless the claimed ROI was based on inflation adjusted dollars, comparing the ROI of the DOW directly with the ROI of gold is legitimate because you are comparing both with constant dollars.

But you are comparing apples and oranges! You can't compare inflation adjusted returns for one thing with current dollar returns for another. Adjust the returns on gold for inflation and compare your results.

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Iriemon,

When I used the term "real returns", I adjusted for inflation. The returns (3.0% for the Dow and 1.2% for gold) are in constant dollars. I believe one needs to use constant dollars to get an accurate picture of the ROI.

FWIW, failure to adjust for inflation would have yielded nominal returns of 6.9% per year for the Dow and 5.0% for gold during the timeframe in question.

donsutherland1 said:

When I used the term "real returns", I adjusted for inflation.

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Don-

Throughout this thread and others, I've noticed that you take the CPI pretty much at face value.

In contrast, I feel that price indexes are a meaningless statistic, which I've mocked in my Axiomatic Economics by Victor Aguilar: The Devil’s Dictionary of Economics as being comparable to "the 'welcome' sign of a town, which gives the year it was founded, the elevation, the population and then (Isn’t this the epitome of cutting-edge humor?) the total of those three numbers... If the prices of the things you buy (like food and gasoline) are going up and the prices of the things you sell (like your house or your labor) are going down, you’re screwed. But, fortunately, the average of these two sets of numbers is zero, so inflation is 'under control.' Who says the Federal Reserve isn’t on top of things?”

In my Axiomatic Economics by Victor Aguilar: Critique of Austrian Economics I write:

"In 1930 Hayek predicted 'monetary theory will not only reject the explanation in terms of a direct relation between money and the price level, but will even throw overboard the concept of a general price level' (1967, p. 29).

"Yet this general price level is still with us. The 5 March 2003 edition of USA Today reports that, in the past year, prices for gasoline were up 29.3%, fuel oil 21.0%, health care 9.2% and tuition 6.3%, which is bad news because these are all fixed costs that working class Americans are committed to paying. But prices for personal computers fell 20.7%, information processing 11.9%, men’s clothing 3.9% and autos 2.8%, which is also bad news because information processing and the manufacture, marketing and service of computers, clothing and autos are where most people’s jobs are. So what is the response of mainstream economists? They report the arithmetic average of these numbers, 3.3%, and announce that 'inflation is under control and there is no sign of deflation.'

"Considering his strong words against price indexes (1966, pp. 219-223), if Mises has kept up on the affairs of the living with a posthumous subscription to USA Today, he must be rolling in his grave. This author also writes about this excessive tendency towards aggregation: 'The assertion of mainstream economists that the average level of prices in an economy is a meaningful statistic has done more damage to their credibility than any other assertion they have made.... Such an average is not just ludicrous but it is definitionally without meaning, for one need only ask in what units the result is expressed and one has found a contradiction' (1999, pp. 144,149).

"Opposition to an average price level belongs to the legacy of Mises, though it was Hayek who put the question to the English:

"'f we have to recognize that, on the one hand, under a stable price level, relative prices may be changed by monetary influences, and, on the other that relative prices may remain undisturbed only when the price level changes, we have to give up the generally received opinion that if the general price level remains the same, the tendencies towards economic equilibrium are not disturbed by monetary influences, and that disturbing influences from the side of money cannot make themselves felt otherwise than by causing a change of the general price level' (1967, p. 28)."

I am not trying to single you out, Don - all mainstream economists accept the CPI at face value. However, I would like to hear a justification for this oft-quoted statistic.

REFERENCES

Aguilar, Victor. 1999. Axiomatic Theory of Economics. Hauppauge, NY: Nova Science Publishers, Inc.

Hayek, Friedrich A. [1935] 1967. Prices and Production. New York, NY: Augustus M. Kelly, Publishers

Mises, Ludwig von. [1949] 1966. Human Action: A Treatise on Economics. Chicago, IL: Contemporary Books, Inc.

Iriemon said:

I'll certainly stick to what sources say as opposed to your say-so.

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Here is a source that agrees with me

Hoover Institution - Policy Review - The Fed's "Depression" and the Birth of the New Deal

ARealConservative said:

Here is a source that agrees with me

Hoover Institution - Policy Review - The Fed's "Depression" and the Birth of the New Deal

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Thanks. That article directly contradicts you.

Iriemon said:

Thanks. That article directly contradicts you.

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the hell it does Iremon.

You tried to claim that gold was the cause, but only the Federal Reserve has the ability to constrict the supply of money. This article didn't blame the depression on the lack of monetary expansion, it blamed the depression on constriction of the money supply, which is not possible in a free market.

article said:

The same Federal Reserve caused the Great Depression when its wise men made a series of cumulative mistakes that contracted the money supply by one-third and wiped out purchasing power in an unprecedented fashion.

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ARealConservative said:

the hell it does Iremon.

You tried to claim that gold was the cause, but only the Federal Reserve has the ability to constrict the supply of money. This article didn't blame the depression on the lack of monetary expansion, it blamed the depression on constriction of the money supply, which is not possible in a free market.

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Which supports my point exactly. The Fed during the GD constricted the money supply in an attempt to maintain the gold standard. It should have been doing the opposite, making credit more availalble. It is certainly possible to constrict money supply in a free market. Money is hoarded, people don't spend, don't lend, business can't get credit, production slows. That can happen whether the money is based on a commodity or a fiat. The difference is in a fiat based system, the central bank has the controls to expand or constrict the money supply in response.

Iriemon said:

Which supports my point exactly. The Fed during the GD constricted the money supply in an attempt to maintain the gold standard. It should have been doing the opposite, making credit more availalble. It is certainly possible to constrict money supply in a free market. Money is hoarded, people don't spend, don't lend, business can't get credit, production slows. That can happen whether the money is based on a commodity or a fiat. The difference is in a fiat based system, the central bank has the controls to expand or constrict the money supply in response.

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it supports my point that the fed was created in 1913 and is the blame for the depression.

the central planners caused the depression.

ARealConservative said:

it supports my point that the fed was created in 1913 and is the blame for the depression.

the central planners caused the depression.

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I agree the Fed's action was a factor -- it erroneously tried to maintain the dollar based on a gold standard, which was the basis for the money system in those days. Supporting my point that a commodity based currency hampers the tools a central bank can use to influence the economy thru the money supply.

PS, my handle is "Iriemon" not "Iremon" as you have misspelled it in a couple posts. Please spell my name correctly unless want the same.

Iriemon said:

I agree the Fed's action was a factor -- it erroneously tried to maintain the dollar based on a gold standard, which was the basis for the money system in those days. Supporting my point that a commodity based currency hampers the tools a central bank can use to influence the economy thru the money supply.

PS, my handle is "Iriemon" not "Iremon" as you have misspelled it in a couple posts. Please spell my name correctly unless want the same.

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so you disagree with my article. fine. but stop pretending it contradicts what I claimed.

ps. sorry for the name thing, it was an honest mistake

ARealConservative said:

so you disagree with my article. fine. but stop pretending it contradicts what I claimed.

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We were talking about the GD and the constriction of the money supply and hoarding. You posted: "You mean after the Fed was created? Sorry but no" and about the Fed expanding the money supply.

Your own article confirmed what I wrote and that in the GD the Fed did not expand the money supply.

Iriemon said:

We were talking about the GD and the constriction of the money supply and hoarding. You posted: "You mean after the Fed was created? Sorry but no" and about the Fed expanding the money supply.

Your own article confirmed what I wrote and that in the GD the Fed did not expand the money supply.

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I said the Fed was created for the purpose of inflating the money supply.

My main problem with your article cited is the blame it puts on England for trying to restore a gold backed currency as having any part of the depression when the blame is fully on the actions of the Fed.

If they didn't exist, we wouldn't of had a great depression. If they did what they were created for - to stave off panics and inflate the money supply, we also wouldn't of had a great depression.

ARealConservative said:

I said the Fed was created for the purpose of inflating the money supply.

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I hadn't observed you were making an irrelevant observation in response to my point.

My main problem with your article cited is the blame it puts on England for trying to restore a gold backed currency as having any part of the depression when the blame is fully on the actions of the Fed.

If they didn't exist, we wouldn't of had a great depression. If they did what they were created for - to stave off panics and inflate the money supply, we also wouldn't of had a great depression.

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It was the action of the Fed trying to maintain a commodity based money system. If we hadn't been on the gold standard which the Fed tried to maintain, we probably wouldn't have had the GD.

I agree the Fed is not perfect, as I said earlier in this thread. They are human. Just that the Fed is a better system than a commodity based system, IMO.

Iriemon said:

I hadn't observed you were making an irrelevant observation in response to my point.

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There is nothing irrelevent about it.

The entire purpose of their existence at that point was to inflate the supply of money in order to stave off panics. When given the opportunity to do something of use, or do nothing, which would of been ok as well, they constricted the money supply - The absolute worse thing they could of done - and it caused the depression.

Iriemon said:

It is certainly possible to constrict money supply in a free market. Money is hoarded, people don't spend, don't lend, business can't get credit, production slows. That can happen whether the money is based on a commodity or a fiat. The difference is in a fiat based system, the central bank has the controls to expand or constrict the money supply in response.

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This was my point BTW. A single third party can't constrict the money supply in a free market. In a free market the money supply is only constricted based on million of people acting independently and in their own best interests.

I don't know what "best interest" compelled the Federal Reserve to constrict the money supply at the worst possible time, but based on their attempts to try to blame anything but their own central planning mistakes, I would suggest they did it to gain power.

ARealConservative said:

This was my point BTW. A single third party can't constrict the money supply in a free market. In a free market the money supply is only constricted based on million of people acting independently and in their own best interests.

I don't know what "best interest" compelled the Federal Reserve to constrict the money supply at the worst possible time, but based on their attempts to try to blame anything but their own central planning mistakes, I would suggest they did it to gain power.

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The did it to maintain the gold standard. Which is a great example of why a commodity based currency is a bad idea. We all agree it was a mistake to constrict the money supply, but the reason they did it was people were trying to exchange their dollars for gold and there were too many dollars to support the gold. Since the policy was to maintain a gold standard, a commodity based currency, the Fed had no option except to reduce the number of dollars so that it more equated to the amount of gold.

Setting the currency based on a commodity price instead of in response to the terrible economic conditions was, as we all agree, a bad mistake by the Fed. It should have just dumped the gold standard and put liquidity into the money supply (something it did a few years later).

Yes, the Fed made a mistake. The mistake was trying to maintain a currency based on a commodity like gold.

ARealConservative,

I believe a better way of describing the Fed's role during financial crises is that it was established to be a lender of last resort.

Also, U.S. monetary policy was constrained by the gold standard. University of California, Berkeley professor of economics Barry Eichengreen has done some extensive research in the role the gold standard played in constraining monetary policy during financial crises (U.S. and abroad).

DonSutherland said:

ARealConservative,

I believe a better way of describing the Fed's role during financial crises is that it was established to be a lender of last resort.

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I look at the above as the how part of the equation and not the why. Why did we need a lender of last resort?

Also, U.S. monetary policy was constrained by the gold standard. University of California, Berkeley professor of economics Barry Eichengreen has done some extensive research in the role the gold standard played in constraining monetary policy during financial crises (U.S. and abroad).

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“
I won’t refute that a gold standard has a downside – namely that governments that ignore economic law and engage in “guns and butter” programs create financial crisis. I believe the “scramble for gold” was directly caused by inappropriate and probably even fraudulent financial behavior during and after WW1 by the worlds governments.

ARealConservative said:

Why did we need a lender of last resort?

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You raise an important question.

During a financial panic that leads to a sharp and sustained sell-off in assets, the decline in asset prices often induces further fear. In turn, that additional fear feeds additional selling in a rush for the exits to the extent that a self-reinforcing asset destruction spiral occurs. Such a spiral can rapidly dry up liquidity, as fears spread across the financial system. Then, people could rush to withdraw funds. Stressed banks could find it difficult to impossible to honor counterparty payments. In such an environment, interest rates spike and liquidity disappears.

During such occasions, a lender of last resort can provide a stabilizing impact. By injecting liquidity into the financial system, such an institution can ease the public's fears and reduce the public's incentive for a run on the financial system (physical or electronic). In doing so, it can help prevent the kind of financial system meltdown that has, in the past, led to a severe recession or even depression.

dondutherland1 said:

You raise an important question.

During a financial panic that leads to a sharp and sustained sell-off in assets, the decline in asset prices often induces further fear. In turn, that additional fear feeds additional selling in a rush for the exits to the extent that a self-reinforcing asset destruction spiral occurs. Such a spiral can rapidly dry up liquidity, as fears spread across the financial system. Then, people could rush to withdraw funds. Stressed banks could find it difficult to impossible to honor counterparty payments. In such an environment, interest rates spike and liquidity disappears.

During such occasions, a lender of last resort can provide a stabilizing impact. By injecting liquidity into the financial system, such an institution can ease the public's fears and reduce the public's incentive for a run on the financial system (physical or electronic). In doing so, it can help prevent the kind of financial system meltdown that has, in the past, led to a severe recession or even depression.

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This wasn’t really a question of mine though. As I was trying t explain, the term “lender of last resort” is simply the how – the why is to prevent panics.

It’s no secret how much respect I have for you, and as a layman, I am clearly out of my league in talking with you on these issues (but that will never stop me from trying….and learning)

My chief concern is that it doesn’t work and the history of fiat economics is new enough to maintain reasonable doubts. Creating a lender of last resort can’t guarantee these panics won’t happen anyway. As I have argued thus far in this thread, the Fed failed to prevent the panics in 1930, and I go as far as claiming it was intentional. Iriemon maintains they did this to save the gold standard but the Fed was not in favor of the gold standard as it was a major impediment for increased power that only fiat currency would give them.

The argument boils down to if it is better for a select few to make the decisions and hope they make the correct decisions for all, or if it is better for millions of individuals to act independently, even if they foolishly make the wrong decision.

Thanks for the kind words, ARealConservative.

The argument boils down to if it is better for a select few to make the decisions and hope they make the correct decisions for all, or if it is better for millions of individuals to act independently, even if they foolishly make the wrong decision.

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I believe, in general, the latter option works better. Certainly, when one compares the historic performance of market-oriented economies vs. centrally planned ones, the market-oriented ones do better. However, like any other human institution, even markets have their limitations. The lender-of-last-resort (LOLR) function arose out of repeated experiences in which panics led to significant financial system impairment and severe recessions afterward. Needless to say, an LOLR function is not risk- or cost-free. The challenge of finding the right balance between avoiding systemic financial system failure on one hand, and overreaching to the extent that it creates significant economic costs/distortions on the other can be a difficult one.

donsutherland1 said:

The lender-of-last-resort (LOLR) function arose out of repeated experiences in which panics led to significant financial system impairment and severe recessions afterward. Needless to say, an LOLR function is not risk- or cost-free. The challenge of finding the right balance between avoiding systemic financial system failure on one hand, and overreaching to the extent that it creates significant economic costs/distortions on the other can be a difficult one.

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For me personally, this rings as a major overstatement.

We have the 1930, the 1970's and now another possible calamity on the horizon. I think it is reasonable to ponder if this solution is not more prone to significant financial impairment then the free banking era.

ARealConservative said:

For me personally, this rings as a major overstatement.

We have the 1930, the 1970's and now another possible calamity on the horizon. I think it is reasonable to ponder if this solution is not more prone to significant financial impairment then the free banking era.

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Some clarification of my point from earlier:

1) I don't believe that the probability of substantial financial system shocks has dropped materially. In large part, as human nature has remained remarkably constant across time, the behavior that leads to the risk of financial system impairment--particularly that which fuels the rise of asset bubbles as well as certain fraudulent conduct--remains a threat.

2) Mechanisms for the transmission of contagion are probably more widespread now given technology and globalization that have given rise to the development of sophisticated derivative instruments, practices such as securitization, which can be beneficial but also carry real risks if not handled adequately within a sufficiently robust risk management framework.

3) A lender of last resort merely serves a powerful tool for addressing shocks before they lead to the kind of financial system collapses or substantial impairment that had been occurring in the past. The capacity to dramatically expand the money supply and/or inject liquidity into the financial system mitigates the risk of debt-deflation. It does create an elevated risk of inflation should growth in the money supply not be reduced or the money supply permitted to contract once the economy has turned around.

donsutherland1 said:

Some clarification of my point from earlier:

1) I don't believe that the probability of substantial financial system shocks has dropped materially. In large part, as human nature has remained remarkably constant across time, the behavior that leads to the risk of financial system impairment--particularly that which fuels the rise of asset bubbles as well as certain fraudulent conduct--remains a threat.

2) Mechanisms for the transmission of contagion are probably more widespread now given technology and globalization that have given rise to the development of sophisticated derivative instruments, practices such as securitization, which can be beneficial but also carry real risks if not handled adequately within a sufficiently robust risk management framework.

3) A lender of last resort merely serves a powerful tool for addressing shocks before they lead to the kind of financial system collapses or substantial impairment that had been occurring in the past. The capacity to dramatically expand the money supply and/or inject liquidity into the financial system mitigates the risk of debt-deflation. It does create an elevated risk of inflation should growth in the money supply not be reduced or the money supply permitted to contract once the economy has turned around.

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Speaking of the Fed, Don, I saw a quote by Greenspan on another thread that he said in 2005 which warned of the high risk investing by Fannie and Freddie. He appeared to be urging Congress do something about it, which made me curious why HE couldn't.

Two questions:
1) Why is the FED unable to supervise Fannie and Freddie and force them to mitigate on their high-risk investments?
2) Why did the FED not at least do that on banks?

ARealConservative said:

For me personally, this rings as a major overstatement.

We have the 1930, the 1970's and now another possible calamity on the horizon. I think it is reasonable to ponder if this solution is not more prone to significant financial impairment then the free banking era.

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Without intervention 90% of U.S. banks could ultimately fail, and the FDIC only has $50 billion set aside to cover $1 trillion in deposits. That might translate to 18 out of 20 people with their bank deposits wiped out, depending on how the money was divided. Don't you think that would create havoc not just in the US, but globally? Moreover with credit markets frozen solid, huge numbers of businesses would simply be wiped off the map with proportionately larger numbers of people thrown into possibly years long unemployment, prompting massive homelessness and poverty.

The Fed may have a history of not managing the money supply well in prior crises, but under the existing circumstances some intervention might be better than none. Besides, at least here they are trying to step in ahead of time, before the economy completely tanks. This last Sunday, even House Minority Leader (R-Ohio) John Boehner acknowledged the gravity of the situation admitting this "may be the most serious economic crisis the world has ever dealt with."

As a matter of history, I found an interesting summary of the LOLR. According to the summary, "Henry Thornton (1760-1815) and Walter Bagehot (1826-1877) laid down a set of rules for stopping banking panics and crises. Known collectively as the classical theory of the lender of last resort, those rule stressed (1) protecting the aggregate money stock, not individual institutions, (2) letting insolvent institutions fail, (3) accommodating sound but temporarily illiquid institutions only, (4) charging penalty rates, (5) requiring good collateral, and (6) preannouncing these conditions in advance of crises so as to remove uncertainty. These precepts continue to inform central bank policy today." I am not fully informed of the history of the prior financial crises which prompted the formulation of this solution, but I can only presume the consequences were so devastating, the solution was justified.

metreon said:

Without intervention 90% of U.S. banks could ultimately fail, and the FDIC only has $50 billion set aside to cover $1 trillion in deposits. That might translate to 18 out of 20 people with their bank deposits wiped out, depending on how the money was divided. Don't you think that would create havoc not just in the US, but globally?

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Inflating the way out of a banking panic isn't that different though. If the only way to protect your money is to make it worth 10 cents on the dollar, is your life savings actually being protected, or is it simply being eroded?