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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

James Grant

Posted by WARREN MOSLER on May 28th, 2009


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(email exchange)

>   
>   Hi Warren. I heard James Grant speak yesterday. He was funny, entertaining, articulate
>   and full of historical knowledge, but I found his monetary analysis appalling. He wants
>   the U.S. (and the rest of the world) to be on a strict gold standard.
>   
>   It seems to me that the consequent reduction in flexibility and efficiency could be a
>   death sentence for hundreds of millions of people around the world. What do you think ?
>   

Agreed!

The gold standad wasn’t abandoned because it worked so well!

The gold standard panic of 1907 was so bad they created the Fed in 1913 to keep it from ever happening again.

It happened again and even worse in 1929 to the point gold was dropped domestically in 1934.

No depressions since as the supply side constraints on ‘money’ were eliminated and counter cyclical fiscal policy became viable.

They kept the Fed open anyway and gave it other things to do.

Send this along to Jim, thanks!


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27 Responses to “James Grant”

  1. Jim Baird Says:

    There’s no talking to goldbugs. Like the Israelites of old, their hearts always yearn to return to the worship of the golden calf:

    ” 7 And the LORD said unto Moses, Go, get thee down; for thy people, which thou broughtest out of the land of Egypt, have corrupted themselves:

    8 They have turned aside quickly out of the way which I commanded them: they have made them a molten calf, and have worshipped it, and have sacrificed thereunto, and said, These be thy gods, O Israel, which have brought thee up out of the land of Egypt.

    9 And the LORD said unto Moses, I have seen this people, and, behold, it is a stiffnecked people:”

    Reply

    Dissenting Comments Encouraged Reply:

    The gold standad wasn’t abandoned because it worked so well!

    I am confused, I think you are in error. The gold standard was not abandoned, I am quite sure central banks still deal in trading and buying and selling that stuff. When central banks and governments no longer deal in gold, then I will admit it has been abandoned. When fort knox and the tanks and army guys there are instead guarding data centers instead of shiny metal rock then I will agree we are off a gold standard. For now, You have to agree the statement you made above was incorrect and in error, this planet is still on a gold standard, so why lie and say it isn’t?

    Reply

    warren mosler Reply:

    with a gold standard the currency is convertible into gold at a fixed rate by the govt of issue.

    you are talking about something entirely different

    Reply

    vipul Reply:

    When the gold standard applied, it was printed on the currency how many dollars that note could be redemeed for. And there were actual gold certificates that guaranteed payment by the treasury in gold coin:

    http://en.wikipedia.org/wiki/File:Series1934_100gold_obverse.jpg

    Pull a dollar out of your wallet now, its says clearly, “One Dollar”, “Legal Tender for All Debts Public and Private.” It doesn’t mention gold, it doesn’t promise payment of dollars or anything upon redemption. It cannot be redeemed for anything. It’s just a piece of paper, which the government will accept as payment of debt, and that the government guarantees everyone else in America has to accept too. Warren isn’t just making up stuff, the evidence is written right there on the bill itself.

    Dissenting Comments Encouraged Reply:

    What is good for the goose, is good for the gander. If the big central bank boys think gold is worth hoarding, I see no good logical reason why individual citizens shouldn’t also hold the same silly beliefs. I am no gold bug and think those guys are silly, but it’s hard to argue against their memes when bernanke and friends still value shiny metal rock. Why do governments hold that stuff, why not clear it out of fort knox and tell those silly gold bugs gold will no longer be used by or between nation states?

  2. Mike S Says:

    Those who cannot learn from history are doomed to repeat it.

    I think one of the problems is that banking has been so opaque for so long that people do not know basic accounting. If we taught accounting and banking like we teach geometry in high school, there would soon be a generation of people who understand that a bank purchasing debt does not net create money. Then, these kids would begin to question the conventional financial framework about “monetizing the debt”.

    Reply

  3. knapp Says:

    I think the risk of any fixed-rate standard (gold, currency board, etc) is that contracts are denominated in nominal values and the gov’t has an embedded call option to “go off” that standard or “rewrite the dictionary” when the political heat is on, such as in a banking crisis. This deflationary risk is just as real in non-gold regimes such as the Euro as it is under a gold standard.

    It’s the fixin’ that causes the trouble. It takes power away from gov’t to do the things that people want them to do. “Going off” gold or leaving the Euro is a means for govt to take that power back.

    Reply

  4. Curious Says:

    “The gold standard panic of 1907 was so bad they created the Fed in 1913 to keep it from ever happening again.

    It happened again and even worse in 1929 to the point gold was dropped domestically in 1934.”

    And now again in 2008/2009. So it seems that neither the fed nor the gold can prevent panics. What can? Are there alternatives?

    Reply

    Mike S Reply:

    Panics happened about every 20 years from 1850 on. Then we’ve had exactly one in 70 years.

    Remarkably, this most panic happened after an extended period of government budget surpluses.

    Reply

  5. Vipul Says:

    The solution is the same as what was forced on us in 1941 by Japan’s attack on Pearl Harbor, massive government spending which results in full employment of the able-bodied population.

    The point is that chaining yourself to gold eliminates that option, since government has to first go find/take the gold from whoever is holding it. That’s exactly what Roosevelt did in the 1930s, making it illegal for private citizens to own gold.

    Reply

  6. Jim Baird Says:

    Curious:

    Check out this post:

    http://www.moslereconomics.com/2009/04/02/we-are-not-anywhere-near-a-depression/comment-page-1/

    As Warren says, the current economy is nowhere near as bad it was in the 30′s. The automatic stabilizers (enabled by floating exchange rate fiat money) have ensured that. Of course, if the people in charge understood their own monetary system it could have been considerably better, but even so we will emerge from this hiccup not significantly worse for the wear.

    Reply

  7. barton Says:

    It’s a shame about James Grant. He’s been so good over the years at pointing out excesses in corporate balance sheets, leverage, etc,. but he really doesn’t understand at all that a sovereign issuer of its own currency isn’t the same thing. This point is the main fixed idea we are battling against here.
    I don’t know whether these guys hate government per se, simply because it IS government, or if they have all been so brainwashed over the years, or they simply haven’t taken the trouble to really think it through and understand the role of a sovereign issuer of a floating FX non convertible currency. Someone needs to write something really simple about HOW and WHY a floating FX non convertible regime is different from the old paradigm. They simply cannot understand that it doesn’t have to “come from somewhere”, or put differently, it ultimately all comes from whatever the government has spent into existence!

    Reply

  8. Dave Begoka Says:

    BUKAKA’s new law, having the currency system based on a rock is right out of the stone age!

    What if we have 95% of the gold dug up, and the population keeps growing?

    What if they find a bunch more?

    What happens when Nibiru gets here and the Anunaki take it all?

    When I was a truck driver I delivered to a “Government Owned” gold mine in the middle of the desert, when I asked how they found the deposit they said satellite imagery. Copper Canyon in Mexico they are sifting through rock that has like .00001% gold and spewing all sorts of poisons into the river killing everything? WHY?

    Ron Paul’s H.R. 1207 to audit the FED? If what Scott says is true and all profit goes back to the treasury, WHY? Is Ron Paul a shill for the Military Industrial Complex? Covering up the true drain on us all? He is the one who is pushing this gold standard thing.

    If they do audit, how could we ever believe them anyways, look at how corrupted the 911 commission was. AND THE JFK THING! AND EVERYTHING ELSE IN DC!

    http://www.youtube.com/watch?v=KDHQ0Nn0lLM

    NO WONDER!?

    Reply

  9. Rand follower Says:

    Maybe people like the gold standard because without it, their family’s savings will be devalued 95% over an 80-year lifetime.

    Maybe the 1907 panic (aka the “Rich Man’s Panic”) led to the Federal Reserve under the cover of night because the aforementioned rich men wanted a permanent, self-renewing bailout provider. Just ten years earlier, a public electoral battle had voters choosing gold explicitly over silver, the soft money alternative.

    How does the failure of the Bretton Woods regime make the case against the gold standard? What about Jude Wanniski’s gold standard (the New York fed targets a gold price rather than an interest rate, using the same open market operations). The Fed doesn’t need a single ounce of gold to run that gold standard. A better alternative would be for the Feds to get out of the money and economy businesses. Under free banking, one bank could issue fully-backed gold notes, and another could issue Ponzi notes. Caveat Bankor. And yes, market discipline should be on the liability side.

    Maybe Warren Mosler only talks about “flows” and pretends “stocks” don’t matter, because he desires a Latin American / Caribbean style populist democracy, where the savings of the middle class are repeatedly confiscated by direct theft or inflation, turning the middle class into paupers mewling with their beaks open to the ‘benevolent’ military ruling class. Ruling from a sweet, double hulled catamaran?

    For some reason Mosler is rebelling against the Anglosphere achievement of absolute individual property rights guarded by English common law. Read his white papers to see how and why he wants to tear down Western civilization.

    Reply

  10. warren mosler Says:

    Maybe people like the gold standard because without it, their family’s savings will be devalued 95% over an 80-year lifetime.

    THEY ARE ENTITLED TO THEIR OPINIONS.

    OTHERS DON’T LIKE THE PERIODIC BOUTS OF 25% UNEMPLOYMENT AND MASSIVE REAL LOSSES OF OUTPUT.

    THE GOVERNMENT PROTECTING A FEW FAMILY’S SAVINGS AT THE COST OF 25% LOSSES OF REAL OUTPUT FOR EVERYONE ELSE SEEMS TO HAVE LOST OUT AT THE POLLS.

    ARGENTINA WAS THE LAST MAJOR FIXED FX COLLAPSE WHICH DIDN’T HAPPEN UNTIL THERE WERE 32 DEAD IN THE STREETS ONE NIGHT IN THE RIOTS.

    Maybe the 1907 panic (aka the “Rich Man’s Panic”) led to the Federal Reserve under the cover of night because the aforementioned rich men wanted a permanent, self-renewing bailout provider.

    NO DOUBT! AND PEOPLE WENT ALONG WITH IT TO HOPE TO PROTECT THEIR JOBS AND INCOMES AS WELL?

    Just ten years earlier, a public electoral battle had voters choosing gold explicitly over silver, the soft money alternative.

    TRUE. THE BLIND LEADING THE BLIND. STILL THE CASE FOR THE MOST PART.

    How does the failure of the Bretton Woods regime make the case against the gold standard?

    IT MAKES THE POINT THAT THE GOLD STANDARD ISN’T SUSTAINABLE AT THE INTERNATIONAL LEVEL.

    What about Jude Wanniski’s gold standard (the New York fed targets a gold price rather than an interest rate, using the same open market operations).

    FORBES STILL HAS THAT AS A PROPOSAL AS WELL.

    HOWEVER IT DOESN’T WORK. OPEN MARKET OPERATIONS HAVE NO CONNECTION TO THE PRICE OF GOLD. I HAD THAT EXCHANGE SEPARATELY WITH STEVE AND JUDE MANY YEARS AGO. IT WAS CLEAR THEY HAD NO IDEA OF HOW RESERVE ACCOUNTING AND MONETARY OPERATIONS ACTUALLY WORKED AND SIMPLY STOOD BY THEIR EMPTY RHETORIC.

    The Fed doesn’t need a single ounce of gold to run that gold standard.

    THE POINT IS MOOT. MONETARY OPERATIONS ONLY OFFSET OPERATING FACTORS AND THEREBY ARE PART OF THE PROCESS THAT SETS INTEREST RATES, AND NOT (NET) QUANTITIES OF ANYTHING.

    A better alternative would be for the Feds to get out of the money and economy businesses. Under free banking, one bank could issue fully-backed gold notes, and another could issue Ponzi notes. Caveat Bankor. And yes, market discipline should be on the liability side.

    THEY ALREADY DO THAT AND CALL IT STOCKS AND BONDS.

    WHATEVER THE GOVT TAXES IN BECOMES IT’S ‘CURRENCY’
    TAXES ARE A COERCIVE, NON MARKET FORCE. THEY INTRODUCE IMPERFECT COMPETITION TO ANY MODEL, AND ONLY WORK AS A NON COMPETITIVE COHERSIVE FORCE.

    SO ANY MODEL WITH TAXATION IS NOT A ‘FREE MARKET’ SITUATION.

    Maybe Warren Mosler only talks about “flows” and pretends “stocks” don’t matter,

    STOCKS MATTER A LOT AND ARE UNDER THE CATCH ALL CALLED ‘SAVINGS DESIRES’

    because he desires a Latin American / Caribbean style populist democracy, where the savings of the middle class are repeatedly confiscated by direct theft or inflation, turning the middle class into paupers mewling with their beaks open to the ‘benevolent’ military ruling class.

    AN EMPLOYED BUFFER STOCK IS A SUPERIOR PRICE ANCHOR TO AN UNEMPLOYED BUFFER STOCK. MY PROPOSALS WORK TOWARDS FAR GREATER PRICE STABILITY THAN THE CURRENT ARRANGEMENTS.

    Ruling from a sweet, double hulled catamaran?

    GLAD YOU LIKE IT!!! AND DON’T FORGET IT SETS NEW STANDARDS FOR FUEL EFFICIENCY. 10 GPS AT 20 KTS WITH THE RECENT INSTALLATION OF SMALL FORWARD FOILS. THAT’S BETTER THAN DOUBLE WHAT ANY OTHER 50 FT CAT CAN DO WITH MONOHULLS EVEN WORSE.

    For some reason Mosler is rebelling against the Anglosphere achievement of absolute individual property rights guarded by English common law. Read his white papers to see how and why he wants to tear down Western civilization.

    AND THE MARXISTS DON’T LIKE ME BECAUSE THEY ARE AGAINST ANYTHING THAT WOULD PROLONG CAPITALISM.

    Reply

  11. Scott Fullwiler Says:

    Never ceases to amaze me that people equate well-being or standard of living with the price level. Even in neoclassical microeconomics that’s not how you do it . . . any student doing that would fail my classes. Of course, there is some connection, but whether or not there has been a reduction in the purchasing power of the pennies in my pocket is a LOT less important than whether my real income and/or real wealth has risen. In short, I don’t care if I can’t buy a Hershey bar for a nickel anymore if I now can buy more Hershey bars. And any suggestion that the average American’s standard of living has declined over the past 80 years is laughable, as is the suggestion that their savings has declined 95% over that period . . . just investing in tbills over that period would have beaten inflation considerably (if not gold, too), without subjecting the economy to the excessive procyclicality of a gold standard.

    Reply

  12. Jim Baird Says:

    “OPEN MARKET OPERATIONS HAVE NO CONNECTION TO THE PRICE OF GOLD. I HAD THAT EXCHANGE SEPARATELY WITH STEVE AND JUDE MANY YEARS AGO. IT WAS CLEAR THEY HAD NO IDEA OF HOW RESERVE ACCOUNTING AND MONETARY OPERATIONS ACTUALLY WORKED AND SIMPLY STOOD BY THEIR EMPTY RHETORIC.”

    Let’s see – help me understand the reserve accounting, here: Let’s say we have a reserve requirement the same as today (for simplicity, let’s assume no interest on reserves). The Fed set the target gold price at, say, $500. The price starts to fall, so the Fed starts buy gold in the open market, increasing reserves in the banking system. The interest rate drops to zero and stays there. If the price starts to rise, the fed starts to sell gold, draining reserves from the system – if it drains beyond the minimum reserve requirement, interest rate jumped to infinity (or, more likely, to the discount rate, once banks gets over the “stigma”. Is that about it?

    Reply

    warren mosler Reply:

    with the forbes plan the fed would buy and sell only securities to get the price of gold up and down

    might still be on his website

    Reply

  13. Jim Baird Says:

    “Buy and sell only securities”

    How the hell would that work? Would it be like the Volcker fiasco where you’re attempting to “target” something that you have no control over, leading to 20% interest rates?

    Reply

    Scott Fullwiler Reply:

    Pretty much. Goodhart’s rule applies in both cases . . . the act of trying to take advantage of a correlation via policy rule merely leads to the decoupling of that correlation.

    Reply

    warren mosler Reply:

    exactly. it’s completely ridiculous and shows no understanding of monetary ops

    Reply

  14. Matt Franko Says:

    Ive been looking at some food price history and found
    this interesting link to some USDA price history for poultry, pork and beef. (MS Excel required)
    In the tables, if you go back to the 1980 timeframe, many gross farm values of the commodities really havent changed in almost 30 years (sometimes higher/sometimes lower/even with all of the “printing money!” LOL!). The retail prices have gone up some though.
    If this is where they measure “inflation”, I would submit that most retail price increases have probably flowed thru in some way to the “rentier” interests and their commerical real estate, that, through increasing leverage as interest rates have been slowly descending to zero now since 1981ish timeframe; have driven up the price of comm. real estate and now demand higher rents/prices for the retail space to sell the food products. The 25+ year interest rate ride to zero is over now though. May be business as usual for the farmers, the rentiers are going to have problems going forward with the same game plan IMO.
    Resp,

    Reply

  15. Rand follower Says:

    If soft money is so great for the middle class then why did real US median incomes march steadily upwards for decades until 1973 when they plateaued forever? Closing of the gold window just a coincidence? Blame the god-like Saudis for 35 years of stagnant real income?

    Or could it be that closing the gold window steamed open the middle class’ paycheck envelopes for steady looting year in and year out?

    Poor buggers put their wives to work to keep real household income increasing. Then started to borrow against homes, then borrowed unsecured until it all maxed out.

    The entire soft money experiment since Nixon has been a disaster for the middle class.

    Who cares about occasional 25% unemployment when the alternative is decades of real income stagnation? I’ll move in with my in-laws for a few years’ depression if I can have real income increases for the rest of my working life, (only ever happened with hard money).

    @Warren yes, a personal gold standard / simulation of free banking is possible with stocks and bonds – just invest your paycheck in GLD every two weeks

    @All if middle class savings is so risible and irrelevant then how do you explain the importance of dowries worldwide, and how do you explain away the immense transfer of wealth from older to younger generations (not just the Rockefellers). One explanation for the rise of the Nazis is that the Weimer hyperinflation destroyed all of the dowries, which destroyed the transmission of middle class values, which destroyed the middle class, without which no free society can survive. Without the bourgeoisie, Germany was up for grabs between the international socialists and the national socialists.

    Reply

  16. Military Keynesianism Says:

    “If soft money is so great for the middle class then why did real US median incomes march steadily upwards for decades until 1973 when they plateaued forever? ”

    Perhaps after WW2 we were one of the few nations that didn’t have our mainland and factories bombed to smithereens? The 70′s forward other nations had finally caught back up?

    “Closing of the gold window just a coincidence? Blame the god-like Saudis for 35 years of stagnant real income?”

    I see a lot of high rises in Dubai that probably wouldn’t have been built there but in the USA had those oil fields been under our borders and not theirs.

    “Poor buggers put their wives to work to keep real household income increasing.”

    I appreciate your spirit, but my granpappy worked 8 kids, 2 mules, and 1 wife like slaves on the family farm in Alabama during the 30′s forward. Picking cotton and harvesting corn mostly. Today all our children are TOO GOOD to do farm work and we import immigrants. And our wives – LOL! – read up on mike lewis of “liar’s pokers” fame – he just published a new book how the women of 50 years ago did much more domestic/child rearing work than today – now men have been bitched out and do a lot more of that work than they used too. He is really pissed about it, his father walked in on him changing shitty baby diapers and said what are you doing fool? That is the womans job! I know until about 10-15 years ago most mens bathrooms in the USA had no baby diaper changing station, but now most do, what an EVIL plot as been foisted upon us men by these EVIL feminazis.

    “Then started to borrow against homes, then borrowed unsecured until it all maxed out.”

    Have you seen the commercial on youtube about the wife convincing her dumb husband to get more house than she can afford “susan researched this?”

    “The entire soft money experiment since Nixon has been a disaster for the middle class.”

    It has been a disaster for white western males, but from barack obama to nancy pelosi, the women and minority power has went WAY UP.

    Reply

  17. warren mosler Says:

    the ‘labor market’ is not a fair game as a basic point of game theory
    people have to work to eat
    employers hire if they think they can make a desired return on investment.

    therefore the tendency should be to see real wages stagnate indefinitely
    if ‘left alone’

    prior to the 70′s labor unions had sufficient power to keep real wages rising. once imports broke business pricing power and thereby union power as well real wages stagnated.

    without some kind of ‘external’ support wages will not recover.

    and with today’s high unemployment policy it could get a lot worse
    as this admin presides over what may turn out to be the largest transfer of real wealth away from workers in history

    Reply

    Military Keynesianism Reply:

    “without some kind of ‘external’ support wages will not recover.”

    The local theme park a few years ago was flying in african tribal people to work. Also some of the hotels I visited in atlanta last year also had african tribal people working. There are several macro trends to consider, world population growth experienced a one time BOOM that will never be repeated going forward. Less supply of humans will impact global wage markets. Secondly though, as far as the US is concerned, where do we go to find more humans to exploit? We seem to have already tapped asia and africa – where is the next group of uneducated rural folk to bring into the world economy. My japanese friends say thier wives no longer mop floors because they have that “scooba” and “roomba” robot, so as we build up the robot workers that is one last macro trend to keep prices going down – john henry just couldn’t compete with that digging machine.

    Reply

    zanon Reply:

    WARREN: Your reasoning is not correct here.

    1. people have to work to eat — TRUE
    2. employers hire if they think they can make a desired return on investment. — TRUE

    3. therefore the tendency should be to see real wages stagnate indefinitely if ‘left alone’ — FALSE

    Firms can replace the man, but the man can also replace the firm. Labor and capital are complements, as well as substitutes. As productivity goes up, the gains get split between labor and capital. Real wages should (and have) increased. This split has remained remarkably stable in the us at about 70%, in favor of labour.

    Reply

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