

James Grant: Requiem for the Dollar  - cwan
http://online.wsj.com/article/SB10001424052748704342404574575761660481996.html

======
gsaines
Interesting article, but not terribly useful or pragmatic. I was also hoping
for a little more self-awareness. The author is essentially railing against
the US policy of printing money to get out of crisis (which is a valid point)
by advocating a solution that would send the entire world economy into a
recession that would make this one look like the 2001 dip. Because it's the
WSJ, I guess I should have expected at least some conservative rhetoric, but I
found it a little too naive.

What would have been a more interesting question to consider is what can be
done to address the trade deficit and inflation problems with our current
monetary system. Although it's valid to suggest that minimum viable product
wouldn't work for macro and international economics, it has a lot less
practical application.

~~~
zaphar
can you back up your statement that his proposed solution would send the
entire world into a recession? I always find it interesting that people say
this and yet don't give any reasons why. I'm not financial genius myself but
surely just collateralizing the dollar with something automatically cause a
recession. What exactly is the mechanism you think would cause this? Asking
cause i genuinely don't understand myself.

~~~
cynicalkane
It's bizarre these so-called conservatives at the WSJ have abandoned Chicago
style economics for gold-bug reactionary alarmism.

The monetarist theory--now the dominant theory of monetary policy--is that one
of the biggest, most economically important features of a recession is a
flight to liquidity. In such a situation, the demand for tangible money--and,
under US law, there is none more tangible than the dollar--will drastically
jump, despite a limited supply. Nobody doubts the tangibility of the dollar
when they are forced to pay taxes, and if they do, they might find themselves
in a cell with a tangible lock and 6 by 6 tangible feet.

The correct thing to do, then, is to expand the money supply. This might
happen by a seemingly alarming amount, especially given the highly leveraged
nature of our economy. But otherwise a flight to liquidity will shut down the
financial system, cause huge losses in "safe" bank accounts and funds, cause
massive deflation as money becomes scarce, and cause a nasty depression--which
is what happened from 1929 to 1932.

The money supply has expanded from about $800 billion to $2 trillion.
Alarming? Maybe, but

1) we're not seeing inflation yet

2) most economists agree that the Fed contracting the money supply was a major
cause of the 1929 Depression

3) the Fed is perfectly willing to stall the economy to prevent inflation,
which is what they did in 1979 when a shameless monetarist finally was given
power. See:
[http://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_Fe...](http://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_Federal_Reserve)
. It's worth noting that Volcker is one of Obama's chief economic advisors:
the guy in charge of economic recovery board.

4) the amount of paper cash has increased by a "mere" 120 billion or so. Most
of the remaining cash is sitting in Federal Reserve bank accounts, not being
used.

So I wouldn't dump greenbacks yet. If you're like most people few of your
assets are in greenbacks anyway.

Finally, if I keep seeing articles like this, I'm buying puts on gold. You
heard it here first, folks.

~~~
patrickgzill
If you claim that you haven't seen inflation, then I am going to guess that
you are not the one in the household that is buying groceries. Example: Wheat-
based products like pasta used to sell on sale for 50 to 80 cents /lb; now a
sale price is $1/lb; or an increase of over 20% over the past 2 years.

~~~
jonknee
And yet in the real world wheat prices peaked in 2008 (along with oil) and are
now back to 2006 prices of ~$200/metric ton.

[http://www.indexmundi.com/commodities/?commodity=wheat&m...](http://www.indexmundi.com/commodities/?commodity=wheat&months=120)

Don't base inflation on your local Safeway.

~~~
pmorici
Why not? For the average citizen prices at the local store are the thing that
immediately effects their daily lives and will in turn cause them to change
their spending habits accordingly subsequently effecting other parts of the
economy beyond basic needs.

~~~
jonknee
Because how much you spend for wheat is not what inflation is (unless the only
thing money was used for was to buy wheat). The price changes of any one good
is an inaccurate look at inflation. Oil tripled last year but that doesn't
mean we went through 300% inflation.

------
mark_l_watson
It seems to me that many (most?) people I know just can not cope with the
truth about our economy, but there is some real nervousness. I have had
friends who have lost over 50% of their retirement funds in the last two years
- they tend to be more realists than other friends and family members who get
(or will get) government pensions. The pensioners tend to have faith in the US
and local governments that seems to me to be outside the bounds of clear
thought and common sense.

I may be over simplifying this, but I think that in addition to the obvious
greed and avarice of the elites, that we have a basic problem with fear. Fear
can keep a society from making sacrifices now rather than postponing the pain
and making the future more difficult.

I think that the next ten years will be interesting to live through (in
negative and in positive ways) but facing problems head on seems like a better
approach to what our leaders are doing now.

------
rg
A much deeper article by software entrepreneur "Mencius Moldbug":

[http://unqualified-reservations.blogspot.com/2009/12/gold-
an...](http://unqualified-reservations.blogspot.com/2009/12/gold-and-central-
banks-game-theory.html)

"If gold will eventually be remonetized, gold is insanely cheap. If gold will
never be remonetized, gold is insanely expensive. It's one or the other.
Therefore, if you guess right about this question, you will make huge profits,
and if you guess wrong take huge losses."

"The reason I still expect gold remonetization to happen - in the long term,
not tomorrow! - is that there's simply no other viable alternative. Everyone
knows that the global economy needs a new currency. Most can see that the
dollar cannot be saved or replaced by any other sovereign currency or basket
thereof - because no central bank could tolerate the economic effects of the
upward revaluation that would result if its currency replaced the dollar in
C[entral] B[ank] portfolios"

~~~
jordanb
Gold isn't a viable reserve currency. The supply of gold is dictated by mining
operations, not by the liquidity needs of the world economy.

And there is a viable alternative reserve currency:
<http://en.wikipedia.org/wiki/Special_Drawing_Rights>

~~~
kingkongreveng_
The supply of gold is irrelevant as long as the above ground gold stores dwarf
what is mined every year. A single ounce of gold is theoretically sufficient
to run the entire economy. The value of that ounce would just shoot up as the
economy grew more productive.

What exactly do you mean by "liquidity needs"? If people need cash they earn
it or save it. That cash is supposed to represent real wealth someone saved.
If it's printed out of thin air it just represents a theft from people who
have actually produced and saved.

~~~
ubernostrum
_The value of that ounce would just shoot up as the economy grew more
productive._

Which is a coy way of saying "there would be massive, uncontrollable price
swings".

With a gold standard and modern economies you don't get wild inflation, but
you do get wild _de_ flation, with effects just as bad (since inflation and
deflation are isomorphic to each other).

~~~
kingkongreveng_
Steady deflation is natural and good. As technology and business grow more
productive prices generally fall. Prices fell for most of the 1800s (pre
central bank).

The problematic deflation associated with depressions is simply the
consequence of fiat money credit bubbles collapsing. That deflation is an
indictment of artificial interest rates and fiat money.

~~~
ubernostrum
But a gold standard, today, wouldn't produce steady deflation, so you're not
really arguing with what I said.

(a gold standard, in this modern world, would tend to produce periods of wild
price fluctuation, ending with a significant deflation from the previous
status quo)

~~~
kingkongreveng_
Yes, gold money would result in steady deflation as the economy grows. We have
wild price swings now. Look at chart of any major commodity over the last 10
years. Gold would stabilize it as there would be no hot money flows on a gold
standard.

~~~
ubernostrum
I've explained this before, and probably will have to explain it again:

<http://news.ycombinator.com/item?id=629390>

If you're right, basic economics is wrong. More likely, basic economics is
right and you're wrong.

~~~
kingkongreveng_
You didn't explain anything. Why would the value of a constant amount of money
increasing in proportion to productivity growth lead to "wild fluctuations"?

~~~
ubernostrum
You seem to take it as given that the opposite imbalance (rapid inflation)
would lead to wild fluctuations. I'm inclined to agree, since actual prices do
not move in perfect lockstep and there will be a great deal of uncertainty in
all markets.

But that's the same as an admission that rapid deflation (a necessary
consequence of the effectively fixed amount of gold) would do so as well. This
is true because, logically, the effects of either type of imbalance should be
similar, with the only difference being the direction of the final stable
point (up in the case of inflation, down in the case of deflation).

~~~
rsheridan6
The US economy grows by about 3% a year, give or take a point. With gold money
and a constant supply of gold, I fail to see why this would lead to "wild"
deflation. It seems that deflation should mirror economic growth, which is
hardly wild.

~~~
ubernostrum
The problem isn't the average year over year. The problem is the outliers: we
live in a modern world where massively game-changing events can occur and
spawn whole new industries almost overnight _without_ correspondingly wiping
out old industries in the same time period (once such event -- the Internet --
is how you're talking to me right now). These events cause sudden huge upward
swings in available goods and services, while gold remains stable. The only
thing that can happen to a gold-standard economy in such a situation is
crippling deflation.

~~~
rsheridan6
I didn't see this for a week so you probably won't either, but here goes:

Productivity has grown a few percentage points a year, give or take,
consistently, for a long, long time. One industry may boom for a decade, but
the economy as a whole is relatively stable. I'm still not seeing anything
wild.

------
billswift
One thing I haven't seen mentioned recently, though some of the comments here
reminded me of it, is the effect of fairly steady deflation, the kind enforced
by a gold standard, on savings rates. Deflation boosts savings and depresses
borrowing, because the value of the dollar will be higher in the future, so
you are getting higher interest (ie, benefit more) from savings and losing
more in interest (ie, paying more) on loans.

------
trebor
I must say, the value of the dollar is depressing. Take a gander at this
comparison I did of the Yen and Yuan compared to the dollar (btw, falling is a
bad thing in this chart!)...

>
> [http://finance.yahoo.com/echarts?s=CNY=X#chart3:symbol=cny=x...](http://finance.yahoo.com/echarts?s=CNY=X#chart3:symbol=cny=x;range=my;compare=jpy=x;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined)

In my opinion as a US citizen, we need to enforce the currency law and enact
the death sentence upon all who have perpetrated this upon our country and our
fellow citizens. These persons have committed mass fraud, manipulated
financial markets, and have almost irrevocably destroyed our prosperity. Off
with their heads: we must make an example of them!

It's high time we return to the gold/silver standard.

~~~
jonknee
China's got a lot more to lose with a strong Yuan that we do. They'll price
themselves out of their entire manufacturing chain.

