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Berkshire Hathaway Inc. Message Board

  • goofybot_7 goofybot_7 Jan 5, 2004 12:57 PM Flag

    Gold used to serve as a central bank

    The ever expanding world production of gold before the 1930s served as a central bank practicing world-wide easy monetary policy. New liquidity was being injected into the economies, while inflationary expectations remained close to zero (because government spending was under tight control under the Gold Standard). By 1930, the world production of gold slowed down significantly and was outstripped by population growth. Since most leading currencies were pegged to gold (Gold Standard era), the amount of dollars per capita dropped and the Great Depression followed. Value of the dollar started growing (more people chasing the same amount of dollars) prices started falling, market interest rates shot up into the stratosphere and unemployment soared.

    The Keynesian folly distracted most governments from the real cause of the world-wide depression: contraction of money supply. In fact, the high-tax, big government policies worsened the economic plight and slowed down the recovery from the Depression. Government deficit spending did inject much needed liquidity into the markets, but did so in a perverse and inefficient way. No wonder it took almost 8 years to shake the Depression off completely.

    Because there was no mechanism of controlled expansion of money supply at the time, the US government followed the welfare state, high-tax, deficit spending ideas of Keynes instead. The idea that the free market will always provide full-employment was abandoned.

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    • >Both dumb as a rock and smart as a fox, which help make any top-down anaylsis suspect;-).<

      I vote for dumb as a rock, bought and paid for, and/or politically motivated. :-)

    • Then again, maybe $500 gold and $40 oil are just 'normal'.

      "they are dumber than a rock as a group"

      Both dumb as a rock and smart as a fox, which help make any top-down anaylsis suspect;-).

    • >Any change in policy by the central banks would absolutely kill the gold rally and cream the gold mining stocks.<

      Yes. Probably temporarily.

      Considering the Fed's and Washington's policies, the losses they are piling up on dollars currently etc... it would convince me further they are dumber than a rock as a group - which in turn would make me more bullish. :-)

    • Its intersting that the Keyenisan view seems to have made strong inroads with former autrians like greenspan.

      If I should be so bold, I think some of the Keyensian re-birth actually has come from the moneterist school from chicago.

      Typcially, the moneterists were grouped with the autrians.

      Thinking outloud, it seems to me that, the moneterists have come fully to grip with the notion of a fiat currency. Originally more inclined perhaps to Avoid the fiat currency, the monerists realized that the currency supply must grow at least as fast as the economy, else the currency itself becomes a restriction towards necessary credit for an economy to expand.

      They initally held the view that a central bank, should not try to intervene actively but to act predictably in allowing the steady predictable increase in supply of money.

      However, thinking alloud, I think that they have studied more and more the anomolies of "animal spirits", waves of demand, over investment, world currencies, world trade.

      Well perhaps I won't speak to what "they" think.

      The point is that we do have a fiat currency. The point is that until or unless the currency's inflation becomes so rampant that it doesn't make a useful tool for exchange, its likely to be continued to be used.

      The keyensian notions early uses often caused crowding out ... putting too much money into hands that perhaps sopped up output but didn't lead towards productivity growth.

      But the monterists, being more perhaps attuned to the notions of credit rather than seeking to meddle specifically in a planned economy, perhaps have taken a more dynamic view towards money.

      I've even hear the Austrians say, money is not wealth...especially fiat money.

      And that is precisely the point. Fiat money is an instrument of exchange...with a half life, and if enough of it is printed, and makes its way into investments, real interst rates might be negative.

      A use it or lose it concept would prevail, which would be dangerous if consuption curtailed investment, but given the huge demand for investments for a wealthy society in which many hope to retire and spend their lives not working, given the huge surpluses of US currency held by foreign governments that don't seem to want our products.

      Well it seems to me that there will be money to be invested.

      The issue of course is whether the "investements" will prove to be investments at all.

      The austrians talk about mis investment, as a harmful think. I do agree that overinvestment hurts others with current investments in a field. It may be harmful to the investors themselve too. But I think mis investment must just be seen as another element of consumption. And some of the this "misinvestment" consumption certainly does boost productivity for society, for even as the investors are hurt because the venture doesn't make money, newer more efficient plants processes and extra real wealth resources like pipe and stuctures remain to serve society.

      Its one tricky thing, especially for an investor. Money might not return anything and many fields will be minefield to invest in as the fields capacity might over expand.

      In this sort of environment, I can see how somebody buying "overpriced" real estate might feel most comfortable. While they may or may not come out ahead if they were to sell, they would almost certainlym, if they paid off the thing, eventually have something of some unrefutable value (unless rents even dropped below the costs of insurance, maintenance, and property taxes)

      • 1 Reply to sometomfool
      • I guess we agree that controlled monetary inflation is a boon to the economy as long as the reported price inflation is low (even intentionally so). Governments found CPI to be a real windfall. Print 10% more money, and a certain preparation of CPI will only rise 2%. Spend the 8% difference, cut taxes, and get reelected in a landslide!

        Keynes certainly made a useful contribution to econometrics, but overall his model is fatally flawed because it follows from the model that tax increases lead to greater aggregate demand. His idea of animal spirits is certainly valid, but he did not see the causal link from monetary policy to "animal spirits". Although animal spirits can marginally affect money supply and interest rates, the reverse causal relationship is far stronger, almost overwhelming. Easy money policy will lift the most despondent "spirits".

        Discretionary monetary policy practiced by the Fed is definately one of the most flexible and powerful tools in a free market economy. Keynesian big government approach is unwieldy and harmful to free market.

    • But, goofy, that's not what happened at all! The central european hyperinflations, wheelbarrows full of money for a loaf of bread, you're saying all that came from the gold standard? From DEflation? What?

      Maybe my computer is broken today, I am getting a lot of strange posts.

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