Money, concern about inflation?

[mudsling3]

Currency/money, I am sorta just use them for granted just like many other people. Not until recently I came to some better understanding of these terms and concepts such as: Fiat money, inflation, central banking, gold and silver standard…

“Buying gold and holding it is somewhat analogous to converting one’s savings into one hundred dollar bills and hiding them under the mattress-- yet not exactly the same. Both gold and dollars are considered money, and holding money does not qualify as an investment. There’s a big difference between the two however, since by holding paper money one loses purchasing power. The purchasing power of commodity money, i.e. gold, however, goes up if the government devalues the circulating fiat currency.”
http://www.ronpaullibrary.org/document.php?id=537

[Prime Junta]

Inflation is a fact of life. It was even when money was fixed to the gold standard -- since people kept mining for gold, the supply of potential money kept growing too. It's even more so nowadays that money has become very much an abstraction -- a set of bits stored by a bank, basically.

As to inflation, yes, it is something you should be aware of. We live in a globalized economy, where a crisis in one area can have major and unpredictable effects in other areas, especially since transactions can happen in real time, simply by shifting bits from one bank to another. One effect can be sudden changes in currency value.

Take the value of the US dollar. It's been depreciating steadily against the euro, pound, and yen for a while now; in fact it's lost nearly half its value against the euro compared to the highest point it had. The reason is pretty simple: America is running a pretty damn huge "triple deficit" -- trade, budget, and investment. Essentially, it's buying foreign goods by printing money. That sort of thing can't go on forever.

The worst-case scenario is an Argentina-style meltdown, characterized by mass unemployment and hyperinflation (i.e., the currency losing virtually all of its value within a few weeks). This could happen following a cascade of bad things happening at a bad time. I kinda doubt we'll see that with the US dollar, but some pretty respected economists refuse to rule it out either.

In any case, I have a pretty strong feeling we're heading into another economic recession. One's due about now. How deep it will turn out to be, I don't know.

What does it mean to you personally? That depends entirely on your economic situation. The worst place to be when something like that happens is between two houses -- you've just bought a new one but haven't managed to sell the old one, when all of a sudden the value of both houses falls through the floor as your interest payments go through the roof. That's personal bankruptcy time. The best place to be is having a solid, unexciting job in a solid, unexciting industry, with a reasonable but not overwhelming debt burden. You'll probably keep your job allowing you to keep up payments, as inflation will shrink your debt, and once the recession ends, you'll come out smelling like a rose.

[mudsling3]

Thanks to your input, I am learning as much as I can about this issue. Just talked with a co-worker of Mexican native, who informed me that the new Peso has dropped to 11 Peso to 1 $ since its inception in 1994 (3 Peso to 1 $), and Mexicans prefer saving in dollars. Just wait till they know what the dollar is doing!

Housing is hot in the financial news here in the States, I read that the current SubPrime housing bubble has great impact on global ecoonmic, as a German bank losing billions of euro investment and not to mention thousands of people losing their homes and owe thousands of dollars. This #&@*ing varible interest rate policy was supposed to help less affluent people to purchase their home. It is a scam through and through.

Seems hard to have a inflation-proof currency as the price and value of every commodity flutuates. However Fiat money is only worth the ink and paper, the inflation potential is almost limitless as comparing to commodity-base currencies. Someone raised an interesting example, in early 1900 a silver Morgan dollar(90% silver, 26.7g) gets you 4 gallons of gas, and today an once of silver($13, 31.3g) will also get you 4 gallons of gas. That's an astounding revelation in how commodity base currency can maintain its value. Fiat money has loop holes built-in for exproitaion, I think it is crazy to allow it to continue.
Here is a link to some more info about old gold standard, maybe new gold standard
http://news.goldseek.com/bullnotbull/1182956520.php

[Prime Junta]

Yah. I wonder which bright light thought it was a great business idea to lend money to people who are unlikely to be able to pay it back...?

I very much doubt we'll go back to a commodity standard currency, despite the advantages. We're just going to have to live with the volatility associated with fiat currencies. Basically, commodity standard currencies always sound like a great idea during an economic downturn, but they become a bad idea during an upturn.

The gold standard is like a built-in speed limiter on a car -- if you feel that the driver will kill somebody if they go past 60 mph, you should install one -- but then not be surprised if a better driver zips past them at 80 because they don't have the limiter.

[Corwin]

Here, we control inflation by increasing the prime interest rate everytime inflation is in danger of going up!! It's not very popular with anyone except the economic bean counters!! Fortunately I don't have a mortgage, but a volatile stockmarket affects me since all my superannuation is invested in it!!

[Alrik Fassbauer]

People tend to invest and hoard (so to say ;) ) in strong currencies - and what's stronger than precious, rare materials (like Gold and Platinum, for example) ?

Currently, the Euro is quite strong. I believe that this might have some effects - for Europeans, for example, buying stuff in the U.S. is now a bit cheaper.

[Bartacus]

Currently, the Euro is quite strong. I believe that this might have some effects - for Europeans, for example, buying stuff in the U.S. is now a bit cheaper.

Yeah, but there are also things like importcharges and sometimes it can not even be bought here. For example an PS3 costs 600$ in the USA, but it costs also €600 here in Belgium. Compagnies simply ask more revenue.

[mudsling3]

@Prime Junta, Speed limiter as an analogy has a little bit of appealing to vanity :) IMO, Fiat money/FED is a superbus without upper speed limit, the driver's temptation is to drive it as fast as he can in the absence of police patrol. Unfortunately, there are hazardous oil spills such as Subprime mortage, prolonged wars along this once-use highway. You can imagine what happen if it spins out of control, and there are no airbags for the passangers except the driver.

this article about subprime today
"The near zero liquidity of these highly leveraged funds has resulted in margin calls, panic, and some of these funds being forced to sell positions in other sectors of the market. But, this crisis is near over. The Fed has come to the "rescue." Just today it has pumped $19 billion in new reserves into the banking system by buying mortgage securities. My rough calculation suggests that over the last two days the Federal Reserve has pumped in enough new reserves to increase the money supply by somewhere between 10% and 15%"
http://www.lewrockwell.com/orig8/wallach1.html

[Prime Junta]

@Prime Junta, Speed limiter as an analogy has a little bit of appealing to vanity :) IMO, Fiat money/FED is a superbus without upper speed limit, the driver's temptation is to drive it as fast as he can in the absence of police patrol. Unfortunately, there are hazardous oil spills such as Subprime mortage, prolonged wars along this once-use highway. You can imagine what happen if it spins out of control, and there are no airbags for the passangers except the driver.

That's true, but still, consider how gold prices react to market conditions. When the market goes down, gold goes up as investors shift money into low-risk, low-return stuff. When the market goes up, investors shift money into high-risk, high-return stuff, and gold goes down.

So, if the dollar was a gold standard currency, it would be worth more than twice as much now than it was in 2001 -- IOW, it would be ridiculously low in 2001, and ridiculously high now. Neither of these things would be good for the national economy.

Basically, the gold standard is no substitute for sound economic policy. It just makes it a bit more difficult to have a disastrously bad one. What's more, it's not foolproof -- when down to the wire, there's always the temptation to debase the currency. I'm quite sure that the pressure to do just that would have been pretty huge when gold was going at $250 an ounce!

this article about subprime today
"The near zero liquidity of these highly leveraged funds has resulted in margin calls, panic, and some of these funds being forced to sell positions in other sectors of the market. But, this crisis is near over. The Fed has come to the "rescue." Just today it has pumped $19 billion in new reserves into the banking system by buying mortgage securities. My rough calculation suggests that over the last two days the Federal Reserve has pumped in enough new reserves to increase the money supply by somewhere between 10% and 15%"
http://www.lewrockwell.com/orig8/wallach1.html

Which, of course, will further weaken the dollar.

The problem is that due to the Bush administration's disastrously bad economic policies, the Fed is caught between a rock and a hard place. The dollar is looking very wobbly to start with, so pumping more into the market will weaken it further, which reduces the purchasing power of the American economy, which risks slowing growth and a recession; not pumping more into the market risks a liquidity crisis and a recession. If the dollar was on a sounder basis to start with, injecting dollars into the economy could actually stave off a liquidity crisis while having only a minor effect on the value of the currency. But it's not, so things aren't looking good.

[Corwin]

The problem is, when America sneezes, the rest of the world catches the flu!!

[txa1265]

The problem is, when America sneezes, the rest of the world catches the flu!!

That is the thing ... I don't disagree with PJ's reasoning, but he does have a strong anti-American bias that shows through on all of his posts, which seems to cloud the reality that US downturn = world recession, whereas other markets faltering, even huge ones like Japan, have only limited global reach.

Of course, the real answer is to get some sound economic policy in the US.

[Prime Junta]

@txa -- I could counter that by pointing out that you have a strong pro-American bias, which seems to cloud the reality that the US economy is no longer the dominant one in the world. The EU economy is bigger, the East Asian one has reached the same scale as the EU and the US, and the Russian one is much more robust than during the last recession. Moreover, the status of the dollar as the world's reserve currency has already been eroded by the euro. All of this will soften the impact of a US recession on the global market.

Second, I do feel that a global recession is a price worth paying if it means the US dollar will completely lose its status as the world's reserve currency, which would reduce American economic and political power to a more reasonable level. The current system is seriously out of balance, and the longer it goes on without a correction, the harder the fall will be when it happens. I'd rather get it over with sooner than later.

But no, it won't be pretty, and yes, the effects will reverberate all around the world for sure, even to the point of a global recession.

[txa1265]

I'd rather get it over with sooner than later.
Very true - I think that the antagonistic interdependence in the world vis-a-vis the US is not a good thing (i.e. we HATE you ... now please send a check) ... the reality of the world has shifted and I cannot stand the way in which the current administration seems to have adopted the line put forth in many video games and trashy scifi books and movies that our power can only exist when faced with a massive enemy ...

[Prime Junta]

Very true - I think that the antagonistic interdependence in the world vis-a-vis the US is not a good thing (i.e. we HATE you ... now please send a check) ...

I'm curious... which speaker do you think has which line? Both, perhaps?

[txa1265]

I'm curious... which speaker do you think has which line? Both, perhaps?

... I *did* use interdependence ;) Funding comes in many forms above and below the obvious means ...

[Prime Junta]

Very diplomatic answer. Also known as a "dodge." Good job. ;-)

[txa1265]

Very diplomatic answer. Also known as a "dodge." Good job. ;-)

It wasn't intended as a dodge - I think that too often a 'black or white' answer is sought when the reality is much more gray. Because when it comes in terms of direct aid, sending troops or hardware or whatever, the world tends to look to the US more than any other single country ... but given deficits and cooperation deals and other behind-the-scenes stuff, the flow of money isn't ever particularly 'transparent'.

[Prime Junta]

It wasn't intended as a dodge - I think that too often a 'black or white' answer is sought when the reality is much more gray. Because when it comes in terms of direct aid, sending troops or hardware or whatever, the world tends to look to the US more than any other single country ...

Yes, Americans do like to think that.

...but given deficits and cooperation deals and other behind-the-scenes stuff, the flow of money isn't ever particularly 'transparent'.

That it isn't.

[txa1265]

Yes, Americans do like to think that.
... .

[Prime Junta]

A couple of facts about foreign aid:

(1) The USA is the largest individual donor nation.
(2) Almost all US foreign aid comes with very short strings attached: it goes to reward political allies. This is not the case with most other donor countries.
(3) As a percentage of GNP, the USA is towards the bottom of the pack of industrialized countries when it comes to foreign aid.
(4) If you consider the EU as a single economic unit, it is quite a long way ahead of the US in foreign aid, both in absolute and in relative terms.
(5) In UN peacekeeping operations, the USA comes in at number 43. It has about 300 peacekeepers around the world. The largest single contributor is Pakistan, with over 10,000 peacekeepers. (I won't go into the NATO peacekeeping operations here.)

What I'm sayin', is that the world does not, in fact, look the USA first for assistance or relief. The reasons are that (1) the assistance isn't anywhere near as big as Americans like to think compared to what other countries contribute, and (2) it always comes with some very tight strings attached.

[magerette]

On topic (I think) some might find the information in this article (http://www.ft.com/cms/s/80fa0a2c-49ef-11dc-9ffe-0000779fd2ac.html) interesting. Unfortunately, it is a journalist's rephrasing of the original report by the head of the U.S. Government Accountability Office, but it's pretty concise.

Edit: There is a link to the actual report in the article--I just overlooked it. It's an interesting read.

[Prime Junta]

Damn, I hate parallels like this one.

The fall of Rome was a pretty complex process. As such, you can easily find things to point to if you want to draw a parallel between it and any major power in trouble. However, it's just as easy to point to major factors with no clear analogies.

Moreover, the phrase "declining moral values and political civility at home, an over-confident and over-extended military in foreign lands and fiscal irresponsibility by the central government" is just plain wrong on a number of counts.

(1) If by "moral values" you're referring to the usual thing (i.e., sexual mores and hedonism), the late Roman empire actually saw a *tightening* of such values, as Christianity became the state religion. The high point of the Roman empire -- the period of the "Five Good Emperors" from Nerva to Marcus Aurelius -- was actually characterized by very permissive mores. Of course, if you're referring to stuff like corruption, nepotism, profiteering, and what have you, you could paint a different picture.

(2) The military during the late Roman empire was not, in fact, "over-confident and in foreign lands." If only. It was within the empire, keeping down insurrections at home and barbarians at the borders -- but it was no longer loyal to the central authority in Rome, rather than individual generals. That meant that whoever had the most loyal legions got to be Emperor, and the Praetorian Guard got to decide how long they stayed that way.

I'll give you fiscal irresponsibility -- that happened for sure. The Roman Empire was running huge deficits for a long time, pissing away the treasury to buy luxuries from the East. There you could draw a better parallel with the US, since the fiscal irresponsibility was largely caused by a huge disparities in wealth -- the poor were miserable to start with and only got poorer and more numerous, while the rich had all the power and just kept getting richer, which isn't that different to developments in the US lately.

However, the main problem with the parallel is that it misses both the major ultimate cause for the decline, as well as the obvious proximate cause. Namely, the decline of productivity due to ecological damage, and the little matter of the Huns -- or, actually, the huge population movements originating in Central Asia. Eastern Rome survived for another thousand years because they weren't hit as hard by the barbarian hordes, y'know.

Finally, the USA isn't Rome. The polities have hugely different social and political structures, values, capabilities, and histories. For starters, Rome's ascendancy lasted a half a millennium, while America's only been a great power less than a century, and a hegemonic one for little more than 50 years.

So the parallel isn't really very useful, other than as a rhetorical device.

[magerette]

Well, it's a rather grandiose(and over-used) parallel, I agree. As I mentioned, the article itself is by a journalist, and typically, the sentence he quoted was the only reference in the 14 page report that referred to Rome per se; it is a report primarily about fiscal irresponsibility and aging government, and it's main thrust is to point out that America needs smarter, more responsible leadership from the grass roots level to Washington. I imagine no one can argue with that. ;)

Here's a little snip of the actual report, (which is written in a rather breezy Suzy Sunshine prose--my bold) :

The problem is that much of government today is on autopilot, based on social conditions and spending priorities that date back decades. I’m talking about when Harry Truman, Dwight Eisenhower, and John Kennedy were in the White House. The fact is, the Cold War is over, the baby boomers are about to retire, and globalization is affecting everything from foreign policy to international trade to public health.
Unfortunately, once federal programs or agencies are created, the tendency is to fund them in perpetuity. This is what I mean when I say our government is on autopilot. Washington rarely seems to question the wisdom of its existing commitments. Instead, it simply adds new programs and initiatives on top of the old ones. As President Ronald Reagan once quipped, a government program is “the nearest thing to eternal life we’ll ever see on this earth.” This is a key reason our government has grown so large and so expensive.

[Prime Junta]

Well, it's a rather grandiose(and over-used) parallel, I agree. As I mentioned, the article itself is by a journalist, and typically, the sentence he quoted was the only reference in the 14 page report that referred to Rome per se; it is a report primarily about fiscal irresponsibility and aging government, and it's main thrust is to point out that America needs smarter, more responsible leadership from the grass roots level to Washington. I imagine no one can argue with that. ;)

I can.

The "grassroots" -- that is, everything up to the municipal and in many cases the state level -- actually works rather well in the US. The real problems are at the federal level -- that's where the closed political elite, the out-of-control government programs, the pork-barrel politics, and the corrupt lobbies are. All you have to do to solve them is to dissolve the union. ;-)

Incidentally, the Italians are in a similar situation, only worse. The difference is that Italy is a small country and therefore potentially easier to reform. So if you want to draw parallels, Rome in 2007 is a better place to look than Rome in 507.

[magerette]

I can.

:p

The "grassroots" -- that is, everything up to the municipal and in many cases the state level -- actually works rather well in the US. The real problems are at the federal level -- that's where the closed political elite, the out-of-control government programs, the pork-barrel politics, and the corrupt lobbies are. All you have to do to solve them is to dissolve the union. ;-)

Or change the nature of a man...

I agree that smaller is easier in terms of change--for good or ill. A large part of the problem is the hugeness of the country(and thus the infrastructure) the salad bowl effect of recent immigration/class polarization, and the enormity of overcoming the inertia of the past.

AFA grassroots functionality, having been a municipal employee for most of my life in small cities up to a fairly large one, I do agree up to a point. The problem is that the larger government(or possibly anything else) becomes, the more mediocrity, inefficiency and apathy intrude. I worked for a small city with big budget problems, but it was actually less of a nightmare in terms of accomplishing tasks than a large city with an almost unlimited budget. This problem is just exacerbated at the federal level and carried to the nth degree of inefficiency by what amounts to a sinecure for the self-serving careerists there employed. So the level of grass roots functionality depends heavily on how layered a bureaucracy you're dealing with. In terms of fiscal responsibility, many municipalities function just like the feds with far too little accountability, the delusive "lowest bid" system and strangling unionization.

[mudsling3]

good discussion... but I run out of ammo. Just dig around the web and brought a couple of books.
Ironically, this little paper was written by the God-father of Federal Reserve, Alan Greenspan before he became the Chairman.
http://www.eldoradogold.net/pdf/greenspan_economic_freedom.pdf
I seems to get the impression that fiat money is like a habitual drug user or gambler, it will only escalate to its inevitable and destructive end. but would take a grain of salt...from these advocates of Gold. Just like other things, it also follows the supply and demand curve.

An interesting site about Austrian School of economics, advocate of free market economic vs. statist. Central bank by definition is statism.
http://www.mises.org/

[zakhal]

Talking about inflation im more worried about inflation of computer hardware than money. I spend tons of hard cash on hardware that becomes worthless in just few years. Oh well one gotta have hobbies I guess.

[Prime Junta]

So the level of grass roots functionality depends heavily on how layered a bureaucracy you're dealing with. In terms of fiscal responsibility, many municipalities function just like the feds with far too little accountability, the delusive "lowest bid" system and strangling unionization.

You put your finger on it. Every layer of hierarchy puts the decision-makers that much further from the electorate and their oversight. OTOH if you have a very big administrative unit, it becomes very hard to govern without some kind of hierarchy. That's why any organization becomes harder and harder to run efficiently and honestly as it grows in size. So the EU is seeing very similar structural problems as the US for very similar reasons, and other large countries like Russia, India, China, and Brazil aren't exactly paragons of good governance either.

I have a feeling that creative use of information technology could push that limit up a fair bit, but it's not easy. For starters, we'd need a culture of transparency in government -- make all information freely accessible to everyone unless there's a damn good reason not to.

Until that happens, I for one am not in favor of deepening European integration -- I believe it'll work better as the fairly loose commonwealth of countries that it currently is than a "United States of Europe."

[magerette]

I have a feeling that creative use of information technology could push that limit up a fair bit, but it's not easy. For starters, we'd need a culture of transparency in government -- make all information freely accessible to everyone unless there's a damn good reason not to.

The impact of information technology is about the only really new thing in the human mix. There's no question that it's a factor that can drive change on almost every level; my Pollyanna-ish (http://en.wikipedia.org/wiki/Pollyanna)*hope is that it will indeed produce not only accountability but response in government.

The best part, to my mind, is that it's a tool that transcends barriers of distance and makes information acquisition and transfer available to anyone with the initiative to seek it out. And it's especially a tool of the young, a very potent force for change in themselves.


Until that happens, I for one am not in favor of deepening European integration -- I believe it'll work better as the fairly loose commonwealth of countries that it currently is than a "United States of Europe."

I think you're wise. You don't want to start seeing EU agencies releasing statements comparing things to the fall of Rome. :)



(*for those not familiar with this american usage, you can check the link--you have to scroll down a bit)

[mudsling3]

Talking about inflation im more worried about inflation of computer hardware than money. I spend tons of hard cash on hardware that becomes worthless in just few years. Oh well one gotta have hobbies I guess.

I disagree, I think we are getting better value performance/$ as time progressing(technology advancing). A decent rig costs me about $1500 since my first 286 to Q6600. but the performance difference is night and day. Gas was $1/gallon when I first got my car and now is $3, MPG is about the same. Electronics seem to the exception, it gets cheaper over time despite inflation.

Of course, I agree they are d*mn expansive, particulary at launch.

[mudsling3]

Dollars are falling to all time low... Gold soars all time high.

Ron Paul vs. Bernanke, House Financial Service hearing on CNBC Sept 20
http://www.youtube.com/watch?v=LhglwvE50cg

Remember that Government Inflation Rate 2% doesn't put food and fuel into consideration.

[Alrik Fassbauer]

I'm currently quite happy that the Euro is so strong. :)

In principle this would mean that I can buy goods from the U.S. - or the "Dollar-Zone" in general - much "better" now.

The only drawback is that customs eats up most of the money I save by having a strong Euro.

[Prime Junta]

It's going to be a significant drag on the European economy, though. Every 10 cents the Euro gains, Airbus takes a loss of two billion.

[Alrik Fassbauer]

That depends.

("On what ?")

The European economy doesn't entirely consist of Airbus.

As long as other countries are still willing to buy European wares despite the strong Euro, we're happy with that.

On the other hand, countries - based on the Euro - that like to buy wares coming from Dollar-based countries do something goo to the edport of the Dollar-based countries. And I think that's not *that* bad.

It's always give and take, sometimes it's the one side, sometimes its the other.

[mudsling3]

When this thread started, gold was at $600 an Oz, now at $840, I challenge to anyone to make a 38% face value profit in 3 months! Ben is talking about lowing the interest rate again... can inflation be cured with more inflation. You got to watch this. http://www.youtube.com/watch?v=yAwvlDJgJbM

[Lucky Day]

while we're at it the Loonie is approaching $1.10 American. I never thought I'd see that in my lifetime. This is bad for me as I get paid in Greenbacks and going home will now cost me bank.

Oil almost hit $100 a barrel this week. Very, very bad at the pump. Given the credit crunch in mortgages and this upcoming Christmas disaster due to poisonous Chinese toys the 8 year recession cycle is about to begin IMO.

[Corwin]

Guess we need another war to kick start everything again!! :biggrin:

[HiddenX]

good article ->

What is driving oil prices so high? (http://news.bbc.co.uk/2/hi/business/7048600.stm)

[mudsling3]

Check out these numbers by Grandfather Economic Report series
http://mwhodges.home.att.net/inflation.htm#1800

On a related note, FBI and Secret Service Raided a "real" money supplier back with 100% Silver and Gold
http://www.youtube.com/watch?v=4_sSipUrBG0
http://www.youtube.com/watch?v=lg8P9dNXTEg
There is a serious error in the second report regarding target of the Class action Lawsuit - It is againt the Federal Government, not Liberty Dollar. It's quite amusing the they mentioned "funny money" :)