Tuesday, November 4, 2014

Gilded cage

This blog wouldn't be around if it wasn't for gold bugs.

Many moons ago my former-employer (and friend), the truest gold bug you'd ever meet, would lecture everyone in the office for hours about imminent hyperinflation, the wonders of the gold standard, and why gold should be worth $10,000. Fascinated, but unsure what to make of his diatribes, I started to read about the history of monetary systems, all of which would eventually provide grist for this blog.

A gold bug will typically have the following characteristics. 1) An abnormally-sized portion of their investing portfolio will be allocated to the yellow metal; 2) they believe in an eventual 'day of reckoning' when gold's price rises into the stratosphere, the mirror image of which is hyperinflation; 3) their investing case for gold is twinned with strong moral view on the decrepitude of the current monetary system and/or society in general; and 4) they are 100% sure that the monetary system's collapse will lead to the flowering of a new and virtuous system, a gold standard.

One thing I discovered fairly early on from my interactions with the gold bug community is that there's no point in debating a gold bug. In any debate, you should be able to ask your opponent what evidence they'd accept as proving their idea to be wrong. Gold bugs are loathe to submit such a list. After all, to do so would open up the possibility that they might have to precommitt themselves to changing their mind, which is the last thing they want to do. A gold bug's ideas are comforting to them. They've structured their entire mental landscape around these ideas, not to mention their entire life's savings and often careers around them.

Gold bugs have a powerful set of defense mechanisms to protect their ideas from outside threat. These mechanism, I'll call them 'mental bodyguards', will kill on sight any idea or bit of evidence that runs contrary to the gold bug schema, thus saving the gold bug from the discomfort, and potential danger, of having to weigh each new bit of data on its own merit.

For instance, consider the fact that central bank money was unmoored from the gold peg in 1968 (almost 50 years ago!). The monkeys behind the wheel should have caused hyperinflation by now and all those financial Noahs who were smart enough to jump into the gold boat before the fiat flood should be fabulously wealthy. But gold trades at just $1200 or so, not far above $850 levels set in 1980. Except for a few exceptions like Zimbabwe, hyperinflation hasn't happened.

Gold bugs can rationalize this contradiction because they possess a 'mental bodyguard' that absolves them of any responsibility for the timing of their predictions. Like the Millerite movement—which predicted the second coming of Jesus Christ on March 21, 1884, only to have to push the date to April 18 when nothing happened, and when that day passed uneventfully, bumped the event to October 22—gold bugs can keep pushing the day-of-reckoning further into the future without suffering any mental dissonance. Using an even more impressive bit of mental-Aikido they turn disconfirmation into a positive. The longer gold's meteoric rise is forestalled, say gold bugs, the more time it provides true believers with an opportunity to accumulate a larger stash of the stuff.

Another powerful mental body guard is the invocation of "them". Gold bugs invariably blame vague external and impersonal forces for wreaking havoc on the noble intentions of gold bugs and the upwards trajectory of the metal's price. They  may be the Federal Reserve, the plunge protection team, or a cabal of Jewish bankers (politically-correct gold bugs just blame Goldman Sachs). When gold falls in price it's always because of the the machinations of these oppressors, without which the metal would be worth $12,000 or $13,000 by now. (Yes, gold bugs like to refer to gold as "the" metal, presumably to differentiate it from all the plebeian metals)

Thanks to the them mental body guard, the inability of gold bug predictions to be borne out in reality is never due to any inherent weakness in the ideas themselves, but to outside interference. Doubts are conveniently refocused on something external like Ben Bernanke and the Fed, upon which gold bugs regularly bestow two minute hates.

Other mental bodyguards that prove useful in protecting the core gold bug ideology include the knee jerk discredit that gold bugs level at both the economics profession and economic data. Gold bugs screen out economists by deriding them as mainstream and therefore (obviously!) puppets of the system. The shoot-first assumption of guilt spares gold bugs from having to engage with these economists' potentially contradictory ideas on a level playing field. The same goes for inflation data, which they dismiss out of hand as being 'cooked'. And if you try mentioning the MIT Billion Prices Index to them, they hum loudly and put their fingers in their ears. (Although when there's any sort of divergence between the BPI and CPI, they suddenly start to make noise).

The awful returns that gold and especially gold shares have provided over the decades have impoverished many gold bugs as well as those unlucky enough to listen to them. Yep, I've seen the year-end statements. Yet somehow the gold bug meme continues to limp on. That's because gold bugs are less concerned about making money than upholding "the cause", as they like to refer to it. The cause is a vague combination of the promotion of a gold standard and a +$10,000 gold price, where simply holding gold through all downturns is an expression of support for that cause. Mere financial losses cannot keep them down.

Now I've been tough on the gold bugs in this post, but the fact is that gold bugs would probably say that both myself and any of their many accusers harbour mental body guards of our own. And the gold bugs probably wouldn't be entirely wrong. With so much time and energy having been invested in the various things we know and believe, a bit of cognitive dissonance is only natural. I'd argue that the gold bugs having walked much further out along that plank than their critics.

This post won't change the minds of any gold bugs—as I already pointed out, they've made up their minds long ago. But if you're a busy individual with some money to invest, and you're considering a gold bug advisor, remember that the fate of your investment may take second seat to the gold bug's devotion to the cause. Be wary.


  1. Thanks, enjoyable read (but...).

    While your caricature of the typical gold bug is definitely an accurate representation of some I've come across, I also think it's important to validate that not all who own gold have the same views.

    I suspect that in a lot of cases the 'mental bodyguard' has actually been created and deployed as a defense mechanism for the derision they've received as a result of holding any Gold.

    I've seen those who advocate a 5-10% allocation of physical gold referred to as gold bugs, so it's no wonder that those who choose to own THE metal ;) build up a wall of resilience and fight back with similarly blanket rules (e.g. on economists & MSM). Might be a bit of a chicken/egg argument to be made here though (which came first).

    But anyway my point is that not all gold bugs are the same. I don't expect hyperinflation, but think gold is worth owning as a hedge against financial instability. I don't think the return to a classical gold standard is likely, but do think gold might have a more prominent role to play in the monetary system than it has over the last 40 years while the USD has dominated.

    1. "Might be a bit of a chicken/egg argument to be made "

      The mainstream derides gold in general, but that's only because they deride gold bugs, and the metal gets included in their derision. If gold bugs didn't exist, then the mainstream wouldn't apply any derision to the metal, just like they don't hate on copper or nickel. Just my two cents.

    2. If there were no gold bugs then it wouldn't be considered and used as a monetary metal as is still the case today after many thousands of years history. Not really sure what your point is here.

    3. What do you mean by 'monetary metal'?

    4. Gold's use as a monetary metal has evolved over time, from being directly involved in exchange (Gold coins), to backing paper currency used in exchange (e.g. US Dollar was defined as a measure of Gold) and is now held as a monetary asset of last resort (by central banks & private citizens). Defining it in current times would be difficult as it's used in different ways, but for example Russia has recently suggested they might use Gold to pay for imports to get around Western sanctions. Not long ago I read that Turkey was smuggling Gold into Iran in payment for natural gas and oil. Are you suggesting it's not used as a means of payment and monetary metal?

    5. I wrote about gold for gas here: http://jpkoning.blogspot.ca/2012/12/turkey-iran-and-gold-for-gas.html

      If some asset becomes a monetary asset because central banks hold it, then bonds, stocks, MBS, and ETFs are all monetary assets too since they are commonly held on central bank balance sheets.

      If an asset becomes a monetary asset because it can be used to get around controls, then all sorts of assets are monetary. In this post I showed how stock can fulfill the role.

      The general point I'm trying to get at is that most things are monetary to some degree or other.

    6. "most things are monetary to some degree"

      I don't disagree, but would judge each asset based on regularity of use and reason for holding (as to the level of it's money-ness). I think Gold has clear enough headway in this regards (compared with copper or nickel) to be considered a/the monetary metal.

      Most central banks took MBS onto their balance sheet out of necessity (bank bailouts, adding liquidity, trying to kick start lending), not because it represents a last resort medium of exchange.

      Why do you think central banks hold (or in some cases are adding to) Gold reserves (and do you think it's for the same reasons as stocks, bonds & MBS)? Under what circumstances do you think the Gold on their balance sheets would be utilised?

  2. Freegolders are a special type of gold bugs. They invest in a lot of physical gold, and they rejoice when the price goes down :-). They abhor all gold price fixing mechanisms, including the gold standard. They hate the trading of gold with paper proxies, as it is another form of price manipulation. For them gold is the ultimate asset, to be stored under ground for the future generations or as a retirement fund. They believe that all paper gold will lose its value. They are not only perfectly happy with paper currencies, the actually demand them, to keep their gold safe from manipulation.

    The reason they rejoice when the price goes down, is that they think it will eventually lead to closing down of mines. Which will cause the physical to be unobtainable in sufficient quantities. Causing the price of physical and paper to split. Further causing the demise of paper proxies of gold, resulting in the removal of the last source of gold manipulation. They think that the current economy will keep on getting bad because the USD has lost its primacy, until the USD loses all its value. This will cause paper gold to lose value (causing the price of gold to go down). So hyperinflation of USD is expected, but not of Euro or other currencies of other surplus regions.

    Ofcourse the above just scratches the surface of the freegold theory.

    1. Odd. Why would the price of physical and paper split? Doesn't make sense to me.

    2. Because the paper price is derived from the exchange of contracts that promise future delivery of physical. If there is any question over the veracity of those contracts and the ability for those short to deliver, then surely you can see how the price between the two might split?

      I won't comment on the likelihood of the situation, but I don't know how you can't see the difference between a physical object and the promise to deliver a physical object.

    3. Most paper gold is payable on demand. If a note's price falls below the value of the gold, then I'll immediately buy that note and redeem it at face value, earning an arbitrage return. Any doubt about the veracity of paper gold causes an immediate run, not a price differential.

      Is there a freegold FAQ?

    4. Right and for the period over which the run occurs you think the contracts under scrutiny would sell for the same price as immediate delivery of the physical metal?

      I don't know if anand will be back on the freegold FAQ, but I found this explanation quite easy to follow when getting my head around it a few years ago:


      I think it's quite a neat solution to separate the Medium of Exchange function of money from the Store of Value. Would solve some of the conflicts we have in the monetary system today. Not sure I would consider it as an inevitable outcome as many of the 'freegolders' would.

    5. Yes, but runs are over quickly. Everyone either gets their gold or the issuer goes bust. With offending paper being almost immediately removed, in general we'll only see good paper that trades at the same price as the metal.

      I'll read the link.

  3. Hi JP,

    I don't want to get caught up in the goldbug refutation excercise at present but I do want to make some comments about the gold miners. I think you should leave them out of the discussion about physical gold's potential role in a reset of the international financial system. (I'm using the word 'potential' here in order to be diplomatic not as a reflection of my own view of the probability.)

    One of the traditional arguments for buying gold miner shares is that their metal reserves in the ground offer a significant discount to the price of the physical gold above ground. IMO this was generally a correct view back in the 1970s but it is completely false today and it has been for many years. So I would argue that discussing the mining stocks and physical gold as elements of one market creates an unhelpful complication in trying to understand the role of gold in earlier monetary systems and its potential future roles.

    I wont press my views on you if you aren't interested in them, so I'll break off here. If you want to discuss this please send me a Tweet. (I just followed you.) Time zone differences and job commitments could lead to some delay in my responses but I will respond as soon as I can.


    PS. Here's some background on the situation of the gold miners from a Canadian analyst named Murray Pollitt. (It's his keynote address to the 2014 Denver gold conference.) - http://www.denvergoldforum.org/assets/downloads/MarketLetter-Keynote-Denver-Final.pdf

    1. You mean Doug Pollitt? Lol.

      Gold bugs have always advocated holding some metal and holding some stocks for juice. Don't blame me for clumping the two assets together, blame the bugs.

      Gold shares have always suffered from a gold bug premium. I'd only buy them when the premium shrinks to zero -- ie. when there are no more gold bugs in the market -- which as I pointed out won't happen since gold bugs are motivated by 'the cause', not the bottom line.

  4. You have just called the bottom in the price of gold.

  5. Unsophisticated gold bugs are a pretty obstinate, and often rude, crowd. But I did have an idea for a tweaked version of a gold standard under free banking system. I'd appreciate any thoughts or criticisms you could provide.

    I'll reprint some comments I made on Glasner's blog. [ http://uneasymoney.com/2014/06/30/the-enchanted-james-grant-expounds-eloquently-on-the-esthetics-of-the-gold-standard/ ]

    Me: "You [David Glasner] mentioned here and in your book that one of the main weaknesses of a gold-based monetary system is its vulnerability to rapid swings in the value of gold relative to other goods and services.

    My question is: what, if any, problems would arise in a free banking system where banks promised to redeem deposits and notes not for a fixed amount of physical gold but instead for a contractually-specified amount of purchasing power? In other words, if the relative value of gold increased, the amount of gold the bank would be obligated to redeem per dollar would decrease, and vice versa.

    I suppose it would be like a privatized version of Fisher’s compensated dollar plan. Assuming the incentive problems could by fixed by the remedies you and Earl Thompson proposed, would it be workable?"

    David replied:

    "Why would a free banking system adopt a variable price of gold and who would decide how the value of gold would vary? In the last chapter of my book I proposed such a system would, relying on the work of Earl Thompson, but it would only about through legislation, not through competition. See my book. I agree that gold is not the only factor affecting the stability of a banking system, but historically gold has often been a destabilizing factor."

    1. John, that's an interesting idea. I like to assume that in a free-banking world, we'd have three or four major clearing houses, each maintaining important units of account, and private banks would be members of any number of those clearing houses. I think you'd need to explain why one of these major clearing house would be able to increase its profits by creating a variable unit of account rather than one that is fixed to some commodity.

    2. My reply was that such an arrangement would protect both banks and their customers from rapid shifts in the value of gold (vis-a-vis other goods and services):

      "It seems to me that under a gold-based free banking system, banks must choose to keep something fixed while allowing something else to vary. If the nominal price of gold is fixed, then as the relative value of gold increases, prices must fall (i.e., the value of the banks’ notes and deposits in terms of other goods & services must increase).

      Although fixed nominal gold prices were customary, even in free banking systems, I don’t see why a bank couldn’t instead choose to keep the relative value of its notes and deposits constant by changing the nominal price of gold? I think this would be beneficial both for the bank and its customers by shielding them from the effects of rapid swings in the relative value of gold.

      Imagine a variation in the Goldfinger scenario where a criminal mastermind radioactively poisons half of the world’s gold minds. The relative value of gold would increase, and banks that kept their redemption rate constant would be inundated with redemption requests by arbitrageurs looking to sell gold in the open market. While Goldfinger is fanciful, the actions of the Bank of France in the 1930s and trends in recent years have shown that rapid increases in the value of gold are not implausible.

      Customers and merchants would also benefit from flexible nominal gold prices. For one thing, pricing in a stable purchasing power unit of account would be attractive since it would lessen the need for price changes in response to changes in monetary gold flows and stocks. If the value of gold were to drastically decline (say due to improved mining techniques, such as cheaper seawater gold extraction), this scheme would protect holders of bank money from being wiped out by the devaluation of the underlying asset of redemption (gold). Borrowers would also be shielded from increased debt burdens due to an increase in the relative value of gold (and lenders would be shielded from the reverse case).

      Finally, you asked who would decide the nominal price of gold. Well, couldn’t it be posted daily in bank branches just as foreign exchange buying and selling rates are today? Banks would adjust their posted rates in accordance with their need for reserves, and holders of gold (such as miners) would shop around for the best “exchange rate” into notes and deposits."

      To which David made a final reply:

      "I didn’t say that under a free banking system a bank couldn’t establish a variable conversion rate between its currency and gold, just that it seems highly unlikely that a competitive system of banks would choose such a standard rather than the simpler and more obvious alternative of a fixed gold/currency exchange rate. The benefits of a variable exchange rate are a public good, and no individual bank would be in a position to internalize them, so I don’t seen what incentive any individual bank would have to adopt what would be a more complicated and costly system."

      I feel that I did mention an incentive (protecting both the bank and customers from rapid swings in the relative price of gold). Would such a benefit be outweighed by the costs of administrating such a system? I'm not sure, but banks and other financial institutions seem to keep a lid (usually) on an awful lot of moving parts (FX, int. rates, and a variety of exotic instruments). Maintaining a stable purchasing power of free banking notes and deposits, in the manner I described, doesn't seem like that much of a difficulty in comparison.

      Can you think of any better objections than Glasner's, which boil down to: 1) there's no benefit; and 2) it's too complicated?

    3. you'd need to explain why one of these major clearing house would be able to increase its profits by creating a variable unit of account rather than one that is fixed to some commodity.

      In the system I imagined, the unit of account would be fixed (by contract) to a basket of commodities (like an indexed-unit-of-account); I feel this is better than fixing it to one commodity (gold), which can rapidly swing up and down in value.

      Whether the nominal price of gold is fixed or variable, the relative price of gold will always vary w.r.t to other goods and services due to conditions specific to the gold market. Allowing the nominal price of gold to fluctuate would prevent such swings from causing frequent changes in nominal prices (and debt burdens denominated in that UOA)--perhaps this would be enough of a selling point for the variable unit of account.

      I roughly recall that, for most of the last 500-600 years or so, the purchasing power of gold and silver have been fairly stable, even including major discoveries (although silver became much cheaper in the late 19th century due to improved extraction techniques). So maybe the well-known free banking systems (Scotland, Canada) didn't have to worry so much about swings in the value of reserve commodities. But if they had continued until today, they probably would have at some point.

    4. One more thought: if the system I describe is workable, then clearinghouses would be able to offer redemption in a variety of assets, even ones that swing around a lot in value. So clearinghouses could either: 1) diversify their reserve assets from gold into other things like silver, or wheat and oil futures, lessening their exposure to gold; or 2) specialize in offering redemption in other assets, depending on the needs of their customers.

      I mentioned this idea to Jim Caton (Money, Markets, and Misperceptions), and he said something about banks possibly using commodity EFTs directly as money instead of quasi-moneys. I'm not really sure what this means, let alone what benefits it could bring--but it sounds interesting.

    5. John, I don't doubt that your system would be feasible and would perform it's function.

      You give some reasons for why banks might have incentives to adopt them -- protecting themselves and customers from wild swings in the gold price. That's plausible although I think it needs more fleshing out.

      One problem is that a new standard isn't introduced into a vacuum, it needs to compete with an old standard that is cemented in place thanks to network effects. So no matter how superior your idea might be, it somehow needs to break through the shackles of convention. On the topic of gold bugs, I don't think they would like your suggestion. From their viewpoint, the advantage of a gold standard is that it can't be tampered with, so a shifting compensated dollar scheme would be a travesty.

    6. First, I really like your idea of competing UOAs at the clearinghouse level. Hadn't quite thought of it that way.

      a new standard... needs to compete with an old standard that is cemented in place thanks to network effects

      Yes, network effects are definitely a big hurdle. But I think the rapid growth of Bitcoin--despite problems such as its volatility and lack of security/storage user-friendliness (I can't be bothered to do cold storage)--is a hopeful sign that a significant breakthrough is possible.

      As you've mentioned many times, there's a big gap in the CC market waiting to be filled by a stable value cryptocoin. If I had a spare billion dollars, maybe I'd start a Ripple gateway to implement this system (not really mine, more a mashup of Yeager/Glasner/Shiller) by issuing indexed-UOA Ripple IOUs called Shillings. It would require a clear, easily intelligible marketing campaign to inform potential users of the benefits and the rudiments of how shifting redemption works, but it could done (basically, your SHLs are convertible for more/less gold as the market price of gold falls/rises, but SHLs will always have the same purchasing power--easy, right?)***

      So the Shilling could position itself as the rock of stability in the Wild West of cryptocoins. Other target markets could be the world's underbanked population (the M-Pesa strategy) and countries with high inflation and/or shaky, crisis-prone banking systems.

      *** Heck, the asset of redemption could be USD. I think this would limit the sales and cap gains tax complications of gold redemption.

    7. it somehow needs to break through the shackles of convention

      This is huge. Even when something is proven mathematically to be better, people are often reluctant to try something new. An example that comes to mind is using optimized lineups in baseball. Computer simulations show that using an optimal, rather than traditional, batting order can produce up to 1.5-2 extra wins per season. That's not a lot, but changing the batting order is free, whereas buying comparable player production via free agency will cost around $5 million/year. So teams are leaving a fair amount of money on the table (and potential playoff opportunities in tight races) for--from what I can tell--no other reason than slavish devotion to tradition.

      [ That's a pretty weird tangent, I know. But I think sports is the purest field for measuring precise, objective value. Is AAPL really worth around $300 billion more than GOOG? Who knows, but I can pretty conclusively say Lebron is better than Kobe, or--to use a hockey example--Hasek was better than Brodeur. ]

    8. Love that link. I was a huge Dominator fan back in the late 1990s when he made a run to the cup final with Buffalo.

      All the other crypto-coin knock offs face the same problem. Many are better than bitcoin, but bitcoin got there first.

    9. True, but BTC's moat isn't insurmountable--many early leaders have been humbled in the last decade: Blockbuster, Myspace, Sony, Nokia. Things could look very different in 3-5 years.

      It seems to me that BTC is trapped in a vicious circle. Mining costs will inexorably rise due to the mining pool arms race, but mining profit is ultimately dependent on an increase in real world, rather than purely speculative, transaction fees. Without significant BTC price appreciation or transaction fee growth, I don't see how miners can stay afloat for much longer. (But I'm no expert, so I could be wrong; I'd welcome correction from other readers).

  6. I don't know how I stumbled on your blog, but happy I did.

    I think of myself as a goldbug for the sold reason I've been called one by a few people. So I'll play the game and comment. First off, your $850 figure that was settled in the early 80's was an anomaly, so I just wanted to point that out. The goldprice average was many times lower over the late 70's and 80's. But that doesn't destroy your argument, so let's move on.

    Most would say the gold movement is a vote of non confidence for the system in general. It's an easy, and I agree, non-ideal way to sit on the sidelines and pout while the rest of the world has an orgy the likes haven't been seen since ancient rome.

    You see, I don't think I'm a fool though I'll admit I might be one. We're a single income household and I get paid roughly around Canada's average family income, so I think I can speak of the common man. Running a household on a single income is practically impossible now - I don't know many out there who do it, but I know it was common and easily done in the 50's and 60's. Something happened in the 70's and 80's that destroyed the single income household and I think the culprit is inflation. I feel as though something is very wrong and a government self-reported inflation figure is very self-serving. Inflation around 2% right now? Right. Not for the common man.

    So, what has historically been a good way to hedge against inflation? Gold. The way I see it, if gold goes down, that theoretically means my wage earnings will continue to have purchasing power. If gold increases, that theoretically means my wage purchasing power decreases, but my gold holdings increase in value. so, gold is a hedge.

    I don't hold it to strike it rich, I hold it to pray I can continue buying bread for my family for the next 20-30 years. In a way, I would be happy if I never had to cash it and a loaf of bread stayed at $3 and gasoline at $1.

    Now, I would be very interested to hear your thoughts about the relationship between ACTUAL inflation (E.G. the common man's inflation - I couldnt' care less what a $500,000 wage earner feels inflation is - see Shadowstats) and gold. But if you do this, please don't assume gold went from 850 in the 80's to 1100 today - that's as ridiculous as the 2% inflation figure.

    If you look at the gains for the most common assets out there - Real estate and

    1. " I feel as though something is very wrong and a government self-reported inflation figure is very self-serving. Inflation around 2% right now? Right. Not for the common man."

      So how do you explain the Billion Prices Index?


      Not much inflation there.

  7. JP, this is a funny one! Thanks. What you're describing here is a kind of fundamentalism. I'll probably get myself in trouble here if it turns out you have a fundamentalist outlook in some other aspect of life, but oh well, I'll press on: I came to a very similar conclusion as you did here recently when arguing with someone (in another forum on a different subject) having a fundamentalist outlook. Basically I was accused of having a "closed mind" so I pointed out all the concrete evidence that would change my mind (change my mind to accept the fundamentalist view point). Admittedly my bar was pretty high, nonetheless I had the makings of an infinitely long list. Then I asked for the reverse: I asked "What evidence can any of you imagine that would change your mind? Sky's the limit! Let you imagination run wild." What I got back was "Nothing! I already KNOW I'm right." This wasn't just one person, but basically everyone taking that position had that same response, or a small variation on it. At that point, what can be said? If THEY can't even imagine evidence that would change their minds, then how could I possibly fabricate such evidence (let alone find real evidence)? Lol.

    1. I think one of the major problems in the debate on alternative monetary arrangements is that it's usually framed in extremely binary terms--either a return to a "pure" gold standard [1] or maintaining the current, govt managed system [2] (perhaps with tweaks, such as market monetarism). But I think reasonable halfway systems can be imagined (e.g. my comments above), even though such proposals receive almost zero attention from academic economists.


      The main gripe of gold bugs/Rothbardians seems to be that the current system allows the govt to pile up ever larger amounts of debt (deepening its control over more sectors of the economy) while favored financial institutions can gamble with impunity (thanks to explicit and implicit govt backstops--deposit insurance and TBTF). Their favored cure is not ideal, but the underlying illness they recognize is real.

      Gold bugs/Rothbardians need to acknowledge, at the very least, that 100% reserves is unworkable. (I also think a fixed nominal price of gold is problematic). But their opponents should acknowledge that commodity-based free banking systems worked quite well in the past, so a central bank is not vital for a healthy economy. At the very least, gold and silver should be acceptable as money (e.g. Ron Paul's Free Competition in Currency Act, and the release of Bernard von Nothaus, creator of the Liberty Dollar), and restrictions on cryptocurrency should be minimized.



      [1] I think most gold bugs/Austrians mean a system w/o a CB (so free banking by default), with 100% reserves. But historically, such a system has never existed, so it makes much more sense to talk about fractional-reserve free banking systems.

      [2] not "fiat," according to JP and Mike Sproul.

    2. Incidentally, the Cato Monetary Conference is tomorrow, and Selgin will be one of the speakers on the role of gold in a modern monetary system. Looking forward to watching his talk.


    3. Thanks Tom. I think you're right that for some it's a kind of fundamentalism, for others its sloppy thinking. We all have to take mental short cuts in life, and often these are going to lead us astray. I do hope that I don't suffer from too many instances of this. If everyone provides a list of evidence that would lead them to change their mind, it would weeds out the fundamentalism and sloppy thinking.

  8. Hi JP,

    Doh! That's the problem with proofing your own writing.

    1. No problem. I can see why you made the mistake, Doug is a chip off the old block.

  9. JP -

    somewhat off topic question... about a year or two ago, i thought that I read a post about the gold miners that talked about the massive amounts of share issuance in the sector, attempting to illustrate the point that perhaps the miners haven't really under-performed the metal as badly as they appear to, because they continue to issue shares, and thus broaden the aggregate market cap of the entire sector via dilution (which makes some price decline logical)...

    I thought that you were the one who wrote this post, but I may be mistaken. Does this sound familiar to you? Have you re-addressed the topic at all?

    1. Hi Kid Dynamite. That old article is here:


      I haven't updated it since then.

  10. I'm sorry this is a reply to the billion prices index reply you make earlier. I tried posting this as a reply twice and it failed (?). Here's my reply:

    The outfit that calculates the data, pricestats adits to using the same econometric methods used in the CPI. (http://www.pricestats.com/approach/overview). So really, it's a CPI with a different basket of goods.

    I'm sure you're all aware of heudonics and all that - you're smart. Here's a page from the BLS themselves explaining how a $250 TV one day was actually more expensive than a $1250 TV selling now because of the increase in it's features and technology.

    I like the theory, don't get me wrong, but as new technology becomes the norm it's a little questionnable to justify it to reduce inflation figures. Besides, the common man who doesn't care about S-video or HDMI Cabling or youtube wireless access doesn't have a choice at some point then to buy it. heudonics only works if the old technology is still available.

    And substitution, I love that. Saying that beef going up actually reduces inflation because people will switch to chicken. Yes. OK.

    I can take slaps on the face like anyone but it doesn't mean I have to like it.


    1. I went to the link. Where does it say that they use the same econometric methods as the BLS does to calculate the CPI? My understanding of the BPI is that it does not use hedonic adjustments.

  11. from Pricestats: "We finally compute our daily inflation statistics using advanced econometric techniques and leveraging official weights as much as possible."

    The company is very tight lipped about their "advance econometric techniques" used. Now, my understanding is that weighted averages and medians and means are not "advanced econometric techniques". When I think econometric I think regressions and autoregressive linear relationships etc.

    That being said, you are allowed to say "you can't prove your point and I will continue to believe the billion prices project accurately provides some kind of nominal real world way to measure purchasing power" but look at the relationship between CPI and the BPP: http://bpp.mit.edu/usa/ (annual inflation chart).

    Now if the CPI uses hedonics, and the BPP closely follows the CPI year after year, I think it is safe to say their methods are similar as well. I'd like to see pricestats say they do NOT use hedonics or substitution. Couldn't find anything but conjecture... funny that.

    Besides, everyday inflation is heavily concentrated in necessities (Heat/energy/food/lodging). So someone making $30,000 a year will have the bulk of his income go towards those things so he will feel inflation the most. Someone making $300,000 a year would only spend a small portion of his income on those things - so if the necessities increase by 10-15% a year he would barely feel a pinch. That's the real disconnect.

    1. "PriceStats methodology to build the indexes follows standard CPI techniques as closely as possible, but there are significant differences in the collection and treatment of the data. First, since PriceStats collects data for all goods available for purchase at the chosen retailers and categories, the price contain information from thousands of different goods varieties, even at the lowest levels of aggregation. Second, there are no forced price substitutions, hedonic quality adjustments, or seasonal adjustments in the data."

      from http://www.price.e.u-tokyo.ac.jp/img/researchdata/pdf/p_wp049.pdf

  12. Thank you for this. I was obviously wrong - thought that doesn't mean they don't use other types of econometric adjustments which is likely what the case is here. Neither one of us will know until they make their process public, right? Just look at pricestats food price index from 2012 to 2014 - it went up 2% in those two years. Really? Do you do your own grocery shopping? Prices where I am have gone up 5% year to date - packaging has shrunk, products weight less, etc etc.

    So now, here I am, a poor old bloke with 2 kids and a wife. I can look at the computer screen telling me prices are going up under 2% annually and I should be jumping up and down with joy -- or I can look at car insurance, gas, utilities, food, housing costs going up by 4 or 5 times that amount and feel the pain.

    My evidence is circumstantial, so the real issue here is I can't get my point accross to people who focus on what the screen is telling them. Am I deluded? I have an excell spreadsheet detailing my expenses over the last 6 years who says I'm not, but who knows.

    1. "Neither one of us will know until they make their process public, right?"

      Did you not read through the rest of the paper? What about all their other papers they've written? You're the one who's having problems getting information about their process... I'm not.

      "... that amount and feel the pain."

      Feelings about inflation are an awful way to measure inflation. If I would never trust my own subjective experience of prices, why would I accept yours as a data point?

      "I have an excell spreadsheet detailing my expenses over the last 6 years."

      Even if you did keep extremely accurate records of everything you paid, your personal consumption basket is an awful representation of the general purchasing power of money. Everyone has a different consumption basket because people buy different things. That's why statisticians collect broad samples -- so they can capture the economy-wide inflation rate. Surely you don't expect me to rank your spreadsheet above the scraped data that the BPP collects, which crawls most of the major websites in the US? It would be illogical of me to do so.

      (Each time you reply, you're starting a new topic. Reply directly to the previous comment instead.)

    2. You know you're completely right and I admire your reasoning.
      Of course I can clearly see it would be complete lunacy to based a national CPI index based on my own expenditure.

      However you have to see it my way as well - it would be complete lunacy for me to ignore what my daily basket of goods is going up by simply because some algorithm is telling me it's not going up by much, if at all.

      If I notice my groceries going up by 10-12% annualized year over year, should I just put that aside and say "whatever, the national CPI is under 1% for food costs!". That would be as crazy.

      So really here, I'm not going to battle the validity of the national CPI indexes and their methodologies since you know more than I do. however, I will continue to look after my own interests as best as I can, based on my observations. And for now, I've only seen steady inflation since 2005 that tends to be multiples of the CPI that's reported in the news. Until this changes, I will continue to hold gold and my point still holds.

      Make sense?

  13. Funny article about gold in light of how central banking operates and manipulates all markets.

    First point, the government borrows from the federal reserve unlimited amounts of currency that was initially backed by gold and currently none at all. When central banking began debt to GDP was relatively low and US foreign policy of intervention was not in a constant state of war every few years. Now some 100 years later debt to GDP is around 120%, foreign policy is intervention with constant wars and currency creation is out of control thanks to QE, credit, perpetual wars etc.

    Secondly, its a well known fact that all fiat currencies in history have been printed into oblivion. Although the difference between them and the USD being the reserve currency of the world is that a world currency can handle much more abuse in the form of unlimited currency creation before a loss of confidence occurs. Though this does not mean that the USD is immune from a loss of confidence. Thus just because the currency hasn't been abused into oblivion in the past does not mean that it will not occur in the future. What we are witnessing today is that the USD is being abused into oblivion as witnessed by dozens if not hundreds of deals that bypass the USD. Not to forget QE programs, increasing base money supply including credit and perpetual wars that are causing foreign countries to dump the USD as the reserve currency.

    Thus as with all fiat currencies in history before the USD it is being devalued (aka loss of purchasing power) and when foreign owners of those USD/treasuries spend them into the economy they return along with inflation which was exported in exchange for cheap foreign goods. This process occurs over decades.

    Hence gold shines its brightest when fiat currencies fail. Such classic examples are easily researched such as the Weimar republic, Zimbabwe and so forth. Gold is not an investment vehicle contrary to opinions expressed but is rather synonymous to insurance against government/banking corruption devaluing the currency into oblivion. Gold is a store of wealth and when fait currency systems are doing well ie low debt to GDP and relatively low base currency supply they appear to be worthless. Though once the debt begins to overtake GDP at 200%+, and unlimited base currency supply is created then it comes back into favor and the price in fiat rises. Forget the fact that after a certain percentage of debt to GDP that the debt cannot be serviced. In other words since debt grows perpetually, perpetually increasing amounts of currency are required to be borrowed in order to service that debt.

    Thirdly, one must remember that in todays markets gold/silver etc are traded in paper aka etf form is arguably leveraged out at 100-1+ paper to physical gold/silver. This "paper" gold/silver etc determines the price of the physical. These etf's are really part of the fiat currency central banking system that manipulates all markets. Therefore the entire worlds supply of mined gold for the whole year can be traded in one day. Although there is a catch, as the price falls from being manipulated by paper the physical sells out. At some point this cannot continue as the physical will not exist for delivery representing that paper. Thus just like fiat currency is backed by nothing but confidence so are etf's.

    Thus when the world looses confidence in the USD/treasuries they come back home and it is then that those trillions cause hyperinflation. When inflation really starts to hit home then citizens loose confidence in the currency and run to gold. This is the reason why this so called "relic of the past" still has purchasing power today unlike hundreds of fiat currencies that are long dead and worthless.

    Thus gold functions as it should even though it is manipulated. It has been a store of wealth for thousands of years and will continue to do so as long as corrupt bankers and politicians steal wealth via central banking by creating unlimited amounts of currency.

    1. "...the government borrows from the federal reserve unlimited amounts of currency that was initially backed by gold and currently none at all."

      Not true. Modern central banks cannot lend directly to governments. The Fed hasn't lent directly to the Treasury since 1979.