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The Absolute WORST of the Anti-Gold Monetary Fallacies

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December 21, 2010 – Comments (22)

Before I get into today's post, let me first say as a lifelong fan of the NFC North Division Champion Chicago Bears, that if Rex Grossman provides your franchise with any answers, you are asking all the wrong questions.

Moving on...

I think I have identified the one monetary fallacy that makes my blood boil more than any other. Of course, there are plenty to choose from. Not a single American is taught any monetary theory unless they get some instruction at the University level. Think about that. No wonder so many horrible half-truths and falsehoods receive widespread public acceptance. No wonder the ideas of hard money scholars like Ron Paul are derided as fringe and impractical. He's talking to a room full of monetary idiots 99% of the time. (At least, that used to be the case.)

So here's the one fallacy I hate the most:

"The global economy has become too complex and too intertwined to be constrained by the gold
standard. The fiat currency system is a product of economic evolution and the growing demands and strains of international trade."  - Reflections on Gold as an Asset Class, The Pragmatic Capitalist, here.

That article contains at least a dozen horrible economic fallacies, but that particular one is so prevalent in modern economic thinking that it needs to be squashed once and for all.

It requires some or all of the following assumptions:

1. The market required, perhaps even demanded the end of the gold standard and the ushering in of an unbacked paper money world.

2. Or, even if it didn't, the market was unaware of how blissful it would be once the shackles of a gold standard were removed. Now that the market is swimming in glorious "global, intertwined (and any other loaded adjective I can throw out)" prosperity, returning to gold would choke the life out of its delicate body.

3. Governments acted in the market's interest, and not their own, when they ended the gold standard.

4. Governments are part of the market.

5. Governments reacted wisely to help fill a market need, introducing unbacked paper, to facillitate global trade.

6. Without unbacked paper money, we would return to the horrible pre-1971 world where global trade was "constrained." Those barbarians!

The worst part about this fallacy is that anyone who spends 20-30 minutes studying the downfall of the gold standard (which began in 1914 at the onset of the Great War), would see that this is all absolutely, f*cking ridiculous.

It's the worst lie I've ever read, and I wrote about how the world went from gold to monetary chaos here

IT IS THE GREATEST LIE EVER TOLD.

Here is the truth:

1. The market never required nor demanded an end to the gold standard.  The market only requires sound money.  Unbacked paper is unsound.  Why would the market do better with unsound money than sound money?  That's f*cking retarded.  Stop believing in ideas that are f*cking retarded, people.  The government required an end to the gold standard because they couldn't pass their war debts off to the tax payers while they were on it.  It was politically infeasible.  But under paper money, suckers... uh, I mean taxpayers can be convinced to pay for just about anything under the guise of inflation.

2.  The market has not progressed any further with unbacked paper money than it would have over the same amount of time with sound money.  There is simply no way to prove it empirically.  You can't compare America from 1971-2010 on paper vs. America from 1971-2010 on sound money. Guess why?  So you have to use this little known economic idea called logic.  In which case, you determine that any amount of money is enough for an economy as long as it is difficult to manipulate and of near-infinite divisibility.  Gold meets both criteria. Paper meets only one. 

3. The State never, never, ever acts in the market's interest. The market is you and me.  The State is them.  It's the State vs. the market.  Not the State working for the market.  Does the State look out for you?  What, while it gropes your twelve year old daughter and humiliates you with taxation and surveillance?  Ok...  The State acts in its own interest, which is the accumulation of power at your and, therefore, the market's expense.

4.  Likewise, the State is not a part of the market.  The State's role, historically and for all time, is to find a market (a group of people like you and me) and subjugate it to its interests, so that it can feed off it and grow rich as the beneficiary of other people's productivity.  This is how empires are formed.  No State ever created a center of commerce.  They are a parasitic class of people that attach themselves to already existing growing centers of commerce.

(Btw, be careful not to confuse the functions of government with the State. For example, you can have a community that is self-governed that does not contain the parasitic apparatus known as the State. For more on this, read Albert Jay Nock. You will not learn this distinction, or anything else really, in public school.)

5. The State introduced unbacked paper to paper over war debts. The last time there was a semi-worldwide gold standard was 1914.  From 1914-1971, we had pseudo standards that were the ad hoc desperate moves of pathetic losers called bureaucrats and bankers.  Does that sound like the wise interventions that filled a market need?  No, it's a collection of idiots doing what idiots do.

6. Global trade is hindered, not helped, with unbacked paper money.  It causes distortions in economic calculation.  It prevents poverty stricken nations from maximizes capital allocation.  It robs the productive class and passes those earnings to bankers who then enslave entire populations through national debts.  Unbacked paper destroys capital.  How the f*ck does that "improve" trade?  

End rant.

Opt of the State

David in Qatar

22 Comments – Post Your Own

#1) On December 21, 2010 at 6:01 AM, dag154 (55.63) wrote:

David,

your rant sounds a little psychotic and is unnecessarily rude.   Governments are not by definition evil or opposed to the markets (as for their  [groping] 'your twelve year old daughter' I am sure that Dr. Freud would have some interesting comments on the point).  

If you don't have a functioning government, as with Somalia or the Democratic Republic of Congo, then, I assure you, you will not have any kind of free market.  The most developed markets all have one thing in common: a stable and strong government.

The problem with the gold standard is that supply is limited by whatever mining companies can produce.  It is very inflexible and this is not useful when you are dealing with an economic crisis.  On the other hand fiat money is flexible but, as a result open to abuse.

In my opinion we need a calm, intelligent and thoughtful system in order to deal with money supply.

Then again, some people will always go a little nuts and it is their decisions which are so damaging.  So my opinion is go long on gold, it protects you from the nutters (see, we agree).

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#2) On December 21, 2010 at 7:38 AM, whereaminow (< 20) wrote:

dag154,

your rant sounds a little psychotic and is unnecessarily rude

It's a little of the former, not enough of the latter.

Governments are not by definition evil or opposed to the markets

The State is by nature parasitic. The State's actions can be very evil.  

If you don't have a functioning government, as with Somalia or the Democratic Republic of Congo, then, I assure you, you will not have any kind of free market.  

Total nonsense that underscores another fallacy common among the public. The problems in Somalia and DRC have nothing to do with the free market or not having enough government.  They are called Failed States and not Failed Markets for a reason.

The most developed markets all have one thing in common: a stable and strong government. 

Causation fallacy.

The problem with the gold standard is that supply is limited by whatever mining companies can produce. 

Why is that a problem?  Problem for whom?  Did the markets ever complain about this?  No. Governments complained about this, because they couldn't pay for their war debts.  It had nothing to do with the markets.

It is very inflexible and this is not useful when you are dealing with an economic crisis.  

That depends on the cause of the economic crisis, doesn't it?  Most crises are caused by governments debasing their currencies. How does debasing them further fix anything?

On the other hand fiat money is flexible but, as a result open to abuse. 

Which is exactly why you are taught to love them.

In my opinion we need a calm, intelligent and thoughtful system in order to deal with money supply. 

In my opinion we need to get real angry or we going to get really f*cked.

So my opinion is go long on gold, it protects you from the nutters (see, we agree). 

Hooray! =D  However we end up there, it's all good.

David in Qatar 

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#3) On December 21, 2010 at 8:26 AM, ttboydxb (28.81) wrote:

Great post David as usual.  Unfortunately we can no longer be CAPS buddies....   Go Packers!!!   :)

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#4) On December 21, 2010 at 9:18 AM, MoneyWorksforMe (< 20) wrote:

Another great post! Keep it up. I read and enjoy all of your posts. You add a great deal of value to the Fool community! 

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#5) On December 21, 2010 at 9:20 AM, whereaminow (< 20) wrote:

ttboydxb,

Are we sure Mike McCarthy is a good coach? How many injuries and close games can you guys lose before we start asking if this guy is any good?

Not that I'm complaining ;)

Great post David as usual 

Nah, just having some fun. How many people's holiday cheer can I destroy?  It's good to have goals =P

David in Qatar 

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#6) On December 21, 2010 at 9:21 AM, whereaminow (< 20) wrote:

MoneyWorksforMe,

Thanks man! Happy Holidays!

David in Qatar  

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#7) On December 21, 2010 at 9:27 AM, ChrisGraley (29.65) wrote:

Plus a million fiat currency inflated recs.

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#8) On December 21, 2010 at 9:34 AM, whereaminow (< 20) wrote:

ChrisGraley,

And one sound, manipulation-free Happy Holidays to you!

David in Qatar 

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#9) On December 21, 2010 at 9:34 AM, lctycoon (< 20) wrote:

The State is by nature parasitic. The State's actions can be very evil.  

Can be evil, but are not necessarily so.  You are correct in that the State is by nature parasitic.  It produces nothing and so cannot be anything but parasitic.

Why is that a problem?  Problem for whom?  Did the markets ever complain about this?  No. Governments complained about this, because they couldn't pay for their war debts.  It had nothing to do with the markets.

Correct.  Among other debts.  If we had to go back to the gold standard now, it would wipe out every progressive in government and force massive downsizing in this country.  It would not be a bad thing, but it would require that people take more responsibility for their own foolish decisions (like not saving for retirement or unemployment).  That's something else that we are not taught in school.  Every politician says that spending creates jobs - it does not.  Investing does.

That depends on the cause of the economic crisis, doesn't it?  Most crises are caused by governments debasing their currencies. How does debasing them further fix anything?

Case in point:  The current economic malaise which was primarily caused by government encouraging people to buy houses.  Many of these people belong in the renting crowd.  And why did the government want everyone buying houses?  To run up real estate values and get more money through real estate taxes.

In my opinion we need a calm, intelligent and thoughtful system in order to deal with money supply. 

That's exactly what a gold standard system would provide.

So my opinion is go long on gold, it protects you from the nutters (see, we agree). 

If you're predicting doomsday, you'd be better off with food and lead.  Gold creates no wealth, only preserves it.  And even then, you can only keep your gold if you can defend it.

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#10) On December 21, 2010 at 9:38 AM, Jbay76 (< 20) wrote:

Always happy to read your posts David!  I finished RP's End the Fed and now on The Revolution: A Manifesto....so thanks for the reading list.  It's interesting at  how many of the books you listed in that post that are not available at the public library.  I'm not all that surprised, more like bummed.

 

Keep 'em coming!

+1 

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#11) On December 21, 2010 at 1:51 PM, chk999 (99.97) wrote:

So what do you think the odds are of going back to a PM backed currency? I think they are so close to zero as to be un-measurable.

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#12) On December 21, 2010 at 1:58 PM, rfaramir (29.32) wrote:

I'm interested in how we might get back onto a gold standard. It was a very specific and unlikely order of events that got us off it, and I'm hoping that it will be less perilous to get back on. Will it be A) one easy jump back to normal (only hard to leave it, not restore it), or B) do we have to laboriously and carefully reverse the order we lost it, or worse, C) do we have to invent a different order of restoration than the order (or its reverse) that we lost it?

Here's how we were led off the gold standard:

1) 1913 cartelize the banks so they can resist bank runs when they fraudulently increase the supply of money substitutes (paper dollars) above the amount of money (gold) that they hold. Federal Reserve Bank system established.

2) 1916 President Wilson lies to get re-elected ("He kept us out of war!") and promptly plunges us into war. Wartime inflation and expropriation of transportation infrastructure. (Central planning started)

2a) 1920-1921 Great Depression of 1920 averted because the government did nothing! Reduced expenditures, reduced some (but not all) central planning, allowed bankruptcies, got back on gold standard, and the result was a roaring economy in 18 months. Only downside was ratchet effect of government control: not all wartime 'emergency measures' were rescinded.

3) 1920s Great Britain tried to go back to gold standard but without reducing supply that had increased to pay for the war. Result is they asked us to inflate equally, which Federal Reserve does until our gold was leaving US (like their gold was leaving GB).

3a) 1929 Crash and start of Great Depression. Like 2a, not directly related to leaving gold standard. Unlike 2a, central government feels it has to "do something" instead of letting the boom's malinvestments be liquidated. Hoover does New Deal Lite. FDR lies to public to get elected (decries Hoover's actions). Once elected, FDR actually doubles down on same policies in first 100 days (now called New Deal but no different except in degree).

4) 1933 FDR confiscates American private gold holdings, 1934 FDR devalues gold from $20.67/oz to $35/oz, gold exchange standard started (Americans still not allowed to own gold, so cannot participate in holding monetary feet to fire, but foreign banks can). Dollar's link to gold still official, but much weakened.

5) 1929-1945 Unconstitutional fascist socialism establishes strong central government planning, complete with government control of production, distribution, price controls, wage controls, rationing, and drafting into military service. Unions given control to ratchet wages upwards only.

5a) End of WWII restores only some liberties. Most government price controls that we still live with today trace back to federal rationing power established during WWII as 'emergency measures'. Enough liberty restored to allow economy to absorb millions of returning soldiers into workforce (cause of end of Great Depression, not the New Deal and not the War).

6) Breton Woods to 1971. Near-fiat money: American paper dollars back paper currencies of rest of world, American gold 'backs' dollar. Tie to gold loosest yet. Paper money used by Americans for two generations so they forget what real money is. Fed inflates...

7) until foreign banks try to call US gold in return for overabundant US dollars, Nixon repudiates gold standard. Fiat money established worldwide in seemingly one stroke, though it actually took 58 years.

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#13) On December 21, 2010 at 2:08 PM, whereaminow (< 20) wrote:

So what do you think the odds are of going back to a PM backed currency? I think they are so close to zero as to be un-measurable.

The odds are obviously much better if a defeatist like yourself isn't in charge :)

The State would make us all miserable if we forced their hand. They would starve you and your family before they let us take their drugs away. They are that depraved.

Happy Holidays everyone!

David in Qatar  

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#14) On December 21, 2010 at 3:25 PM, GNUBEE (24.34) wrote:

rfaramir

Nice summary. Many fail to see all events as you have spelled out, and how they worked together to produce a pure fiat currency. Glad you got this in the post.

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#15) On December 21, 2010 at 4:03 PM, rfaramir (29.32) wrote:

GNUBEE

Thank you. I'm just a student of the Austrian school. Robert P. Murphy's easy read "A Politically Incorrect Guide to the Great Depression and the New Deal" (http://mises.org/store/Politically-Incorrect-Guide-to-the-Great-Depression-and-the-New-Deal-P580.aspx) and Murray N. Rothbard's "An Austrian Perspective on the History of Economic Thought" and "A History of Money and Banking in the United States: From the Colonial Era to World War II" (free pdfs and podcasts at http://mises.org).

 

It takes a while to get one's mind around liberty and its consequences. And longer to summon the moral courage to allow others their liberty to make room for you to exercise yours. Failing to do that empowers the State to take control so as to limit 'their' (our) liberty to 'protect' (dominate) us, which ends up impoverishing us all.

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#16) On December 21, 2010 at 5:00 PM, Dow3000 (< 20) wrote:

Dude, I love that you are getting jacked up about this.  I can feel ppl getting more and more angry.

 Your ability to articulate what should be obvious to everyone if they weren't constantly bombarded with BS propaganda is very legendary...I seriously hope you think about teaching or trying to get a voice on a bigger platform

Not sure if you have heard of Stephan Molynieux..but if not, look up his stuff...he is an incredible philosopher

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#17) On December 21, 2010 at 9:58 PM, whereaminow (< 20) wrote:

rfaramir,

And longer to summon the moral courage to allow others their liberty to make room for you to exercise yours

That's such an excellent observation. One of the persistent objections to liberty comes in the form of, "well, of course, I wouldn't abuse my liberty but everyone else is untrustworthy and vicious. Therefore, I would prefer to abdicate some of my liberty in order to keep these bad people at bay."

The problem with this analysis is multi-fold. First, it assumes that we will be able to identify the moral elite that will be able to govern in such a world. This is dubious. After all, if so many are so bad, how are we to sift through them to find enough people to be our moral leaders. Next, it assumes people would act the same way in a world without the State's divisive incentives. If you incentivize looting from your neighbor, more people will loot from their neighbors. If we remove that incentive, we can assume that it will be reduced.

Dow3000,

Thanks man! I will look him up.

Happy Holidays.

David in Qatar

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#18) On December 22, 2010 at 1:44 PM, rfaramir (29.32) wrote:

article: "The argument that inflation, instability, corruption and mal-investment cannot occur under the gold standard is historically false."

Irrelevant statement, since no one claims bad stuff "cannot occur" under the gold standard. It occurs, but the system is self-correcting. The corrupt (inflators) have to redeem their paper with gold, resulting in net outflows of gold which is evidence of and penalty for their corruption.

Without the gold standard, there is no corrective available. Booms and busts occur, hurting everyone but the central counterfeiters.

Just like the free market concept in general (as the gold standard is a naturally emerging and essential part of a voluntary exchange system) does not guarantee that bad market actors won't exist. But it does correct for them. Unskilled speculators lose money, as do entrepreneurs with no notion of what the public wants next. The skilled or gifted ones make profits and are empowered to make us all wealthier by providing the goods and services we want and need.

The State does not want to be restrained by gold (or anything). So it wormed its way out of the gold standard bit by bit. We live with a broken system until this essential corrective is restored.

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#19) On December 22, 2010 at 2:22 PM, rfaramir (29.32) wrote:

more from the article: "The favorite arguments used by inflationistas are the Weimar Republic and Zimbabwe, however, any true historian understands that the United States is not even remotely comparable to these corrupt and inefficient economies."

He conveniently forgets our own true history, the Continental Congress issued paper money to pay our soldiers. Eventually, "not worth a Continental" became common due to the hyperinflation that resulted.

Only Zimbabwe was corrupt and inefficient. The colonies were fighting a war, very stressful; and the dire straits tempted them to be corrupt and print unbacked notes. Germany would have been thriving if it weren't for WWI war debts that had to be paid in gold. Normally, inflating reduces debts (fraudulently, partially repudiating them), but Germany could only inflict this on its own citizens. Its debts stayed constant (rose in nominal terms) no matter how much they printed.

 

more: "The argument that 99% of all fiat currencies have failed is simply an outright falsehood."

LOL, technically true, since the number is 100%, except for all current ones, which are all pretty much in the process of failing.

more: "the restrictions of the gold standard have resulted in more government defaults than any flexible exchange rate fiat currency."

No. Bad management, spending more than you take in, and making promises to pay you cannot keep result in defaults. The gold standard was just the market's way of detecting who is a bad manager. Without it, governments can fraudulently print their way out of their agreements.

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#20) On December 22, 2010 at 10:28 PM, whereaminow (< 20) wrote:

rfaramir,

article: "The argument that inflation, instability, corruption and mal-investment cannot occur under the gold standard is historically false."

Irrelevant statement, since no one claims bad stuff "cannot occur" under the gold standard. It occurs, but the system is self-correcting. The corrupt (inflators) have to redeem their paper with gold, resulting in net outflows of gold which is evidence of and penalty for their corruption.

This argumentative technique, employed here by PragCap, is borrowed from sports talk radio. It's making up an argument that doesn't exist and then defeating it, such as "I don't care what anybody says, Brody Croyle is NOT a quality NFL quarterback!"  Well, thanks for pointing that out, genius.

I counted at least a dozen logical fallacies in that article. It's really really atrocious. PragCap has some high points, but MMT in general has become a haven for paper bugs (and gold haters) who have defected from the Keynesian camp. He's their new hero.

David in Qatar

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#21) On December 22, 2010 at 10:53 PM, NOTvuffett (< 20) wrote:

whereaminow, +1, great stuff.

My favorite golden idiotic ideas are: 

1.  It is a worthless shiny yellow metal.

2.  There is not enough gold in the world to use as money.

For #1 I would say "give me all your worthless gold", lol.

For #2 I would say "money is just a medium of exchange, it would be preferable to have something with intrinsic value instead of slips of paper that represent government debt".

 

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#22) On December 28, 2010 at 1:05 PM, mattdaddy21 (< 20) wrote:

I'm a converted Bears fan.  I grew up in Illinois, so had the pleasant experience of a sub-standard to awful team through most of the 90's.  Since moving to Wisconsin I've become a full blown traitor!

It's nice to see the Bears doing well for a change, but.... Go Packers!! Woop up on the Bears this Sunday and possibly the next game after that! :)

P.s. It's about time the Bears had a QB with an arm.  Does this mean he has to start wearing the Jim McMahon sunglasses out of respect?

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