An Open Letter To Paul Krugman On the 'Republican Lust for Gold'

"People of privilege will always risk their complete destruction rather than surrender any material part of their advantage."

John Kenneth Galbraith, Age of Uncertainty

This is a response to Mr. Krugman's recent column as it was featured at Economist's View titled, Republican Lust for Gold

I am not in favor of a return to a gold standard.

I am a reasonably well-educated, politically progressive professional, a likely supporter of Bernie Sanders as an economic reformer and an opponent of endless war, and certainly not the 'Wall Street Democrats.'   I believe that the current 'debate' over the place of gold in the economy is breaking along ideological lines to the point of a religious fervor and intellectual blindness, on both sides.

I think of gold as an alternative store of wealth, which without any sanctions from the state pro or con can serve a very useful purpose. It gives people a 'choice.' It can act as a barometer of sentiment. And it serves a purpose, especially in times of pervasive fraud in the financial asset markets, as an asset without mispriced or even hidden counterparty risk if held directly.

And if you think that the problem of pervasive fraud has been fixed you are sorely mistaken.

If a system cannot stand the criticism offered by something which it cannot and probably ought not to control, then perhaps the fault is in the system, and not in the critics.

And while we are on the topic, what by any stretch of the imagination do you subscribe the issue of 'gold' to the Republican establishment? Who shut the gold window in 1971? One of the few things that Chairman Greenspan said is that statists from both sides of the aisle despise and fear gold because it constrains them in their quest for discretionary power. And he was right.

The current 'stimulus' is a massive failure because it has been trying to save a broken and largely unreformed financial system, rather than provide stimulus and support to the vast majority of the participants. It is the consequence of placing the highest priority in means and methods, because they are 'ours.' Our method, our model. First and foremost. Because we fear for our credibility.

And so the participants who are complicit in the fraud and those who are invested politically in the models and methods both become ensnared in a 'credibility trap,' and what Mike Lofgren has called 'the anti-knowledge of the elite.'

Unfortunately, Gresham's law is still works. Gold, and to a lesser extent silver, are flowing 'en masse' to Asia in almost astonishing numbers of tonnes each month. The numbers are there, little publicized and noted in the prestige media, but almost shocking. It has not yet made its way fully into official reporting mechanisms, even so called 'industry organs.'

Mr. Krugman, nine out of ten Americans will notice that the vast peoples of Asia and the Mideast are not 'Republicans.'   The central banks of the world are hardly 'Republicans,' but they became net buyers of gold around 2007.

No, they are not the easily mocked Republicans.

But they are looking for a safe alternative to a monetary and financial system that is going off the rails, again.  The modern hypothesis that all money is purely arbitrary is only feasible if one has the ability to make their purely arbitrary valuations stick.   That is the Faustian bargain with the will to power, the endless war of the monetary relativists.

Would we make enemies of the whole world for the sake of a corrupt and unsustainable financial system? Alas, some would, and are doing so even now.

As I am sure you know, once a force like Gresham's Law goes into effect, which it already has, it can quickly turn into a torrent of consequences.  Will we continue to argue until that event is upon us, as we did with the prevalent fraud in the housing bubble that was created by the same perpetrators who have continued to rig markets even until today?

The dogmatic modelist and political hack sees China and India and other nations buying gold and says, 'We must stop this! Control it!' The thinker sees a sea change in the monetary markets and says, 'we must understand why this is happening, and what we may be doing to provoke it. And if we are doing something wrong, then correct it.'

No I do not support the gold standard, not at all. It would be entirely inappropriate for a patient still in the ICU to be prescribed a regime of hard exercise and strict diet. And the corruption in this system is capable of corrupting anything, even an external standard.

Given the proper regulation, transparency, and judgement, a paper currency can emulate the steadiness of a gold standard while allowing for more latitude in times of distress. Do you really believe that we have held to that prescription with our serial bubbles, frauds and crises?

But I do feel quite strongly that the current policy of constant market intervention in the West, which is obviously happening to anyone who is capable and experienced in watching trade patterns, is going to tear a hole in the facade that this sick series of policy errors is becoming.

If one takes even a cursory look at the trade flows of gold, one can see that the flows into Asia and the Mideast are relentless, and growing. And the decline of 'free float' in the UK and US in particular is striking. The numbers are difficult to discover, but some have taken on that task.

The leverage and shuffling of free bullion around to dull the interest in leverage is approaching 300 to 1 in NYC and 200 to 1 in the 'physical' LBMA market in London is the kind of obvious error that one looks back at from the wreckage and says, 'What were they thinking?'

We made a mistake. A big one.  We have tolerated a farcically ineffective program of 'reform' and a massive top down stimulus focused on the 'system' with an austerity for the public that is going to rip a tear in the social fabric which will take years, and a significant amount of pain, to mend.

It is going to happen, no matter what models or arguments you may wish to stick your head in. I am not trying to argue a point. I am trying to encourage people to at least look at what is happening, and to stop comforting themselves with obviously faulty numbers and metrics from a system that has stopped serving most participants in favor of a powerful few.

This is going to end badly. I was more demure when we had similar discussions here like this prior to the housing bubble collapse. 'And no one could have seen it coming.'  Because their eyes were closed and they comforted themselves with what they wanted to hear.

There is, at some point, going to be a dislocation in the international currency and bond markets.   And it will be noticeable, unless we change our ways and embrace honesty, transparency, broader equity, and reform.

It will not come from the political process, because that has also been broken by the power of big money.  That has become so painfully obvious that the only way to continue to justify it is to declare corporations to be 'people' and bribery to be 'free speech.'

People may think of themselves as 'Keynesians,'  and what the 'other side' thinks about Keynes is admittedly mostly an ideologically tainted caricature.  But first and foremost what made Keynes effective was his practical focus on the desired results and not to a preconceived model which crushes out the better part of reality in its understandable and unfortunate inadequacy that is common to all 'models.'  Keynes was an independent thinker who was confident enough to occasionally change his mind without worrying overmuch about his credibility, and not an acolyte of some constraining school of thought made dogma. 

No, rather than a 'gold standard' now I think gold should stand alone, and be allowed to speak whatever truths it may. As for any use of it by nations, let them make what use of it as they wish. It is a tool. But once they make it 'official' they cannot seem to keep from trying to cage it, and control it. But by then it is merely collateral damage of a growing corruption and fraud of finance, rarely without an accomplice in monetary economics.

At some point the thought leaders will have to rise above their own political enthusiasms and personal aspirations and begin to honestly and openly address what is going wrong. And then perhaps we may begin to push for the return of some of the basic principles hammered out in the 'New Deal' which we so foolishly allowed to be weakened and then overthrown in the 1990s, and even until now.

And, Mr. Krugman, that was a decidedly bipartisan effort. And the players and their enablers who brought us that misery are still active, unabashedly, in the highest circles of power.

Economists-Say-Dumb-Things Chronicles: 'Debt Is Money We Owe To Ourselves'

Like so many sloppy discussions of economics to make an important policy point, but badly, this one diverges from common shared reality fairly quickly. 

Let me strike the key hypothesis in this, that prompts a leap of faith, over a cliff and into the abyss of fantasy.

"Debt is money we owe to ourselves."

Something on which Mr. Krugman can agree with Dick Cheney who said, 'Reagan proved that deficits don't matter.'   How is that for a twist?  

From an accounting standpoint and within the realm of theoretical identities this is true. Each debt is someone else's asset.

The key of course is how we define 'ourselves.'  

If 'we' are the entire planet, equally and without distinction of interests and property, then perhaps one might say, ok, although it loses all meaning and significance.   I would not mind pooling my household books with one of the Banking billionaires and to be able to step up to the Fed's free cash window anytime to do my business, with the assurance that I have a government guarantee underpinning my ledger, but alas.

And this is a problem because the paramount issue we are facing today is the historically extreme concentration of capital assets in a relatively few hands, and the burden of unpayable debts being imposed upon a large segment of the people by a system that has been hijacked by the moneyed interests.

If you take this pithless observation by Mr. Krugman down one level of detail in the States for example, one finds that the debt is an asset on the books of a increasingly small number of wealthy people, with much of it controlled for them by a handful of Banks.

This system is not sustainable, and I see no sign that it will even cohere, without substantial reform.

I wonder if the average American who is losing their car and house, and who is being hounded by debt collectors for whom those debts seems to matter a great deal, can use that argument with the Banks.

Putting aside private debts, let's just stay in the realm of sovereign debt, where the economic imagination can more easily take its flights of fancy.

Debt is just money we owe to ourselves is similar to the flat pronouncement that a sovereign that issues its own currency can never default. Money is just an accounting entry so why the fuss?  And from this comes a Pandora's Box of muddy thinking, a selective myopia towards history,  and Trillion Dollar Platinum coins. 

I wonder if Greece can use this argument, that debt is just money that we owe to 'ourselves,' when they meet with the Germans this week. 

But no, the US is different.  Every other country may fail, and many have including that insubstantial nation of Russia not all that long ago,  but not us. We are young and immortal.  Our benchmark for virtue is power, and we are virtuous enough to be able to say that when things are not working out as we planned, we are able to decree that 'money is whatever we say it is,' and God help anyone who does not agree.

And so we might presume that the mighty US is going to be able to make that case about debt forever to its creditors who are outside the direct thought control of its monetary system, a short list of which is contained below.

It is funny how the moneyed interests and their courtiers are always saying, 'debt doesn't matter,' especially when they want us to assume their gambling debts which they incurred by frauds using our own money.   Until, that is, they decide to call in the loans and the debts, and impose their will upon the people with foreclosures, garnishment, austerity, and debtors' prisons.

I agree wholeheartedly that the rhetoric around the discussion of spending priorities gets silly and overheated and quite frankly disgusting.  That has more to do with a society in the grip of a greedy few, corrupt public servants, sophistical theoreticians, and boisterous minions than it does with the need to expand our economic theories into existential irrelevance.  Madness is certainly attractive perhaps in a land going mad, but it is unlikely to be productive.

Arguments like those from the MMT crowd, both right and left, and economists like Paul do us no favors in concocting some fantastical solution to what is primarily a problem of governance, justice, transparency, and power gone horrible wrong.

The 'debt' and the 'budget' are not an economics argument but a policy argument.  What is important to us?  What do we continue to hold as these truths?   And how do we resolve those disagreements?  Avoiding that policy and priority discussion enables those who are caught in the credibility trap to continue to beg the question entirely, and the real task at hand, which is reform. 

We cannot discuss reform until we expose the corruption.  And therein lies the problem, because quite a few powerful hands have been dipping into the largesse, and quite a few courtiers have a vested interest in continuing to propagate the lies and myths of a failing system.

I am not a 'hard money' guy.  I am certainly not in favor of a domestic gold standard as a remedy for our current set of problems. 

 

What I am saying, and I think it has been consistently so, is that the system that we have now is so fundamentally broken that no matter what incidental things that we do, no matter how much stimulus is provided under whatever rationales, that all good will be turned to ill, the gap of inequality will keep widening, and that the situation will continue to worsen, lurching from crisis to crisis.

 

Is this not what we have seen since all the programs were put in place since the crisis of 2008?  That the rich are getting richer, because all we have really done is prop up an unjust, broken, and unworkable system.  And I think that this is the point that is being made by Greece in Europe today.

You cannot keep a game running when the insiders that control it are making up the rules as they go along, hiding their assets, dictating the judges' decisions,  dipping into the other players money at will, and generally cheating and doing whatever they wish when they wish, because they can.

The system is too flawed to be sustainable, and must change in order to cohere.

NY Times

Debt Is Money We Owe To Ourselves

By Paul Krugman

February 6, 2015

Antonio Fatas, commenting on recent work on deleveraging or the lack thereof, emphasizes one of my favorite points: no, debt does not mean that we’re stealing from future generations. Globally, and for the most part even within countries, a rise in debt isn’t an indication that we’re living beyond our means, because as Fatas puts it, one person’s debt is another person’s asset; or as I equivalently put it, debt is money we owe to ourselves — an obviously true statement that, I have discovered, has the power to induce blinding rage in many people...

More than that, as Fatas points out, rising debt could be a good sign. Think of my little two-classes model of debt, where some people are less patient than others — perhaps (to step outside the model a bit) because they have better investment opportunities. Moving from a very limited financial system that doesn’t allow much debt to a somewhat more open-minded system should, in that case, be good for growth and welfare...

And the problems with public debt are also mainly about possible instability rather than “borrowing from our children”. The rhetoric of fiscal debates has been, for the most part, nonsense.

Read the entire piece here.

Today's Gold Smackdown Portrayed on a June Futures Chart, 5 Minute Intervals

Why would the government turn a blind eye to this?

Well, in addition to allowing your cronies to make boatloads of money by gaming the markets, there is a not so subtle message wrapped within this chart from the financial engineers of the current banking system.  This is all a part of the currency wars.

"One of the central facts about modern America is that everything is political; on the right, in particular, people choose their views about everything, from environmental science to gun safety, to suit their political prejudices. And the remarkable recent rise of “goldbuggism,” in the teeth of all the evidence, shows that this politicization can influence investments as well as voting.

What do I mean by goldbuggism? Not the notion that buying gold sometimes makes sense. Gold has been a very good investment since the early 2000s, and it’s probably not all bubble. One way to think about this is that gold is like a very long-term bond that’s protected from inflation; and actual long-term inflation-protected bonds have also seen big price increases, reflecting a general perception that there aren’t enough alternative good investments.

No, being a goldbug means asserting that gold offers unique security in troubled times; it also means asserting that all would be well if we abolished the Federal Reserve and returned to the good old gold standard, in which the value of the dollar was fixed in terms of gold and that was that. And both forms of goldbuggism soared after 2008."

Paul Krugman, Lust for Gold

You see, gold is not an investment decision, it is a 'lust.'  And since it does what Mr. Krugman does not wish it to do, it is irrational, and something from his evil adversaries on the right. 

There is nothing quite so cheaply formed as this type of toss off piece from an establishment economist in defense of the status quo. 

This is the common thread I see amongst financial engineers and theoreticians.  The weakness in their theories and models always seems to turn to the brute force of financial market repression when their schemes get into trouble, based on some inherent weakness or false assumption that makes them unstable.  That certainly is the picture in Europe. 

Here is a piece I wrote some time ago about the 38 Year Cycle in Monetary History

Here is a detailed picture of the gold trading on the Comex today. You can look at it and judge for yourself.

There was no news to provoke this kind of a massive sell off in a quiet market and on heavy volume. 

This is just shock and awe in the currency wars.  And everyday people are collateral damage.  And there are always those who will beat the drums, on cue. 

Money Supply, Paul Krugman, and the Great Depression

We like Paul Krugman and enjoy reading his columns. But every so often he writes a column that is so off his normal standards that it makes us wonder if he is on vacation and the task of producing the column has been delegated to a graduate assistant.

Here is one such example.

NY Times
Was the Great Depression a monetary phenomenon?
By Paul Krugman
November 28, 2008, 1:47 pm



Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history?

A central theme of Keynes’s General Theory was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, claimed that the Fed could have prevented the Great Depression — a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression.

Now, what the Fed really controlled was the monetary base — currency plus bank reserves. As the figure shows, the base actually rose during the great slump, which is why it’s hard to make the case that the Fed caused the Depression. But arguably the Depression could have been prevented if the Fed had done more — if it had expanded the monetary base faster and done more to rescue banks in trouble.

So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base:



And guess what — it doesn’t seem to be working.

I think the thesis of the Monetary History has just taken a hit.

We have mixed emotions on this one since we think the monetarist approach is a too one-dimensional to explain what happened then and now, and agree with Keynes that monetary policy alone is incapable of dealing with a complex economic event such as we are now facing. We also do not believe that the Fed 'caused' the Great Depression.

However, to try and make the case that the Fed can "only" control reserves and the currency base, the monetary base, is an old canard trotted out by the likes of Greenspan and his ilk when they wish to make the case that things are happening, like enormous bubbles, that are beyond the Fed's control. This is a Clintonian use of the word 'control' and is always and everywhere rubbish.

The Fed's power, its influence, is profound, and ever moreso in this era of aggressive financial engineering. Krugman uses the narrow argument of literal control to point to the Adjusted Monetary Base as his sole metric and say, "See the monetary base went up in the Depression in his Chart 1, just as it is today in Chart 2. Therefore there was no error from the Fed at that time because it was all that they could do."

Here are two other charts that help to provide a better view of what really happened.



Please note in the above chart that after the British abandoned the gold standard, the Federal Reserve RAISED the discount rate for US banks in the spring of 1931 from 1.5 to 3.5 percent, or 200 basis points.



To emphasize the policy error look at this estimate of real interest rates leading into the bottom of the Great Depression in 1933. Nine out of ten economists might notice that, relative to the price deflation which was obviously occurring, that the increase in Discount Rate was motivated by other than monetary and domestic considerations.

Finally, let's take a look at a broader money supply for the period, M1, against the change in GDP.



Please notice the decline in M1 tracking the changes in GDP.

So, what might the Fed had done differently?

It is obvious that devaluing the dollar was the right thing to do. To that end, the Fed might have cut the discount rate to less than one percent, instead of raising it, which was likely in response to the movement of the British pound and the Bank of England's abandonment of the gold standard. They also might have lent in size to any bank requiring deposits, so that there would be no more bank failures for banks that were in otherwise reasonably good shape, that is, because of depositor runs.

And this is where we do part company with Mr. Friedman and Ms. Schwarz and join Lord Keynes in his observation that it requires fiscal and legislative actions to repair an economic shock such as the country was experiencing in the early 1930's.



Notice that Government Purchase drop, and rather sharply, into the trough of 1933, along with aggregate demand. This would have been the point where Keynes would have likely observed that supply money was not enough, but was only a first step in stabilizing the system. The 'real cure' was to get people working again, to provide wages and gainful employment, to encourage consumption and economic activity.

As an aside, notice that net exports were negative and remained so throughout the period of 1929 through 1933. Much has been made of the Smoot-Hawley tariff, and indeed exports did nominally decrease. But the proportion of decline to imports makes it clear that protectionism was rampant throughout the rest of the world, and had not been caused by anything the United States was doing per se.

We don't have the chart at hand, and will continue to look for it, but the United States was one of the last of the developed nations to emerge from the Depression with positive GDP growth. We think that this was caused by exactly the phenomenon that Keynes observed, which was a lack of government fiscal and legislative activity to promote economic activity, as well as a relatively open market for imports and a "business first" bias, to the disadvantage of the unemployed working people.

In conclusion we would say that contrary to what Mr. Krugman asserts it is apparent that the Fed made a significant policy error in raising the discount rate in early 1931. It is less clear what latitude they might have had to do more to stem the tide of bank failures because of depositor fears, but they clearly could have done more to react to the contracting money supply. We have heard that they only were able to think in termed of the monetary base and had no statistics beyond that with which to guide their efforts.

We think that this is a weak rationale at best for their failure as bankers to respond to the obviously dire situation of the economy which evident in and of itself. We would not accuse them of lacking imagination, inventiveness, determination, and a spirit of pragmatic activism. In fact, they strike us as 'clubbable men' acting for their club.

We shall see this time perhaps if monetary activism alone is sufficient, especially if the Republicans and corporate banking interests have their way. But it does not appear to be the case since making money available to lend does not solve the problem of helping to create an economic environment in which profits might be made.

Indeed, we can imagine an outcome in which misbegotten monetary policy results in an oligopoly of corporate interests and an economy that is permanently frozen in a series of de facto monopolies based on central planning, not all that dissimilar to the experience of the Soviet Union prior to its dissolution and some countries in which a hundred or so powerful families control the government and its economy in a state of permanent corruption and malaise.