Friday, February 5, 2010

Dollars, for the record

"A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services."

Ben Bernanke, in a speech given on November 21, 2002

An interesting quote from the speech linked above:

"Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures."

The Fed cannot target "the rate of economic growth", here defined as the rate of inflation, if interest rates are at or approaching zero (which they are now). Bernanke understands cause and effect/supply and demand, and also understands that inflation is a way for the banks and government to get goods and services, without paying for them, by inflating the currency (printing money and issuing bonds).

In other words, the Federal Reserve's policies are exclusively inflationary because that is the way to keep more of the taxpayer's wealth in their hands. If you understand that inflation is government-sanctioned theft of YOUR wealth, then you should understand why the Statists currently in power want to keep this guy at the helm of the Fed.

Posterity can be a bitch...




Newbius said...

This post came about as I was researching something else. I think it is important to note that Silver and Gold coins are still produced by the US Mint, and are legal tender for all debts. See the following link here:

Also note that, while the coins are able to be used at their face valuation for any debt, they cannot be purchased using FRN$ at the same exchange rate. $50FRN dollars != $50 Gold. The difference in valuation is the amount of your wealth stolen by your government by inflation. The difference between gold in 2002 (~$300/ounce) and now (~$1,000/ounce) is a pretty good indicator of the decline in relative worth of the currency in the last 8 years.


TJP said...

Yeah....Anyway, I always keep an eye out for half-concealed facts supporting absolute statements.

If he's going to use a fantastic example such as alchemical transmutation, I think my realistic response definitely applies: a) we'll be able to take advantage of gold's electrical properties in general industry; b) entrepreneurs will simply buy whatever it is which is transmuted to gold, which in turn will become the new gold.