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on the price of gold

Gold is still well below its 1980 peak in real terms.

Gold prices can go down as well as up, making the market for gold a casino where participants wager that the price will keep rising.

Like gold, the fortune of banks is heavily tied into government behaviour, housing is somewhat less heavily linked.

Industrial use is around 450 tonnes a year. Another 450 tonnes goes to the hoarders, while jewelry use is about 2,400 tonnes. Overall, about 160,000 tonnes has been mined since the time of cave dwellers.

In 2007 demand was 160% of production, due to the latest gold bug fever.
[Figures from National Geographic, January 2009]

“By one measure it has been estimated that, if the banks fully abandoned gold, gold might return to its price at the beginning of the 19th century - estimated at $68 per oz at today’s prices.”
[ Economist, 30 May 2002]

related material
e-gold: a developing example of an independent monetary system

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interesting suggestion regarding the ‘too big to fail’ problem


“However that issue is resolved in the short run, there will remain the problem of institutions growing so big that a collapse risks taking down the whole system. To deal with the "too big to fail" problem in the long run, Mr. Becker suggests increasing capital requirements for financial institutions, as the size of the institution increases, "so they can't have [so] much leverage." This, he says, "will discourage banks from getting so big" and "that's fine. That's what we want to do." ”

(The article is also useful common sense.)

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on fixing the global economy - investing in real capital
- on confusing money with capital

First from a mistaken analysis of the current economic situation:

“The blind rush into massive "stimulus packages" is the culmination of generations of economic ignorance transmitted from professor to student in the guise of advanced, revolutionary thinking — the "Keynesian revolution." The accelerating destruction of our economic system that we are now experiencing is the product of a prior destruction of economic thought. Our entire intellectual establishment has been the victim — the willing victim — of a massive intellectual con job that goes under the name "Keynesianism." And we are now paying the price.”

I gently suggest that the above is not very convincing.

Keynes was a pragmatist. He was far more firmly based in the real world than the hoards of silly scribblers. The linked article looks a lot like magical thinking. As with so many poorly educated people, the writer clearly does not understand Keynes, but uses his name as some sort of vague boo word.

According to the linked article (which is, in fact, rather unclear and apparently muddled), if you don’t consume, but accumulate numbers in an ‘account’ somewhere, you solve your present banking clag-up problems.

It’s nonsense. Numbers in an account never produced anything in the real world.

From the linked article:

“rebuilding the stock of capital”
“capital is accumulated on a foundation of saving”, etc.

What does the writer believe ‘capital’ is? Numbers in an account?
Perhaps he is confused? Perhaps he half believes capital is numbers in an account, but cannot quite hang on to the notion.

Real capital is a bridge across the Thames, or a mass sewage system. The US ‘stimulus package’ (among other matters) is aimed at building bridges and repairing roads. That is real capital, as long as those ‘goods’ are useful, rather than bridges to nowhere.

Look at Keynes’ semi-satirical illustration:

“If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory) there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but as there are political and practical difficulties in the way of this, the above would be better than nothing.” 1936

At the end of the process (for instance, ‘the stimulus package’), you may well have some negative numbers in accounts somewhere, but you do have your bridges, or concert halls, or studies of pig stinks.

But the negative numbers are just numbers in accounts. You may not like the cavalier approach, but it is possible to cross out those numbers at the end of the day, or a few years. And that is precisely what governments do, for instance through inflation. Meanwhile, pensioners and ‘workers’ end up with less money value than they hoped (or believed they had).

It is of vital importance to keep clear the differences between real capital and unstable numbers in accounts.

Real capital is a person’s education, their good health as opposed to their demise, and bridges. It is not the unreliable numbers in an account somewhere.

The numbers in the account are often wiped out very easily by a corrupt crook like Madeoff or Brown the Clown. Look at the Clown’s theft of tens of billions from pension ‘savings’.

Keynesian stimulus is being very widely misunderstood, by the left as an edict to the burying of bottles, and by the dogmatist right as, again in the words of Keynes:

“...the imbecile idiom of the financial fashion, have ‘mortgaged the future’... ”
[Keynes, National Self-Sufficiency, June 1933]

Marker at abelard.org

Brown: an awful example of misunderstanding and misusing Keynes’ ideas

  1. The Clown is involved in unproductive make-work, that is waste and foolishness.
  2. A central insight of Keynes was that there is no natural rate of unemployment.

This is a political issue. You cannot just wait/hope for the market to correct itself. In the meanwhile, people starve or, at best, waste their lives away in depressing circumstances. It is under these conditions that government stimulus is to be suggested.

But wasting ‘money’ on make-work is a foolish and trivial reading of Keynes. Incidentally, Keynes also hated inflation.

Keynes was writing early in the last century. With the great advances of the factory system, a citizen’s wage is now an ever increasing necessity.

Governments have a great propensity to waste and destroy wealth in the pursuit of power. This is embodied in the regular critique of the Clown - that he did not prepare for a rainy day. The Clown has been spending the money/wealth he stole from productive business. That is a large part of why the UK is now in trouble. Brown has undermined production badly, in order to increase his power over individuals as he tried to establish a client state.

His answer to his own devastation is - more of the same.

The Clown is a weak-brained and corrupt cult socialist.

Crowding out creative productive activity during stable times is idiocy of the first water. ‘Stimulus’ in the face of rising unemployment is a different matter.

Keynes correctly regarded socialism as follows:

“Marxian Socialism must always remain a portent to the historians of Opinion - how a doctrine so illogical and so dull can have exercised so powerful and enduring an influence over the minds of men, and, through them, the events of history.”

Marker at abelard.org

Keynes on the steady attenuation of work (regarding a citizen’s wage)

“...What can we reasonably expect the level of our economic life to be a hundred years hence? What are the economic possibilities for our grandchildren?”

Written 1928-30.

“Now it is true that the needs of human beings may seem to be insatiable. But they fall into two classes --­those needs which are absolute in the sense that we feel them whatever the situation of our fellow human beings may be, and those which are relative in the sense that we feel them only if their satisfaction lifts us above, makes us feel superior to, our fellows. Needs of the second class, those which satisfy the desire for superiority, may indeed be insatiable; for the higher the general level, the higher still are they. But this is not so true of the absolute needs-a point may soon be reached, much sooner perhaps than we are all of us aware of, when these needs are satisfied in the sense that we prefer to devote our further energies to non­-economic purposes.

“Now for my conclusion, which you will find, I think, to become more and more startling to the imagination the longer you think about it.

“I draw the conclusion that, assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not-if we look into the future-the permanent problem of the human race.

“Why, you may ask, is this so startling? It is startling because-if, instead of looking into the future, we look into the past-we find that the economic problem, the struggle for subsistence, always has been hitherto the primary, most pressing problem of the human race-not only of the human race, but of the whole of the biological kingdom from the beginnings of life in its most primitive forms.

“Thus we have been expressly evolved by nature-with all our impulses and deepest instincts-for the purpose of solving the economic problem. If the economic problem is solved, mankind will be deprived of its traditional purpose.

“Will this be a benefit? If one believes at all in the real values of life, the prospect at least opens up the possibility of benefit. Yet I think with dread of the readjustment of the habits and instincts of the ordinary man, bred into him for countless generations, which he may be asked to discard within a few decades.

“To use the language of to-day-must we not expect a general "nervous breakdown"? We already have a little experience of what I mean - a nervous breakdown of the sort which is already common enough in England and the United States amongst the wives of the well-­to-do classes, unfortunate women, many of them, who have been deprived by their wealth of their traditional tasks and occupations--who cannot find it sufficiently amusing, when deprived of the spur of economic necessity, to cook and clean and mend, yet are quite unable to find anything more amusing.

“To those who sweat for their daily bread leisure is a longed--for sweet-until they get it.

“There is the traditional epitaph written for herself by the old charwoman:--

“Don't mourn for me, friends, don't weep for me never,
For I'm going to do nothing for ever and ever.”

And more.

related material
“an enormous problem” - bernanke, 10 march 2009

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“an enormous problem” - bernanke, 10 march 2009

“However, the belief of market participants that a particular firm is considered too big to fail has many undesirable side effects. For instance, it reduces market discipline and encourages excessive risk- taking by the firm. It also provides an artificial incentive for firms to grow in order to be perceived as too big to fail. And it creates an un-level playing field with smaller firms, which may not be regarded as having implicit government support. Moreover, government rescues of too-big-to-fail firms can be costly to taxpayers, as we have seen recently. Indeed, in the present crisis the too-big-to-fail issue has emerged as an enormous problem.”

“To help alleviate counterparty credit concerns, regulators are also encouraging the development of a well-regulated and prudently- managed central clearing counterparty for OTC [over the counter, that is, derivatives market] trades.”

This applies to pricing transparency.

Marker at abelard.org

Regarding mark to market:

“The ongoing move by those who set accounting standards towards requirements for improved disclosure and greater transparency is a positive development that deserves our full support. However, determining appropriate valuation methods for illiquid or idiosyncratic assets can be very difficult, to put it mildly. Similarly, there is considerable uncertainty regarding the appropriate levels of loss reserves for loans over the cycle.

“As a result, further review of accounting standards governing valuation and loss provisioning would be useful, and might result in modifications to the accounting rules that reduce their procyclical effects without compromising the goals of disclosure and transparency. Indeed, work is under way on these issues through the Financial Stability Forum, and the results of that work may prove useful ”

Marker at abelard.org

The distance of shareholders from control

From Keynes, National Self-Sufficiency, June 1933

“...The divorce between ownership and the real responsibility of management is serious within a country, when, as a result of joint stock enterprise, ownership is broken up among innumerable individuals who buy their interest to-day and sell it to-morrow and lack altogether both knowledge and responsibility towards what they momentarily own. But when the same principle is applied internationally, it is, in times of stress, intolerable--I am irresponsible towards what I own and those who operate what I own are irresponsible towards me. There may be some financial calculation which shows it to be advantageous that my savings should be invested in whatever quarter of the habitable globe shows the greatest marginal efficiency of capital or the highest rate of interest. But experience is accumulating that remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation.”

“But this is merely an illustration. It is my central contention that there is no prospect for the next generation of a uniformity of economic system throughout the world, such as existed, broadly speaking, during the nineteenth century...”

“ ...the imbecile idiom of the financial fashion, have "mortgaged the future"--though how the construction to-day of great and glorious works can impoverish the future, no man can see until his mind is beset by false analogies from an irrelevant accountancy. Even to-day I spend my time--half vainly, but also, I must admit, half successfully--in trying to persuade my countrymen that the nation as a whole will assuredly be richer if unemployed men and machines are used to build much needed houses than if they are supported in idleness...”

Thanks to DVH for second link.

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simon heffer starts to understand the euro

Article is recommended reading.

“...it [the euro] is still, as I write, at an incomprehensible 90p against sterling...”

About time someone noticed....the euro is also similarly over-valued against the dollar.

“Tomorrow the ECB is meeting to discuss the interest rate, and it is predicted that it will be cut from two to 1.5 per cent. That would make little odds in countries that, like Latvia, have literally run out of money. The IMF is trying to build up a special new fund to bail out countries in distress. It may soon become apparent that this attempt at a currency for disparate nations is about to disappear under the weight of reality - nationalist reality - and the big boys are going to have to come in and sort some nations out. For some countries there will be only three means of staying in the euro. One is to impose the discipline, and risk rioting and the fall of governments. The second is to persuade the ECB to bend the rules to such an extent that the illusion of the euro's strength (it is still, as I write, at an incomprehensible 90p against sterling) is forcibly broken and the speculators have their own field day with it, at last. The third is to get the lender of last resort - the Germans - to bail out countries in trouble.”

“As for the rest of Europe, it must choose either to devalue and end the pretence of economic strength, or persist and risk the breakdown of individual governments. Either way, it is never glad confident morning again for the EU and its bastard currency. Milton was right.”

How does he suppose the euro can be ‘devalued’? The only obvious route to that is to drop the euro.

As for Milton Friedman’s comments of 3 years ago. I reported the problems with EMU over 10 years ago! Here are some quotes i used in that analysis:-

“Alan Greenspan, one of the truly great masters of monetary consequences, has been reported by the Wall Street Journal as saying, "The Euro will come but it will not be sustainable". He also recently expressed concerns over the EMU’s potential capacity to sow dissension between union member states, a central issue as far as I am concerned.

“Ted Truman, international chief of the Fed. (Federal Reserve - central bank of the USA), said that the Euro project could adversely affect the smooth functioning of the international monetary system.

“Volker, an ex-Fed. boss of great experience, said, "I’d rather start the intellectual process now than wait for the crisis and conflict that if not inevitable, are all too possible".”

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on economics, politics and psychology

A huge amount of economics is political.

“Never waste a crisis.” (Rahm Emanuel, 24.11.2008)

Barack Obama is an extremist dogmatic socialist. He’s straining to much enlarge government.
In the UK, Gordon Brown the Clown is printing money like crazy.

Increasing numbers cannot earn enough by their work to buy the trinkets, so Brown is undermining the value of the huge accumulated debt.

This will probably continue until the politicians are forced to introduce a citizens wage, or they decide to tolerate ever increasing social divide, with the less able part of society sinking ever lower.

It is vital to realise the money is used as a means of social control by politicians. Money is, in part, a government cartel. People like the Clown are only interested in control, and they are socialist dogmatists. The Clown’s first concern is elections, not the good of the country or the people. The Clown is interested in the Clown, and is a dogmatic believer in his crazy cult. He and his mates also desire the trough.

The whole political show revolves around elections. Thus, the general pattern is that governments loosen money, approaching elections; and squeeze it down after the election (“watch my lips, no new taxes”, and then the election over, taxes go up). The current contraction has decided not to wait for the politicians.

You cannot understand modern economics without understanding politics.

Next, humans show social rank by accumulated accoutrement. Look at bower birds trying to attract a mate.

You cannot understand modern economics without understanding psychology.

My concern is to ensure that people think sanely about economics, and most especially to realise when decisions are essentially political, and not ‘economic decisions’.

There are available various responses to an economic contraction, from benign neglect to super-meddling. My concern is that such decisions are taken with open eyes and with attention to consequences, intended or otherwise; not taken as some dogmatic responses based on fundamentalist theories.

I am also concerned that the issues are discussed widely, not based on false/foolish beliefs in ‘the market’, or ‘the wonders of government’/socialism.

My prime target is that people attempt to think, rather that react mindlessly.

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on economic markets and engineering

To compare economics with engineering, as a correspondent suggested, borders on delusionary.

The atoms in steel and concrete do not have minds and motivations of their own, they exhibit very low levels of choice. Engineering calculations are, in general, very different to those of economics and markets.

The advantage of markets is they can integrate the decisions of billions. The market is a live system and requires a very different approach to that of engineering.

Socialism is, in part, born out of paranoid drives to control. Naturally, socialists tend to seek magic formulae.

The market is the machine that calculates outcomes. Humans adapt to opportunities, and thence change their behaviour.

Molecules of concrete do not seek advance/‘profits’.

Markets tell you what is happening, or what has happened. They are far less suitable for telling you what is going to happen.

It is the drive to control that is at the centre of the mental disease called socialsm. Trying to control the market is not much different from trying to control individuals. Apply enough ‘control’ and you kill people.

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