Economics and Markets Lab

Why, after years of the market's neglect of gold, is the paper money price of gold now on the rise?Would it be too far-fetched to assume that it could reflect market agents' growing concern about a forthcoming great inflation of government controlled paper money? ..Mainstream economists may be relaxed about such a policy provided "inflation" — typically defined as a change in the consumer price index — remains "low." Austrians, in contrast, not only consider an increase in credit and money supply inflationary; they would also point out that the very process of a relentless increase in government-sponsored credit and money supply is a recipe for disaster, that it will ultimately end in the destruction of the currency...
Austrian-minded economists would reject such a definition as erroneous and even denounce it as a deliberate attempt to confuse the public about the very forces at the heart of the erosion of the exchange value of money...
Inflation … means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term "inflation" to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. It follows that nobody cares about inflation in the traditional sense of the term.[1]
Now consider the case in which an economy's stock of money can be increased through bank-credit expansion — the feature of today's government-controlled money-supply monopolies. Market agents can obtain additional balances through bank loans without being obliged to surrender scarce resources. The additional demand financed by the increased stock of money would lower the exchange value of money vis-à-vis tradable goods...
A money system doomed to fail
Inflation has not become visible to many, though. In recent years a strongly growing credit and money supply has increasingly inflated prices for stocks, real estate, etc., and has to a much lesser extent shown up in consumer prices. To make things worse, the ensuing "asset price inflation" has been widely hailed as a "wealth effect," said to be positive for production and employment...It would not take much to expect that government-controlled central banks, when having to decide between keeping inflation in check or preventing recession, would most likely opt for growth, whatever it takes, even at the expense of a loss in the purchasing power of money...
The real value of gold
The unfolding symptoms of the crisis — that is, growing concerns about the solidity of the banking sector ..Against this background it is no wonder that investor interest in gold has returned...the current US-dollar price of gold would, despite the recent price increase, still appear to be cheap...Even if hyperinflation seems to be a remote,Mises words could be taken as a support for the possibility that gold may well continue its appreciation vis-à-vis paper money:
But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

...The notion of change implies the notion of temporal sequence. A rigid, eternally immutable universe would be out of time, but it would be dead. The concepts of change and of time are inseparably linked together...Human reason is even incapable of conceiving the ideas of timeless existence and of timeless action..He who acts distinguishes between the time before the action, the time absorbed by the action, and the time after the action has been finished. He cannot be neutral with regard to the lapse of time...There is functional correspondence between elements, but there is neither cause nor effect...What distinguishes epistemologically the praxeological system from the logical system is precisely that it implies the categories both of time and of causality..The praxeological system too is aprioristic and deductive. As a system it is out of time..
It is acting that provides man with the notion of time ..Action is always directed toward the future..Its aim is always to render future conditions more satisfactory than they would be without the interference of action..In any case action can influence only the future..For contemplative meditation time is merely duration..The "now" of the present is continually shifted to the past and is retained in the memory only...Reflecting about the past, say the philosophers, man becomes aware of time.[3] However, it is not recollection that conveys to man the categories of change and of time, but the will to improve the conditions of his life...Time as we measure it by various mechanical devices is always past.. and time as the philosophers use this concept is always either past or future. The present is, from these aspects, nothing but an ideal boundary line separating the past from the future..Action is as such in the real present because it utilizes the instant and thus embodies its reality..Later retrospective reflection discerns in the instant passed away first of all the action and the conditions which it offered to action. That which can no longer be done or consumed because the opportunity for it has passed away, contrasts the past with the present. That which cannot yet be done or consumed, because the conditions for undertaking it or the time for its ripening have not yet come, contrasts the future with the past. The present offers to acting opportunities and tasks for which it was hitherto too early and for which it will be hereafter too late..
Man is subject to the passing of time..His time is scarce. He must economize it as he economizes other scarce factors..time would be scarce and subject to the aspect of sooner and later..
A man's individual actions succeed one another..People have often failed to recognize the meaning of the term "scale of value" and have disregarded the obstacles preventing the assumption of synchronism in the various actions of an individual..People have often failed to recognize the meaning of the term "scale of value..The scale of value manifests itself only in real acting; it can be discerned only from the observation of real acting. It is therefore impermissible to contrast it with real acting and to use it as a yardstick for the appraisal of real actions..A logical system must be consistent and free of contradictions because it implies the coexistence of all its parts and theorems. In acting, which is necessarily in the temporal order, there cannot be any question of such consistency. Acting must be suited to purpose, and purposefulness requires adjustment to changing conditions...Presence of mind is considered a virtue in acting man. A man has presence of mind if he has the ability to think and to adjust his acting so quickly that the interval between the emergence of new conditions and the adaptation of his actions to them becomes as short as possible..However one twists things, one will never succeed in formulating the notion of "irrational" action whose "irrationality" is not founded upon an arbitrary judgment of value. Let us suppose that somebody has chosen to act inconstantly for no other purpose than for the sake of refuting the praxeological assertion that there is no irrational action. What happens here is that a man aims at a peculiar goal, viz., the refutation of a praxeological theorem, and that he accordingly acts differently from what he would have done otherwise. He has chosen an unsuitable means for the refutation of praxeology, that is all.

..If mainstream economists and market analysts' predictions (wishes?) come true, and the US Federal Reserve lowers rates several times in the next few months, contrary to popular belief, things in the medium and long term will unequivocally get worse. Lowering rates by pumping fiat-currency liquidity will have the following effects on the US economy:
Credit will not contract as it should have — and might even expand — consequently delaying the necessary liquidation of malinvestments and the cleanup of bad loans.
New easy money will once again flow into stocks and other assets — this has already happened and was the main reason for the recent record highs in the stock market — hence, contributing to further inflation of the stock-market bubble, and creating the conditions for a stronger eventual fall of the market (like the famous October collapses). Moreover, it will provide additional dislocation of the supply chain, as more liquidity and artificial credit are pumped into the higher order, non-consumer-good, initial stages of production. Even more malinvestments will accumulate, setting the stage for ever more bankruptcies.
Prices of these higher-order assets and related goods, wages, and raw materials will keep rising, creating more "inflationary" pressures.
The US greenback will further deteriorate, losing purchasing power for all Americans.
The necessary recession phase of the cycle might be delayed for a few quarters, but its presence will be unavoidable; and due to the factors just depicted, it will be longer and deeper than it should have been.
...Unfortunately, in this centrally planned monetary system, only the Fed can know if stagflation will be allowed to show its ugly face again, wreaking the havoc it did in the awful 1970s.

..As the pace of unbacked credit expands, relative to the supply of real savings, less becomes available to genuine wealth generators, all other things being equal. Consequently, with less real savings, less real wealth can now be generated. (Remember that real savings are required to support the life and well-being of individuals who are engaged in the various stages of production.) In the extreme case, if everybody were to just consume without making any contribution to the pool of real saving, then eventually no one would be able to consume anything.
Surely, then, doesn't this prove that capitalism might indeed have inherent tendencies of self-destruction, just as Minsky suggested? After all, what is to prevent lenders from creating fictitious claims?..
..The current financial-market turmoil, which is believed to have been ignited by the collapse of the subprime mortgage market, has brought to prominence the ideas of the post-Keynesian school of economics and in particular of economist Hyman Minsky. Many commentators believe that Minsky's framework of thinking accurately anticipated the current financial crisis. The heart of Minsky's framework is that capitalism is inherently unstable and has self-destructive tendencies. An important mechanism for this destructive tendency is the accumulation of debt. Contrary to Minsky, our analysis shows that it is the existence of the central bank that makes modern capitalism unstable. It is this factor alone that is responsible for the current financial instability...

The typical mainstream intermediate macroeconomics textbook defines inflation as "[a]n increase in the overall level of prices".
The eminent Austrian economist, Ludwig von Mises, suggested otherwise: What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation
A recent exchange between Congressman Ron Paul and Ben Bernanke ...Congressman Paul, instead of referring to either the PPI or CPI, referred to the MZM money aggregate...inflation is alive and well. That money supply figure is going up about 20 percent per annualized...Congressman Paul's interpretation of the Austrian Business Cycle Theory (ABCT) suggests that distorted messages transmitted via the price mechanism to consumers and to investors in particular cause malinvestment to occur within the economy..
The Achilles heel of all statist attempts at central economic planning is the problem of economic calculation. Ludwig von Mises, who first formulated the theory of economic calculation, reasoned that socialist planning was theoretically impossible because of its inability to rationally allocate resources due to the absence of information provided by prices determined in the marketplace. Mises's reasoning holds true for artificial manipulation of the "time market" ...for interest rates: What economic calculation requires is a monetary system whose functioning is not sabotaged by government interference

Mises wrote:
The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved..
The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market. But it could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system..
The Market Interest Rate — Reflecting Peoples' Time Preference..
The ensuing economic contraction — the inevitable result of a government-sponsored lowering of the market interest rate — would, according to the Austrians, trigger further attempts at lowering the interest rate by way of a further increase in money supply. While such action might keep the boom alive for some time, it entails further malinvestment and inflation, and the costs of the final collapse of the artificial boom increase.
But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them
Crises Erode Support for Capitalism...
In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about

The moral policy for libertarians is to see that the scope of war is kept as localized as possible. The State must be held to its responsibility to enter no foreign war — and to provoke no war via rash and irresponsible statements, official condemnations of other governments, or inordinate armament buildups...Even if our nation is directly attacked by another, justice for those who look askance upon war efforts and levies still requires that the scope of State action be kept within responsible limits. The goal of all State action at such times must be a negotiated peace, so that the burden of destruction and taxes will cease. The State should do its best to put limits and rules on the war, and to outlaw as many weapons of destruction as possible — starting with the worst. Furthermore, so long as the emergency endures, all efforts should be kept voluntary — without conscription, economic controls, or inflation.

..Central banks, the government agents holding the power over the printing press, pursue a monetary policy of "interest rate steering" or, in other words, pushing the interest rate down as much as possible by relentlessly increasing credit and money supply. It is this inflationary monetary policy that causes trouble.
Ludwig von Mises pointed out that
today credit expansion is exclusively a government practice. As far as private banks and bankers are instrumental in issuing fiduciary media, their role is merely ancillary and concerns only technicalities. The governments alone direct the course of affairs. They have attained full supremacy in all matters concerning the size of circulation credit. While the size of the credit expansion that private banks and bankers are able to engineer on an unhampered market is strictly limited, the governments aim at the greatest possible amount of credit expansion.
Initially, the artificial lowering of the interest rate creates an illusion of richness and affluence....
However, the interest rate is a reflection of peoples' "time preference": because of scarcity, people value goods and services available today ("present goods") more highly than goods and services available at a later point in time ("future goods").[3] This is why present goods trade at a premium over future goods. That premium is the interest rate, or the "time preference rate." The interest rate is a free-market phenomenon.
A policy of suppressing the market interest rate through a government-sponsored credit expansion, Mises noted, is a policy against the free market:
Credit expansion is the governments' foremost tool in their struggle against the market economy. In their hands it is the magic wand designed to conjure away the scarcity of capital goods, to lower the rate of interest or to abolish it altogether, to finance lavish government spending, to expropriate the capitalists, to contrive everlasting booms, and to make everybody prosperous...
Mises was aware of what happens once the inevitable crisis caused by a manipulation of the interest rate unfolds: "In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils inflation and credit expansion have brought about."...
..it should be noted that there is no limit to central-bank money printing. Central banks can, at any one time, buy any assets from banks and nonbanks such as bonds, real estate, foreign currencies, etc..
Inflation is a societal evil...inflation is a serious threat to freedom. The majority of the people, suffering badly from inflation, would most likely blame the free market for their plight, rather than blame the central bank for the debasing of the currency...
Mises noted:
Nothing harmed the cause of liberalism more than the almost regular return of feverish booms and of the dramatic breakdown of bull markets followed by lingering slumps. Public opinion has become convinced that such happenings are inevitable in the unhampered market economy. People did not conceive that what they lamented was the necessary outcome of policies directed toward a lowering of the rate of interest by means of credit expansion. They stubbornly kept to these policies and tried in vain to fight their undesired consequences by more and more government interference.[7]
From the Austrian viewpoint, the current credit crisis appears to be a precursor of great inflation. If a deliberate policy of great inflation is chosen in the United States, a monetary policy of debasing the currency would most likely also take hold in other currency areas of the world. The credit crisis has become a threat to the free societal order: as people become dispirited with the free market order, the door would be pushed open for anti–free market policies.

Thus, what also goes left unsaid and unquestioned is, who shares the gains or losses? Shareholder, Stakeholder, or Means to an End?...

The weak dollar will discourage foreign professionals from coming..Contrary to popular opinion, outsourcing and internationalization has been a major source of economic growth in the last decade. If the falling dollar means an end to this era, the consequence could be highly regrettable.

Depending on the particular story, we reach various versions of the Keynesian ideology, which apparently has a universal cure for the economy: government policies. Again, it may be fiscal policy, or monetary policy. Pick a version of your Keynesian story, and you'll know which solution to pursue. But the conclusion is rather obvious: the state, through its compulsory means, has to boost the level of aggregate demand in some way to stop the economy from falling into recession...

For a sustained amount of time the US government did everything it could to aggressively engage in monetary and fiscal pumping. Budget deficits soared and the interest rates were lowered to absurd levels. This helped the supply of dollars to go through the roof and prepare the green paper money for a remarkable collapse...

What matters for economic activity is the money supply and the consumer price index (CPI) determined by it. The most famous monetarist, Milton Friedman, was primarily obsessed with money supply and keeping the CPI stable. If the CPI is unwavering, then the economy has to be in good condition. Problems might arise only when the official rate of inflation gets out of control. But if it is kept at low levels, then the economy is under control, and the monetary policy is sound.In an interview from 2003 (conducted by Henri Lepage), Friedman stated that the conditions of prosperity are secured. The inflation monster has been tamed, unemployment is low, there is no financial crisis and no deflation, productivity is growing, and banks are in good shape...For many years Friedman praised Alan Greenspan's monetary policy. And although he did differ in some way from others (as most Keynesians differ one from another) and did not accept the discretionary tools that the Fed used...

Now, as we see, the current problems can be explained neither by the monetarist way of thinking nor by the Keynesian. Both macroeconomic approaches are flawed and cannot be applied to the recent crisis. The remarkable silence from those two doctrines proves the point. I do not mean that they do not discuss the crisis. Mainstream economists do talk about it, but they are not using the Keynesian and monetarist doctrine...

nobody seriously states that the crisis is a result of decrease in aggregate demand and lack of loosened policies...Price relations, resource scarcity, the structure of liabilities and expected revenues between the firms in the market are the key issues. Welcome to the world of Austrian economics...

One should not forget about Mises's great insight that (http://www.mises.org/story/2370) middle-of-the-road-policy leads to socialism, which applies well beyond price controls. His contribution was that the price control imposed upon the market would not lead to expected results, but instead would create chaos. The endgame is to either abolish all controls, or go along the way of extreme interventionism and end up with full socialism, in which the government runs the economy...

What we are witnessing is a great demonstration of one of the most important Austrian contributions to monetary economics: that a central bank has socialistic potential. Think about it. In socialism, the central planner increases the amount of goods he possesses by means of expropriation. If he needs anything, a decree is the way to acquire it. In the central banking system, the decree is replaced by something else: printing money. If something is needed, direct expropriation and an official decree are not required; fiat money is enough. Print the money and you can buy anything you want...

The ultimate boundaries differ of course. Under old-fashioned socialism, there is always the possibility of creating enslavement through direct use of force. In contrast, in the financial socialism that is being created right now, the last stop is hyperinflation, which will ultimately destroy central bankers' only way of redistributing property — fiat money...

Mainstream economists will not advise the abolition of this tool...

The price of the zinc required to mint pennies has been steadily increasing; according to a recent article in the New Yorker, the cost of producing a penny is now 1.7 cents — it costs nearly two pennies to make one. Producing a coin at a higher cost than the value of the coin itself is known as "negative seigniorage." This phenomenon has led many to question the continued existence of the penny and suggest it be abolished. Understanding negative seigniorage in economic terms will lead to an opposite conclusion: hundred dollar bills should be done away with.
Why is the price of zinc going up?
it is the falling value of dollars themselves that is causing the price to go up. The greater the supply of a good, the less value each individual unit of that good will have. This is known as the law of marginal utility. Applying this law to money leads to the conclusion that when the mint prints more dollars, the value of existing dollars will decrease, and thus it will take more dollars to purchase metals and other goods.
The government is able to "print" money both electronically by manipulating the interest rate and through the physical creation of more dollars and cents.Any increase in the money supply, however minute, dilutes the purchasing power of existing dollars and thus throws off economic calculation. Curtailing the power of the government to print money means creating a more sound, prosperous economy.
What makes coins and other hard commodities desirable as currency is that they cannot simply be printed. Gold, copper, and silver must be dug out of the ground, so the government is limited in the amount that it can spend and, therefore, inflate.
Government fiat does not raise the standard of living; production on the market does. In industries where there is innovation and more production, prices fall.
In a world without government intervention in the money supply and economy, prices would fall to the point that the penny would take on a new relevance. Instead of decrying the penny, economists should recognize its potential to combat government inflation and advocate a return to an even harder currency. Coins may be expensive for the government to make, but this ensures that our money retains some value, regardless of what the government does

there are...two issues of primary importance related to food shortages and food costs:
First, the underlying cause of any shortage is the lack of a free market, since genuine shortages cannot appear in a free market. Instead, while prices of goods would likely rise at the onset of reduced supplies, the goods in question would always be available at some price — and the higher the price, the more the supply would increase to meet demand, which would then of course reduce the price...
The second issue...is that high food prices are a manifestation of current worldwide price inflation. World governments have been printing money at very high rates this decade. While the United States has been expanding the money supply by "only" about 10–15 percent per year, many countries have printed money at rates exceeding 50 percent per year. This money, which had been previously contained mostly in world stock markets, has now also spread to commodity markets, from which the prices of food are derived. Since money is now being created faster than goods are being created, prices are rising...