Gold and Philosophy

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Courtesy of David van der Linden @ New Austrian.org:

A recent article one came across presented an interesting analogy. It was stated that “unconscious thought is like fluid gold, streaming down the side of a mountain towards a deep chasm”[1]. Placing moulds along the mountain saves the gold from flowing into the chasm, just as increasing one’s vocabulary allows one to capture thought and express ideas. The conclusion of the analogist was that the study of philosophy is of value, since one learns to explicate unconscious thoughts, just as capturing gold on the side of the mountain allows one to capture value.

The analogy as it stands is of limited use. Rather than to view gold merely as an object of value, one might learn more by heeding the unparalleled marketability of coined gold. To state that simply capturing gold is a useful endeavour seems to be an objectification. Gold is not valuable in and of itself, rather it is valued by individuals. Capturing gold in moulds does not directly imply one is capturing value, unless one first assumes gold is a valuable substance in and of itself. The minting of gold into coin on the other hand, is useful since one increases the marketability of the substance. To return to the analogy, one can say that broadening one’s vocabulary -the goal of which is to be able to explicate thought- may increase the marketability (or exchangeability) of one’s ideas. Thoughts and ideas are not valuable of themselves, yet it is useful to increase the exchangeability of the same so as to be able to debate, discuss and develop them. Continue reading

The Paradox of Interest Revisited

Courtesy of Antal E. Fekete @ ProfessorFekete.com

The classical formulation of the paradox of interest is due to Böhm-Bawerk and Schumpeter. Its modern formulation is due to Hausman and Kirzner. I quote Kirzner:

Much – perhaps all – will turn out to depend on the way in which the interest problem is formulated. For present purposes we adopt a modern formulation of the problem, but wish to emphasize that this formulation is very similar in spirit and character to classic formulations… The modern formulation we cite is that of Hausman. Hausman points out that an “individual’s capital . . . enables that individual to earn interest. If the capital is invested in a machine, the sum of the rentals the machine earns over its lifetime is greater than the machine’s cost. Why?” Common observation, that is, tells us that possession of a given stock or capital funds can, by judicious investment (say, in a machine) yield a continuous flow of income (annual rentals net of depreciation) without impairing the ability of the capital funds to serve indefinitely as a source of income. The problem is, how this can occur. Why is not the price of the machine (paid by the capitalist at the time he invests in the machine) bid up (by the competition of others eagerly seeking to capture the net surplus of rentals over cost) – to the point where no such surplus remains? We are seeking, then, an explanation for an observed phenomenon which is, in the absence of a theory of interest, unable to be accounted for. Absent a theory of interest, no interest income ought to be forthcoming, except as a transient phenomenon; competition ought to squeeze it out of existence.

In this note I propose to solve the paradox by suggesting that the exchange of wealth and income should be made the cornerstone of the theory of interest, replacing the exchange of a present and a future good.

To say that the capitalist “invests” his wealth is too simplistic. Investing is bound to confuse the issue. Moreover, possession of wealth does not automatically guarantee access to income. There is an implicit exchange of wealth and income interposed between the capitalist and entrepreneur that needs to be made explicit. Here is what happens.

The capitalist exchanges wealth for income. Income is yielded by the entrepreneur, who converts wealth into capital goods (such as a machine or a fruit tree) and hires a manager to tend them (including the task of setting depreciation quotas in anticipation of having to replace the capital goods at the end of their useful life without further charges to the capitalist). The entrepreneur sets up three accounts for the distribution of the yield after depreciation, namely, one for each of:

(1) a fixed interest income payable to the capitalist,
(2) wages payable to the manager,
(3) the remainder, or entrepreneurial profit, payable to himself. Continue reading

The Counter-Productive Monetary Policy of the Fed

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Sowing Inflation, Reaping Deflation

Courtesy of Antal E Fekete @ New Austrian.org

New Austrian School of Economics

Introduction

Typically, bond speculators carry on interest arbitrage along the entire yield curve. They sell the short maturity and buy the long, hoping to capture the difference between the higher long rate and the lower short rate of interest (borrowing short and lending long). This arbitrage is not risk-free per se as it has the effect of flattening the yield curve. As a result the normal yield curve could get inverted unexpectedly, that is, turned upside down, making the rising curve into a falling one while turning the speculators’ profit into a loss.

However, as a direct result of the policy of open market operations (introduced clandestinely and illegally in 1922 through the conspiracy of the US Treasury and the Fed, long before the practice was legalized ex post facto in 1935) interest arbitrage was made risk-free. Astute bond speculators could thereafter pre-empt Fed action profitably. It never fails. Speculators know that sooner or later the Fed will have go to the bill market to buy in order to boost the money supply. They will buy beforehand. On rare occasions the Fed would be a seller. Then speculators, perhaps acting on inside information, will sell beforehand. This copycat action is an inexhaustible source of risk-free profits. Thanks to the Fed’s open market purchases speculators are assured that they will always be able to dump the bonds at a profit which they have bought pre-emptively. The more aggressively the Fed persists in its effort to increase the monetary base, the greater the bond speculators’ profits will be.

Absolute bad faith Continue reading

ECON 101 – LECTURE 3

GOLD STANDARD UNIVERSITY

Summer Semester, 2002

Monetary Economics 101: The Real Bills Doctrine of Adam Smith

Lecture 3

CREDIT UNIONS

– The Invisible Vacuum Cleaner –
– The Quantity Theory of Money –
– Destruction of the Gold Standard –
– And Discrediting the Real Bills Doctrine –
– Are Two Sides of the Same Coin –
– The Working Man As the Guardian of Sound Money –

Lending versus Clearing

July 15, 2002

I dedicate this lecture to the memory of Ely Moore, the first union official ever to have been elected to the Congress in 1834. He was a solid gold-standard man who believed, with Daniel Webster, that

“Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money.”

Daniel Webster

In the first two Lectures I dealt with a new blueprint for a gold coin standard for America and the world, designed to avoid two great pitfalls: (1) the pitfall of breakdown of social peace between creditors and debtors, (2) the pitfall of entrusting gold coins that represent the savings of the people to the banks. In this Lecture I shall recommend that the guardianship to preserve the system of sound money should, instead, be entrusted to the laboring classes and their representatives, the Credit Unions, which would be the only financial institutions chartered to carry deposit accounts denominated in Gold Eagle coins, and which would act as clearing houses for the circulation of real bills.

Recall that real bills provide credits to move urgently demanded consumer goods from the producers to the retail outlets. We don’t need banks for that. In any event, short term commercial credits arise not through lending but through clearing. As the supply of consumer goods emerge in production, purchasing media to finance its movement to the consumer emerge simultaneously through the process of clearing. No lending is involved. Coin, credit, circulation, clearing – the four C’s – are central ideas that economics has ignored. We are going to revive them here in preparation to pave the way to a new gold coin standard. Continue reading

ARTIFICIALLY LOWERED INTEREST RATES CAUSE STAGNATING WAGES AND UNEMPLOYMENT

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Courtesy of Hugo Salinas Price @ New Austrian.org:

Professor Antal E. Fekete has made a remarkable discovery in the field of Economics: artificially lowered interest rates – the fundamental instrument of economic intervention in all the developed countries, practiced in the US by the Federal Reserve – are detrimental to Labor, whether Manual Labor or Management Labor, i.e., detrimental to both the working class and the middle class.

So far as I know, Professor Fekete is the first thinker to point out this particular consequence of an artificially and rapidly lowered interest rate.

The “Developed World” goes along with the Keynesian proposition of lowering interest rates drastically, to juice economies that are re-adjusting to previous juicing through credit expansion not based on previous accumulated savings. Accordingly, the slowest rates of increasing employment (if indeed there is any increase at all, since the statistics are universally doctored to look good and justify Central Bank intervention) are presented by the countries of the Developed World, which are suffering incredibly low rates of interest.

On the other hand, the “Emerging Markets” which have not applied QE and suppression of the interest rate so vigorously, are showing higher rates of employment than the “Developed World”.

In a video on the Internet recently, viewers got a look at social conditions in Dhaka, the capital of Bangladesh. The number of humans is appalling. At the end of the period of fasting of Ramadan, incredible swarms of humans cram into the trains and climb up in hordes upon the roofs of the railroad cars.

The activity of boats on the massive river that goes through Dhaka is amazing; hundreds of boats are seen scampering over the river in constant activity.

There is no question of unemployment in Bangladesh, in spite of the fact that Dhaka is one of the most populated cities on the planet. Why? Because in Bangladesh, if you don’t work, you don’t eat. The economy of Bangladesh, left to itself, provides the maximum output possible for the massive population. Any intervention – and I do suppose they have some government intervention in their economy – must be minimal, because anything more than that would mean death for hundreds of thousands living at the very margin of sustainable life.

There is only one sort of economics in this world, because there is only one sort of human nature. Economics is simply one branch of the study of human nature: the study of the human being as an entity that acts, which is the same as saying that the human being chooses. Other species of living beings may exhibit a limited capacity for choosing, but the human being is entirely dependent on choosing – and making the right choices – for the sustenance of his life. The animal kingdom relies on instinct; the human being relies on his choices, which are not instinctive. Continue reading

Economic Aspects of the Pension Problem – Part 2

Appears Sixty Years Later

Part Two: Productivity Theory of Interest Revisited

Antal E. Fekete

In Part One I discussed the clear and present danger to pension rights: deflation as manifested by the interest rates structure that has been falling for thirty years, while most observers think that the real danger is inflation. In this second part I carry out a deeper analysis of the pension problem, looking at the marginal productivity of labor and capital and its relevance to the theory of interest.

Courtesy of Professor Fekete @ Professor Fekete.com:

Higher marginal productivity: boon or bane?

There is a lot of loose talk about productivity. Paul Krugman is expecting miracles to start happening after an increase in a mythical productivity, provided that government spending is increased to the level matching or exceeding that during World War II.

However, as Mises pointed out, productivity is a vacuous concept unless its meaning is fixed, such as that of marginal productivity of labor. Then, and only then, can one state the pension problem. According to Mises, the only means to increase permanently the wages and benefits payable to workers is to increase the per capita quota of capital invested in the methods of production, thereby raising the marginal productivity of labor. (See References, Planning for Freedom, p 6.) This is certainly true so far as it goes. It is also true that, if we project this observation to the world at large, then we can conclude that in order to have a progressive world economy and receding poverty, global capital accumulation must accelerate relative to increase in population. The greater the quantity and the better the quality of tools, the greater will be the output of the marginal worker, that is, the greater will be the marginal productivity of labor.

In reading Mises one may get the impression that an increase in marginal productivity is always beneficial to society ― as indeed it would have been under the conditions he envisaged. However, in the case of a monetary system that admits both large swings and prolonged slides in interest rates, this is no longer true. If the matter were simply increasing marginal productivity, monetary policy would be a valid means of “turning the stone into bread”. All it would take is central bank action to keep raising the rate of interest indefinitely. This would force the marginal producer whose capital produces at the marginal rate of productivity to fold tent. His marginal equipment and plants would be idled. His workers producing, as they are, at the marginal rate of productivity of labor would be laid off. Marginal productivity would increase. Indeed, the marginal productivity of both capital and labor automatically rises as a consequence of a rise in the rate of interest. However, in this case the rise in productivity, far from being a boon, is a bane to society, as it makes output and employment shrink. The trick is precisely to make marginal productivity rise along with rising output and employment.

Gold standard: a safeguard against deflation

Continue reading

Economic Aspects of the Pension Problem – Part 1

As It Appears Sixty Years Later

Part One: Euthanasia of the Pension Funds

Antal E. Fekete

Sixty years ago. in 1950, Ludwig von Mises published an article with the above title. He pointed to inflation as the greatest threat to pension rights. Today an additional threat is looming large on the horizon: the threat of deflation, and a new examination of the pension problem is timely.

Courtesy of Antal E. Fekete @ ProfessorFekete.com:

Deliberate Dollar Debasement

In 1950 Mises looked at the pension problem from the point of view of the shrinking purchasing power of the dollar, a consequence of what he called the deliberate policy of currency debasement by the U.S. government. In 1950 a pension of $100 per month was a substantial allowance, he noted. Shelter could be rented for a month for less than $30 in most parts of the country. (In 2010, $100 hardly buys one night’s stay at a decent hotel.) In 1950 the Welfare Commissioner of the City of New York reported that 52 cents would buy all the food a person needed to meet his daily caloric and protein requirements. (In 2010, $100 barely buys a cup of coffee and a muffin for every day of the month.)

Of course, currency debasement does far more damage than simply eroding the purchasing power of pensions. As Mises observed, it also leads to the insufficiency of capital accumulation. Companies report phantom profits that mask losses, since depreciation quotas understate the wear and tear of productive equipment. Savings are hardly adequate to pay for capital maintenance, let alone new capital or technological improvements in production — the only source from which pensions to an increasing labor force can be paid. When young workers who now join the labor force are ready to retire, the necessary funds to pay their pensions will simply not be available.

Capital destruction due to declining interest rates

I have written extensively about the proposition, one that mainstream economists doggedly refuse to discuss, that a falling interest-rate structure has a deleterious effect on accumulated capital. Capital is destroyed across the board simultaneously and stealthily. By the time the damage is discovered, it is too late to do anything about it and firms go bankrupt in droves. The falling trend of interest rates is the unrecognized cause of the depression that is presently devastating the world economy — just as it also was 80 years ago. Nowhere is the erosion of capital caused by falling interest rates is more obvious than in the case of the capital of the pension funds. They must earn adequate return on their investments, but a falling rate of interest frustrates this effort. At the lower rate the original schedule of capital accumulation cannot be met. Continue reading

ECON 101 – LECTURE 2

GOLD STANDARD UNIVERSITY

Summer Semester, 2002

Monetary Economics 101: The Real Bills Doctrine of Adam Smith

Lecture 2

DON’T FIX THE PRICE OF GOLD!

July 8, 2002

– Let the Gold Eagle Coin Soar without the Heavy Baggage of Dollar Debt –
– Don’t Let the Banks Sabotage the New Gold Coin Standard – – The World without Banks –

Courtesy of Antal E Fekete @ Professor Fekete.com:

I extend a hearty welcome to my audience at the first university course offered in the 21st century on the gold standard, made possible by Gold-Eagle University, an educational website to offer you knowledge put under taboo by mainstream/establishment universities. Taking this course will not get you a degree, but it may get you something more precious: a better understanding of the world, its past, present, and future.

In last week’s inaugural lecture I offered a blueprint for a new gold coin standard the features of which can be summed up as follows:

(1) Open the Mint to free and unlimited coinage of gold. The one-ounce Gold Eagle coin should be adopted as a monetary unit minted for the account of anyone tendering the right amount and purity of gold, free of charge.

(2) To get the grass-root circulation of gold coins going, labor organizations (including those of pensioners and retired people) ought to be involved through their Credit Unions offering gold-coin deposit facilities. Banks must be excluded.

(3) Short-term credit to move goods from the producer to the consumer should be provided by the bill market, rather than by the banks, on the pattern of the pre-1914 way to finance world trade with gold.

(4) Long-term credit to the economy should be provided by the gold-bond market. The primary demand for gold bonds comes from financial institutions offering gold life insurance and gold annuity policies to the people. The primary supply is from the government and firms that want to operate on the basis of gold capital. Gold bonds must have a sinking fund protection. Issuers of gold bonds must see the revenues with which to retire the liability.

Parallel Monetary Standard

The first remark on this blueprint which, as far as I am aware, is new and radically different from any other that has been offered so far, is that it expressly avoids fixing the price of gold. At least for a transitional period that may last for several years, the paper dollar and the Eagle gold coins would circulate side-by side at a floating exchange rate. In other words, there would be a parallel monetary standard and the paper dollar would be free to compete with the Gold Eagle. The market should in the end decide which of the two deserved to survive. This is a major departure from historical precedents, which have all involved the stabilization of the paper currency in terms of gold. The question arises: why should we have such a complicated blueprint when a simpler one, fixing the gold price, could accomplish the same objective? Continue reading