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Archive for June, 2013

GOLD: SAVINGS AND PENSIONS

Thursday, June 13th, 2013

By Mark Rogers

“Save for a rainy day.” The old adage, but does anyone do so nowadays?

“Saving” is much more likely to mean pensions nowadays, the likelihood of ever having one, and the certainty, if one has been saving towards one, that the recent and continuing bouts of Quantitative Easing (QE) have eroded it. “As much as £30,000 could be wiped off a £100,000 pension pot.” (This is Money, November, 2012)

But QE is only inflation speeded up; paper money is inflationary in and of itself over the long term, and with high tax regimes thrown in, no savings are safe. Those who remember the late 1970s will recall the prudent people who realised that money sitting in the bank was money evaporating, so they reasoned: why not spend it? Slap up meals, theatre tickets, luxury holidays – use it now before it is gone. During the Weimar inflation, industrial wages were eventually paid on the hour, with workers rushing out to spend them before they lost such value as they had by the second.

Converting your savings into gold sounds good, but – those ingots?? Is gold for the ordinary person?

Connect to LinGold.com (either click here, or on the box below this article) and find out. Signing up as a Member of the LinGold Savings Plan at a minimum purchase of 1gm of gold per month gives you a foot on the gold savings ladder: the cost of 1gm of gold compares favourably with the cost of, say, travel passes on London transport. Figures for 2012 on average household expenditure give the highest weekly cost as transport at £65.70, with half of that going on running a car; weekly expenditure on groceries averaged £44.20, with 80% being spent at supermarkets – doubtless because of the loyalty schemes and loss leaders that help keep prices down, as well as all the other prices wars that the supermarkets are more or less permanently engaged in.

Gold therefore, if saved for nothing other than the rainy day of retirement, compares very well with other necessary expenditures. After saving money on the weekly shop at the supermarket, it would be well to consider putting the balance into gold – and thanks to the unique LinGold.com Savings Plan, you too can do it! The democratization of gold is here to stay.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

GOLD STANDARDS III

Wednesday, June 5th, 2013

By Mark Rogers

I have discussed in Gold is Money, and the previous Gold Standards I and II the advantages of understanding that gold is not a commodity, that it is money that serves the usual purposes of money, as a store of value and a means of exchange, but with the vital difference that it also serves as a standard unit of measurement. The latter function is owed to its intrinsic qualities.

However, in Paper Money Collapse, Detlev Schlichter expounds Carl Menger’s view that gold, like all other things that people have found a use-value for, can indeed be considered a commodity, at least in historical terms. (I have looked at this book twice before in Gold Money A Currency of the Past and What Are Banks For?)

How does this argument work? Menger, says Schlichter, that “money could only have come into existence as a commodity”. It was not the creation of the State, there were no issuing authorities; money arose from mutual trading activities in which all commodities had a use-value. Without that use-value, no commodity was worth anything. Schlichter explains:

“For something to be used, for the very first time, as a medium of exchange, a point of reference is needed as to what its value in exchange for other goods and services is at that moment. It must have already acquired some value before it is used as money for the first time. That value can only be its use-value as a commodity, as a useful good in its own right. But once a commodity has become an established medium of exchange, its value will no longer be determined by its use-value as a commodity alone but also, and ultimately predominantly, by the demand for its services as money. But only something that has already established a market value as a commodity can make the transition to being a medium of exchange.”

Gold the Supreme Embodiment of Value

This anthropological-historical understanding of the emergence of money puts the market, trading, at the heart of the valuation process. Which, in turn, reminds us that the ultimate source of value, what something is worth, is its value to the parties, few or numerous, who engage in the transaction. So what in turn is required of a monetary medium, a currency, is a value that as far as possible stands outside that arbitrary subjectivity. Money itself, whatever its currency embodiment, is an attempt to render value objective in that the currency can be used in any exchanges, unlike bartering.

So in turn, the more objective the currency can become, the more it can become a standard (and this is where it is easy to see why it therefore becomes a unit of measurement), the more reliable, the more valuable that currency unit becomes.

And again, in turn, it is easy to see why gold quickly established itself as the supreme embodiment of exchange value: “it is no surprise that throughout the ages and through all cultures, whenever people were left to their own devices and free to choose which good should be used as money, they most always came to use precious metals.”

Gold is Money

Historically then we can enlarge Turk’s and Rubino’s contention that gold is not a commodity, not at least a commodity like oil or eggs, by allowing that the currency standard will have had a life as an object with use-value until other properties lead people to realise that it may have a value above its use-value. People have become familiar with these properties until it is singled out in use as being dominated by these properties and becomes money.

And the dominant characteristic of gold is its stability: soon all other characteristics were subordinated to this one, thereby changing not its nature but its purpose.

Of course, gold can be re-commodified as jewellery or ornament, as Jocelyn Burton, gold– and silversmith, demonstrates in her extraordinary work. People will always have these uses for gold, which are not intrinsically opposed to its properties as money: jewellery after all carries a premium and can, somewhat philistinely perhaps, be regarded as a form of storage, but then this form of storage shares with gold coins the property of portability.

And money can be re-subjectivised, in the past by mutilating it, clipping and shaving gold and silver coinage; and in the present of course the rolling of the printing presses with paper money has made money supremely subjective, its value becoming volatile and it storage properties destroyed.

It may be objected that we have little ancient anthropological evidence for this process, but we do not need to rely upon this as merely an explanation of what “must have happened”, we need only look at how those living in a territory with a devalued currency deal with the depredations of their government: in the twentieth century they have singled out dollars. When I asked an acquaintance from Zimbabwe how Zimbabweans coped with all those noughts, he laughed and said: “We just use dollars.”

The idea that money, and gold as money, emerged from the free trades of people going about their ordinary business also helps explain the deep disdain for gold in today’s political establishment: the idea that people are incapable of looking after themselves has become rooted in modern political thinking.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

GOLD STANDARDS II

Monday, June 3rd, 2013

By Mark Rogers

In Gold is Money and Gold Standards I looked at the consequences of accepting that gold is not a commodity but rather money. I suggested in the former article that the confusion between a commodity with a price, and money with an exchange value, was part and parcel of the confusions that arise out of the corruption of money, its worth and functions that result from a command economy and its fiat currency.

Here’s a splendid example of this linguistic confusion, straight from the horse’s mouth; in remarks to the National Economists Club, Washington, D.C. on November 21, 2002, Bernard Bernanke said:

“[T]he 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. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” [My emphasis; and I shall be making a longer scrutiny of this talk in a later article.]

Talk of “positive inflation” is irresponsible, but it’s what you get when the printing press or its electronic equivalent is set rolling.

Language and Loans

In “Gold is Money” I went on to examine other possible misuses of language in discussing money and value. I raised the issue of whether it was proper to consider the interest one pays on a loan as being in effect the price of the loan, and whether or not the money constituting the loan is in fact sold to one: if it is, then “price” would seem to be the better way to describe the transaction.

Except that this in turn produces confusion, largely because service professions, such as banks, have come to be described in industrial or retail terms: banks have “products” which they “sell” to “customers”.

But this is nonsense: banks don’t manufacture anything, and do not buy in their “goods” at “wholesale” prices which they then try to “sell” at competitive rates.

Take mortgages: if you have one it is on condition that the bank or building society offers to remove a portion of your income every month over a period of years, and if you fail to fund this activity, your house is taken away from you. This is not a “product”. Why do you think you have got one, though? Because you have been beguiled by a metaphor.

Interest and Prices

I suggested: “In considering how we speak about value and prices and fiat money and borrowing and cheap and dear money, it might concentrate the mind if we did indeed speak of the “cost” of a loan, the “price” the bank charges us for lending, or perhaps selling, to us.”

This thought experiment was intended to throw into relief just how we think about what constitutes monetary transactions: there is an important moral sense in which it would concentrate the mind to think about “costs” if credit is extended for non-productive reasons.

When money is “dear” it is likely that the chief criterion for extending credit will be the purpose to which the loan is to be put. If it is for business expansion, say new plant, or into a new market, then the likelihood that the venture will produce a substantial return on the loan means two things: the loan is more likely to be repaid, and that after the loan is repaid the firm will have made a profit on that loan.

The problem comes with credit extended for consumption (and under consumption we most definitely must include homes that are not affordable outright): this is wholly an academic affair. Keynesian economists have persuaded governments that consumption equals an expanding economy (and note again the point in Bernanke’s talk that I emphasized: “a determined government can always generate higher spending and hence positive inflation”). But the question needs to be asked: why do economists think that expense means expanse?

Credit lines extended purely for consumption end up damaging economies. In buying things now that one could not afford without the credit does not add to economic activity, it simply stokes up the personal indebtedness of the debtor and increases the book entries on the bank’s accounts. Because the money has to be paid back out of earnings, not production, it increases the likelihood of the debt being unaffordable and ultimately written off.

There is another problem here: credit lines for consumption imply that there is no real criterion: one’s present income hardly counts because it might not be there when the debt has to be repaid. No, the real irresponsibility is that the loan’s the thing, in and of itself, not whether it will be turned to productive purposes – that is used to make something that wasn’t there before. Failing to see that this distinction needs to be made is what makes Bernanke’s remarks so irresponsible.

Perhaps part of the problem lies in the fact that governments themselves do not produce anything: there are some seven million people who work for the British government, on average higher salaries than those in the private sector and with gold plated pensions (insofar as an unfunded liability can be said to be “gold plated” – the latter phrase really means that the government won’t break its promises to look after its own). These people produce nothing.

So while consumers intending to consume above earnings are anxious to find low interest loans to fund extra, unproductive consumption, it might indeed concentrate their minds to talk about prices, because that might put the nature of what they are doing into perspective.

In the serious world of productive business, however, interest is the proper term to use: the bank takes depositors’ funds and lends them at interest to enterprises that have been considered on balance likely to succeed for the purposes of the loan. In 100% reserve banking this process would perhaps be a great deal more transparent. And using gold as the ever-present unit of measurement will tell us what our money is really worth.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

THE GOLD SPOT: RICARDO ON GOLD AS VALUE

Sunday, June 2nd, 2013

The Gold Spot is a regular feature in which Mark Rogers excerpts a passage from his reading as the Text for the Day and then comments on it.

Extracts from ON THE PRINCIPLES OF POLITICAL ECONOMY AND TAXATION by David Ricardo, from the collected Works and Correspondence edited by Piero Sraffa with the collaboration of M.H. Dobb, published for The Economic Society by Cambridge University Press, Cambridge, 1951

Adam Smith, after most ably showing the insufficiency of a variable medium, such as gold and silver, for the purpose of determining the varying value of other things, has himself, by fixing on corn or labour, chosen a medium no less variable.

Gold and silver are no doubt subject to fluctuations, from the discovery of new and more abundant mines; but such discoveries are rare, and their effects, though powerful, are limited to periods of comparatively short duration. They are subject also to fluctuation, from improvements in the skill and machinery with which the mines may be worked; as in consequence of such improvements, a greater quantity may be obtained with the same labour. They are further subject to fluctuation from the decreasing produce of the mines, after they have yielded a supply to the world, for a succession of ages. But from which of these sources of fluctuation is corn exempted? [Chapter I On Value, Section I]

It has therefore been justly observed, that however honestly the coin of a country may conform to its standard, money made of gold and silver is still liable to fluctuations in value, not only accidental and temporary, but to permanent and natural variations, the same manner as other commodities.

By the discovery of America and the rich mines in which it abounds, a very great effect was produced on the natural price of the precious metals. This effect is by many supposed not yet to have terminated. It is probable, however, that all the effects on the value of the metals, resulting from the discovery of America, have long ceased; and if any fall has of late years taken place in their value, it is to be attributed to improvements in the mode of working the mines.

From whatever cause it may have proceeded, the effect has been so slow and gradual, that little practical inconvenience has been felt from gold and silver being the general medium in which the value of all other things is estimated. Though undoubtedly a variable measure of value, there is probably no commodity subject to fewer variations. This and the other advantages which these metals possess, such as their hardness, their malleability, their divisibility, and many more, have justly secured the preference every where given to them, as a standard for the money of civilized countries.

If equal quantities of labour, with equal quantities of fixed capital, could at all times obtain, from that mine which paid no rent, equal quantities of gold, gold would be as nearly an invariable measure of value, as we could in the nature of things possess. The quantity indeed would enlarge with the demand, but it value would be invariable, and it would be eminently well calculated to measure the varying value of all other things. I have already in a former part of this work considered gold as endowed with this uniformity […] In speaking therefore of varying price, the variation will be always considered as being in the commodity, and never in the medium in which it is estimated. [Chapter III On the Rent of Mines]

Comment: Apart from the importance Ricardo attached to machines cropping up in this discussion (his famous Chapter XXXI On Machinery), the interesting thing to note in these passages is that the argument with Adam Smith about sources of value devolves on gold as having the least variability when compared to other possible sources. Smith laid so much stress on corn, partly because it is a staple foodstuff and people must eat, and partly because the labour used to plant and harvest it was an easily quantifiable volume of work; Smith’s theory of value ultimately depended on labour, because the fact, the necessity of labour is an everyday constant.

Ricardo took exception to both corn and labour as measures of value, because the fact that both are necessary does not therefore bar them from continual accident and misfortune: exceptionally bad weather before a harvest destroys not only the crop but the need for labour at all, and has almost the same complete effect should bad weather occur during the harvest. The resulting famine may cause seed prices for next year’s crop to go up. That people must work for a living may be a constant, but their ability to work at any given time is contingent. Similarly, improvements in machinery may have a longer term effect on labour even as these improvements increase the harvest in a good year.

Therefore, these cannot be units of measurement of value: they fluctuate, or are capable of fluctuating too wildly.

The subject was to crop up again in Ricardo’s “Notes on Malthus”, where he takes issue with the gloomy Mr Malthus’s misreading of the points Ricardo makes above, in particular Malthus’s overlooking the qualifications about gold being “nearly an invariable measure of value” and his consequent assumption that Ricardo meant that as things stood, here and now, gold was such a measure. Indeed, Ricardo gets so hot under the collar in pointing out to Malthus that he had not been so simple as to claim this that he practically reverses himself as expressed above, almost implying that gold has no such intrinsic virtue! But indeed, he was quite cross with Mr Malthus all round; he did, in correspondence, express himself as being even less pleased with Malthus’s book on his second reading than he had been on first reading it, his further disgruntlement with Malthus leading to the “Notes”.

What is important about Ricardo’s quarrel with Adam Smith is that it is a very early rebuttal of the notion of labour as the source of value, and an equally important claim for precious metals as that source, as being the closest thing we are ever likely to possess for the purpose. That this claim is hedged with qualifications demonstrates two things: a prudent mind, and, secondly, that the major and long term experiments with paper money lay, of course, well in the future, i.e. the Twentieth Century. What Ricardo was doing was to estimate which of all possible sources of value, supposing such a measure to be desirable (and he concludes that it is), would best serve. There are obvious attractions in Adam Smith’s approach: it is practical, deals in vital constants of human action, and is empirical. But in the end it is insufficient. There is a discussion of paper currency in Ricardo’s book but it is fairly narrowly focused, as the experience of it in his day was narrowly focused, primarily on its promissory nature in terms of specie. Nothing like what we have experienced in the Twentieth Century was available to the political economists of the Eighteenth Century.

Nowadays, while accommodating the arguments to prudence as is always desirable, a stronger case for gold as “nearly an invariable measure of value” can and must be made because the realities foisted upon us by the advocates and practitioners of paper have been so dire.

For the raison d’être of these articles on goldcoin.org read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES

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Thoughts
"For a mountaineer, the important things are the effort, the posture and the muscles. The rope that holds him serves no purpose when everything works but it gives him a sense of security. In the same way, all gold does is ensure confidence; it's a safe haven."