The Wall Street Journal reports Gold Standard Didn’t Really Tame Inflation, New Research Says.
The research was by St. Louis Fed economist Fernando Martin. Curiously, his study precisely shows that the gold standard did indeed tame inflation.
Let’s investigate Martin’s bogus claim and his peculiar logic in making it.
In his email to the WSJ, Martin stated: “Most of the price increase in the period starting with World War II is due to two specific episodes.”
WWII was the first episode and the “1970s inflation episode was unambiguously the result of Fed policy blunders.” Supposedly, “the lessons learned from the experience helped central bankers start a multi-decadelong effort to lower inflation to historically low levels.”
I cannot tell if the second set of quotes is the WSJ view or Martin’s.
Martin’s Peculiar Logic
Here is Martin’s peculiar logic in explaining why the gold standard does not work: “You can still have high inflation with a metallic standard” because history shows governments regularly go off such regimes.
Got that? The gold standard won’t tame inflation because … the government won’t stick with it!
This is what constitutes critical research and absurd posting of said research by the Wall Street Journal.
CPI Since US Founding
Policy Error by the Fed
The article cited a “policy error” by the Fed as the cause of the stagflation period.
Actually, the policy error was Nixon closing the gold window on August 15, 1971, ending convertibility of gold for dollars. Our balance of trade soon went haywire, as did the explosion of credit and debt.
Balance of Trade
Total Credit
Median Home Prices
The preceding three slides from my June 24, Venture Alliance group presentation.
Not Properly Counting Inflation
The Fed does not count asset bubbles including housing in its absurd measure of inflation.
Moreover, Martin conveniently overlooks the Great Recession and all of the damage it did while the Fed was allegedly providing “stable inflation”.
Economic Challenge to Keynesians
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.
- My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
- My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
BIS Deflation Study
The BIS did a historical study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
Meanwhile, economically illiterate writers bemoan deflation, as do most economists and central banks. The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.
Deflation on Deck?
Is deflation on deck? Yes, asset deflation, a very destructive kind of deflation. When it happens, please thank the Fed for low inflation and volatility suppression.
Full Presentation
Click here to view my entire Venture Alliance Presentation, 38 slides in all.
Also, please consider Secular Disinflationary Trend Hits New Highs: Deflation on Deck? What’s That Mean for Gold?
Mike “Mish” Shedlock
If it didn’t why they did not give us that Gold Standard?
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I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.
Thomas Jefferson
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All thinking people are worrying about that danger. It is time to have antitrust laws limiting the total borrowing and lending of each bank to some “reasonable” amounts compared to the national budget.
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Who’s going to set the limit? The same people who are OK with only 5 banks for the entire United States.
http://www.businessinsider.com/bernanke-no-reason-to-break-up-big-banks-2016-5
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Give you? Nobody’s going to “give you” anything.
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It was July 15, 1971 that Richard Nixon announced he would visit China the following February 1972…Was it coincidence that Nixon ended the gold standard a month later
in August, 1971, opening the door wide to mercantilism with the orient, and/or was this part of Kissinger’s plan for the dollar to become a global reserve currency…
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Both.
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There is much background context to the policy choices of the day. I don’t know exactly what influenced what influenced what. In May 1971 it was clear UK was going to join the EEC, and the future of the Sterling Area seemed limited, quite possibly due to the effect on Commonwealth trade and monetary flows accession would mean. The US obviously decided it would take its own route, maybe someone will explain why the US did not just devalue, though I expect dropping the gold peg and going full fiat was just too much of an opportunity at the time.
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Over issuance of dollars had led to resentment by the likes of France ( no stranger to doing similar), and a single European currency had already been accepted as the future at political level by EEC members, including UK before adherence… so you have commentary like:
“In France, the Bretton Woods system was called “America’s exorbitant privilege” as it resulted in an “asymmetric financial system” where non-US citizens “see themselves supporting American living standards and subsidizing American multinationals”.”
In May 1971, West Germany left the Bretton Woods system, unwilling to revalue the Deutsche Mark.
On August 9, 1971, as the dollar dropped in value against European currencies, Switzerland left the Bretton Woods system.
Wiki.
……………..
So in all, from an outside perspective, it looks like the usual failure of a monetary regime due to abuse by some members, political objectives by others, and a general disagreement on what the framework should mean. If more claims to gold were being issued than there was gold then it already failed before announced. The Euro is in a similar boat, they think they can legislate success by breaking the rules, that being in charge of accounts is what it takes, same megalomaniac illusions on everyone else’s behalf.
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“the policy error was Nixon closing the gold window on August 15, 1971”
Nixon was just the lowly “night clerk” on duty when the Fed gold exchange window ran out of gold to redeem for fiat (a promise made to foreign banks/sovereigns, not USA citizens). LBJ’s 1960’s fiat-financed guns and butter policy (Vietnam War; Great Society expanding social welfare benefits to infinity) rendered the USA technically insolvent in 1971. Only in scale does Nixon closing the gold window differ from an ordinary bank run, where banks run out of money and close their doors. Full fiat was not a viable option. The Kissinger/OPEC petro dollar agreement (paying for Saudi oil with USA fiat, is mandatory) was the chosen USA policy replacement to keep the fiat afloat and allow expanding USA.gov spending in the face of empty USA gold coffers. We are still paying the price, helping Saudis bomb Yemen and wage religious holy war against Iranian heretics. USA’s Iraq War I to protect Saudis was part of the agreement. USA pledged military protection to Saudis in exchange for Saudi protection of USA fiat (petro-dollar). Strangely enough, USA Congress is still obliviously bent on keeping alive LBJ’s guns and butter game to infinity with more wars and expanded entitlements.
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More bogus Federal Reserve research:
…
“Some commentators have suggested that the Fed itself has contributed to the run-up by keeping in place excessive monetary stimulus. According to this argument, the Fed’s policy of very low interest rates and sizable securities holdings are fueling speculation in commodities. Economic theory teaches us that lower interest rates will boost asset prices, including commodity prices, all else equal. But it is unlikely that this effect can explain more than a very small portion of the huge increase in commodity prices that we have witnessed.6 Economists at the San Francisco Fed recently looked at how commodity prices reacted when the Fed announced new policy actions to stimulate the economy. If Fed policies were responsible for the commodity price boom, then we should have seen those prices jump when the Fed announced more monetary stimulus. In fact, the researchers found that, if anything, commodity prices fell after new policy announcements and were not pushed higher by news about Fed policy.7 So, I don’t see any convincing evidence that monetary policy has played a significant role in the huge surge in commodity prices.”
http://www.frbsf.org/our-district/press/presidents-speeches/williams-speeches/2011/may/williams-price-stability-global-economy/
Anyone who follows closely – even remotely – knows that the Federal Reserve telegraphs its moves. So mucho Front Running (not to mention Fed Res folks like Tim Geithner actually calling a banker to give a heads up on impending interest rate move) of FOMC policy, that when policy change announced often a reverse (though short lived) in trend – buy the rumor, sell the news.
Some of their “research” is quite scary.
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“When asset bubbles burst, debt deflation results.”
…
Speaking of … Wards forecasts another poor month for US new vehicle sales. July -2.5% versus July 2016.
http://wardsauto.com/datasheet/wardsauto-us-light-vehicle-sales-inventory-forecast-july-2017
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My study of diet and exercise shows much the same.
Diet and exercise do not improve health or control weight as most people don’t stick with the diet and exercise plan.
Therefore, we should stop promoting these!
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I hereby submit your nomination to succeed Janet Yellen.
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I hereby submit the nomination of Mathew to succeed Janet Yellen.
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Fed economists are like academics peddling global warming fraud. There is no accountability when they are wrong — which is pretty much all the time.
Anyone with any skills is embarrassed to work at the Fed — you are known by the company you keep whether you like it or not. Roger Federer (since we are in tennis season?) would be considered a loudmouth hack if he played in the local town tennis / weekend warrior leagues.
If you are a real tennis pro, you play Wimbledon and US Open. If you are a real economist, you get a real private sector job.
People who can’t get past theoretical models have to settle for academia or the Fed … they are just sad
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– In the 1950s and 1960s the US government thought that running Current Account Deficits were bad and unsustainable. That’s why they imposed a number of measures to reduce US demand. But the briliant Michael Hudson actually proved that it was the opposite. Running current Account Deficits is actually good for the US. Then the US is subsidized by foreigners and can live beyond its means.
– Agree. Falling prices is indeed good for consumers because it increases REAL wages for workers/consumers.
– But it also at the same time increases REAL wage costs for producers and that’s detrimental for those same producers. Leading to more corporate bankruptcies. More companies going bankrupt leads to more Leading to more un-employment and more demand destruction.
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I think following the Great Depression and WWII, the government prioritized employment. While good for the working class, it depressed income for the capital holding class and allowed for the growth of labor unions. Going full fiat while making the US dollar the reserve currency helped reverse that dynamic, giving us the high profit environment we enjoy today.
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Falling prices lead to increased REAL wage costs for employers for all of two weeks, until they lower the offending workers’ salary. Including their own, in case of executives. The burden then falling on said executives, to properly explain why wages need to be lowered, lest they are stuck with a disgruntled workforce who will soon leave. Rather than, as now, allowing the clowns to preen around pretending to offer “raises”, while nudge, nudge, wink, wink, the Fed takes all the “raises” and more back from the workers, and hands in right back, by way of asset pumping, to the weasely executives themselves.
The whole “wages sticky downward” hypothesis that is at the core of all the “we need inflation for labor markets to adjust,” only gives the impression of being some sort of empirically “true,” because persistent money printing have made people used to that being the way things are wrt wages. There is absolutely nothing in human biology that makes a wage any stickier downwards than upwards. After a few generations, or even just a few years, of persistent price decreases, and persistent lowering of nominal wages, that is what people will be used to. It’s not some weird impassibility that will somehow cause a universal rapture.
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The lenders cannot handle price fluctuations, they go out of business. Thought Jon would applaud an end to the financial capitalist rent seekers. When Mr. Average goes to buy anything he will spend with a caution based on the variability of his income, that should flush out asset holders who are retaining the unproductive for inflationary profit. Two sides to most of the arguments re. inflation.
The no claim fiat dollar is another way of setting up a system where whoever has most dollars has most say, where dollars can be ‘invisibly’ directed from source by the combination of lending criteria and monetary policy, to compete with the existing. Crooked fools game. With hard currency prices are properly reflected vs. its ownership. Some people like being managed and collective power, others see the falsehood and corruption at hand.
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– Bla, bla, bla. Does the FED determine what wages are being paid ?? No, they don’t. Yea, sure, blame it all on the FED, right ?
– Falling prices lead to rising REAL wages for producers. Then producers will seek to lower wages or increase productivity. But both lower wages and increased productivity do both lead to decreased demand.
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Producers IN THE SPECIFIC INDUSTRIES that are rendered least competitive by lowered prices for their output, will seek to, and have the easiest time, lowering wages.
Rather than real wages being indiscriminately and undifferentiatedly lowered across the board for everyone, as is the case when the Fed just wantonly robs everyone by debasement, then gratuitously hands the proceeds to an ever shrinking, select group of well connecteds. None of whom does any work at all, in exchange for this windfall.
This more specific adoption to productivity increasing, hence prices falling, at different rates for different firms across the economy, is much more efficient, and equitable, than the blunt instrument of lowering everyone’s wages across the board via debasement. Then pretending you are doing less of it than you really are, by cooking up weird, unsupportable nonsense about how you are somehow not debasing people; just because some guy in China can now produce toys sufficiently more efficiently, that his efficiency improvement naively may look like it counteracts your debasement, when myopically looked at through a lense of prices paid for his arbitrarily chosen and “weighted” goods.
Just pay in gold. Quote prices in ounces (or grams), as established weight measures are harder to weasel around with by debasement in true progressive newspeak style, than is the case once the added indirection of a currency unit that takes on a life of it’s own is introduced. Then sit back and watch as employers and employees somehow magically manage to settle on wages that doesn’t bankrupt everyone all the time. It’s not like that is some sort of rocket science, that requires a giant, centralized, privileged thief-and-redistributor-in-chief to happen.
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“But both lower wages and increased productivity do both lead to decreased demand.”
After established lower wages follow lower prices, change in net demand, as in real wage, should be roughly neutral.
Increased productivity leads to decreased demand?
No. If you are able to produce more, or with less effort ( hence by consequence more), if that production is useful , it will be taken.
If you produce say a greater crop, people will eat more, population will increase (unless they are socialists maybe and miss the point – its equal to them) and hence so will demand.
Your version of demand is to starve everyone instead of satisfying it.
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@Crysangle:
– Nope. I’ll give an example.
– Let’s assume a company with 100 employees and that all earn $ 1000 (per week, month, whatever). Then these 100 workers combined can spend $ 100,000. So, demand is $ 100,000.
– Now this company increases productivity by producing the same amount with only 90 employees, each still earning $ 1000. Then these 100 (!!!) workers combined now can spend only $ 90,000. So, demand will drop from $ 100,000 down to $ 90,000. (This assumes that these 100 workers don’t increase their debtload).
– In an attempt to rescue their turnover (sales-price x sales-volume) producers are FORCED to drop their sales-prices. But it won’t guarantee that sales volumes will increase. Would you automatically buy a second say TV, house or car when the prices of this stuff drops say 10%, 30% or 50% ? No, because you already have a car and a TV.
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Demand in monetary terms drops to $90 000 dollars, but prices also drop to $90 000 dollars for that which they produce. The other ten workers, if there is for example a fixed $ 100 000 available in circulation, may produce something else to sell for that $10 000, and so they, all 100 will have the same as they previously produced plus whatever the surplus 10 workers are producing for the same cost. Alternatively they all just have more free time by cutting hours instead of jobs. You can cut and dice it as you like.
This is an adaptive economy at ground level. A managed economy on the other hand sees an increase in money supply to support demand and prices, and is discretionary to the politics of those that create that money (via debt).
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Fed Research? LOL! Try Fed Propaganda.
Does any of their ‘research’ ever come to the conclusion the Fed should not exist?
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Federal Reserve info… Now who believes them anymore.
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But who is more stupid, Nixon for closing the gold window or the rest of the world for still accepting US credit as payment? I believe even the Soviets continued to keep their eurodollar accounts.
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I think following the Great Depression and wwll. the government prioritized employment. While good for the working class…
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And of course there was the 1983 Gold Commission minority report to which Ron Paul had Murray Rothbard write for him: https://fraser.stlouisfed.org/files/docs/historical/congressional/198303_usgcom_rptcomrolegold_v2.pdf
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No surprise that the Fed, an organization packed with Democrats, is a criminal enterprise.
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“Actually, the policy error was Nixon closing the gold window on August 15, 1971, ending convertibility of gold for dollars.”
The policy error was that which lead up to closing the gold window. With the Vietnam War and Great Society, the government spent beyond its means. The government wasn’t going to end the Vietnam War or Curtail the Great Society programs on August 15, 1971, in order to stay on the gold standard.
The gold standard “doesn’t work” as everything moves in cycles. Gold is a peg and pegs get broken at some point in the phase of a cycle. As they say, there are no atheists in foxholes and no libertarians in a financial crisis.
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It is not the case that the gold standard does not work but government destroys the gold standard with paper currency and steals wealth from the society which is the period when the civilization declines and destroys itself in time.
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Mish is right on here as per usual.
Of course, most of the best federal records for Nixon and the gold window are at the Nixon Library in Yorba Linda, California, BUT, there are lots of good stuff in the records of the Treasury Dept (Record Group 56) at the National Archives in College Park, Maryland. Also, there are related documents in the records of the Department of State (Record Group 59).
The St. Louis Fed’s website FRASER has links here:
https://fraser.stlouisfed.org/search.php?q=nIXON+GOLD+WINDOW
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