That would result in an economy with huge deflation: People consuming the bare minimum of apples needed for survival because their gold savings would appreciate each year in value.
> because their gold savings would appreciate each year in value
Relative value usually matters more than absolute value: if money is depreciating at 1% but you can invest in stocks for a 1% return then you would invest in stocks (ignoring risk). Google: alpha vs beta returns.
Risk/volatility and diversification also matter: putting all your wealth into a single asset class is probably a bad idea.
> bare minimum of apples needed for survival
Edit: People are not ideally rational spenders. Also depending on your age, you may value spending now more than saving for an uncertain future. At 70 your death probability hits 2% per annum[1], so saving 1% for next year might not make sense. At any age you may look at history and you might not trust that your money will useful next year (plenty of examples where stable governments have screwed the pooch).
Could you clarify the preference for stocks over gold assuming returns are the same?
I had a look at alpha and beta returns, but aren't those considerations irrelevant if returns are the same?
Thanks in advance, and apologies for naivety on my part.
Historically 90% of families will lose their wealth within 3 generations. How does that jive with "people will save too much" when it seems rather intuitive monetary policy has nothing to do with how a grandkid who has never worked a day in their life, spends money?
>> Maintaining inherited wealth has worked for generations of Frescobaldis over 700 years
The article gives a counter example (wealth passed 700 years is way over 3 generations), and tries to argue that this example is more than just an outlier?
>> heirs and heiresses make up about half of Western Europe’s billionaires.
You can save cash which does not result in additional investment. When banks refuse to lend money, saving does not result in additional investment, in fact that is the cause of QE. The government feeling compelled to invest because people in the private economy refused to invest.
Cash behaves like an interest free loan to the central bank.
Stuffing cash under your mattress takes it out of circulation. An inflation targeting central bank will 'print' more money to make up for the missing cash.
That new cash will be spend. (Or, if people keep stuffing it under mattresses, the central bank can just keep 'printing' money.)
In a few years, when you take the money from under your mattress and buy yourself a nice ice cream, the central bank will notice that total spending has gone up, and decrease the amount of money in the economy to keep inflation on target.
It's exactly as if you had lend out the money from under your mattress to the central bank.
(And by 'print money', I mean that they will buy assets with newly created money. Typically they buy government debt, but they can also buy stocks or gold or foreign exchange or rare Lego sets.)
In any case, it looks like we don't actually disagree on what's happening, only on how to interpret it.
I hold that stuffing money under your mattress isn't the problem here. Central bank monopoly on printing money is.
If you stuff privately issued money under your mattress, it's the private issuer that can increase its balance sheet. No government-run central bank required for this.
Most "investing" isn't investing either. When you buy Facebook shares on the NYSE not a penny is going to Facebook, you're just transferring shares from one person to another at a new price
Yes and no, you don't want too much of either but they are different. You want people to save more when there is high inflation and consume more when there is less
People are still gonna want the new iphone and latest suv. Having a hard money as the reserve currency doesn’t undermine the economy, quite the opposite.
Yes. People will always demand consumer goods. The problem with deflation is that it incentivizes you to hoard money rather than invest in businesses give out loans. During periods of economic growth with a gold-backed currency, we don't actually see much deflation because the money supply expands when banks naturally give out more loans and people invest a greater percentage of their wealth into equity. The problem comes when there is a recession. People and businesses default on their loans, and lenders are less willing to issue new ones, which effectively contracts the money supply. While it sounds good that your money becomes more valuable, most of the reason for this is that people have less of it.
It's not actually deflation that's the problem. If productivity grows fast enough, prices can fall, no problem. That's what happened to the computer industry just fine for decades.
The real problem is a fall in nominal GDP. And that's a problem no matter whether prices are rising or falling.
I follow your argument but I would argue that incentives to hoard money aren't necessarily bad. I agree with you that hoarding money leads to a reduced money supply, but I don't think this is necessarily a bad thing.
For example: the GFC. Central banks bail out bad actors which perpetuates the incentives that caused these actors to make bad decisions in the first place ("bad" meaning not optimal globally, e.g. selling bonds you know are worthless). If a gold standard was in use, this would simply be impossible. The government would need to increase taxes to bail out the banks, which would be rejected by citizens who are busy hoarding gold and cursing the banks, which means the banks that replaced the bad actors would be incentivized to avoid the mistakes their predecessors made. Alternatively, the GFC may simply not have occurred, because under a gold-standard the banks cannot assume they would be bailed out and this knowledge would cause them to be more risk-averse. "Every Battle Is Won Before It Is Ever Fought"
The use of fiat currency provides control over the economy, but we shouldn't assume that that control is always used in the best interests of the many. The reason a gold standard is so popular among libertarians is that no institution can have arbitrary monetary control over individuals via printing money.
Hoarding money isn't a bad thing if that's your normal state, but it's a bad thing to go stop lending and investing during a recession when that is what is needed the most.
Mortgage backed securities caused the GFC, but only a small part of the bank dealt with mortgage backed securities. It doesn't make sense to let that drag the rest of the bank and the economy down along with it, which is why the bailouts were necessary. It's not the job of central banks to punish bad actors. Their job is to prevent the next Great Depression. You don't blame the ER doctor who delivers a frightening dose of blood thinners to a heart attack patient. You blame the patient's bad habit of eating barrels of pork, which in this case would be Congress. If Congress did not force the treasury to issue so much debt, the Federal Reserve wouldn't have to buy so much of the debt back in order to lower interest rates.
Just to clarify, I wasn't suggesting that a Central Bank (using fiat currency) should punish bad actors; I was suggesting that if the Central Bank used Gold, the bad actors may not have existed, or if they did exist, would have been decimated to the point they are essentially replaced by better actors.
I'm not saying that the GFC and huge Government debt are the fault of the Central Banks, but they are much more likely to occur because the Central Bank uses a fiat currency. If we had a gold-standard and the Government issued huge amounts of debt, eventually they would run out of creditors who trusted them, and they would be forced to change spending habits.
Sure a gold standard is more punishing, and eventually that may force people into better behavior, but by then it may be too late, and you'd be losing out to any country that does bail out their banks. There are always going to be instances in which individual actors don't care about the institutions they're a part of, and the institution isn't guaranteed to catch this bad behavior. For example, plenty of analysts knew that they were screwing over the banks that employed them by buying unsustainable CDOs, but they didn't care because they were making crazy bonuses. Meanwhile, all the C-suite sees is that their underlings making money by buying AAA rated bonds. There's no reason to believe that would have been prevented with a gold standard, just as the Great Depression wasn't.
The countries that would lose out would be the ones that used fiat because they are more likely to have a GFC, whilst the gold standard countries stay more stable via the mechanism I theorized before.
And if the C suit have such little control that their employees can collapse their company, they are simply incompetent and their losses should not be socialised.
How about instead of enforcing your authoritarian money model which puts all the power in the hands of financial capitalists you instead abandon the idea of caring about the interests of the financial capitalists and just let people trad with each other without requiring permission from authoritarians?
It is really quite strange that one would consider the gold standard a source of liberty. Humans aren't made out of gold. They die at some point, creating an obligation that outlasts a human life is honestly sickening and perhaps worse than slavery.
When you say "just let people trade with each other", do you mean a Government policy where payment can be made in any form of value?
Also, I don't understand why a gold standard would produce an obligation that outlasts a human life? A gold standard is seen as a source of liberty because the alternative, fiat money, gives huge amounts of power to the Government / Fed in ways that may not be good for society overall.
How are they supposed to do that when a rich person A who earns more than he spends accumulates ever greater amounts of gold, leaving everyone else who wants to trade and don't care about trading with A stranded.
Think about it this way. Germany keeps saving more euros. Greece and Spain are trading with each other. At some point all the money is in Germany, making it impossible for Spain and Greece to trade with each other even though they would have maintained balanced trade between each other. Greeks can't buy the latest gadgets produced in Spain even if they wanted to.
The value of currency fluctuated much more during most of the 19th century than it did between 1990 and 2020. It’s just that the periods of inflation were followed by years of deflation. I think for most people and businesses stable and predictable inflation os generally preferable to a permanent boom and bust cycle.
I really dislike this Keynesian line of thinking. It helps Governments print away to glory and have no accountability. You'd only save to an extent, because you have to fulfill your hierarchy of needs. Prices ultimately will reflect supply and demand, and your paycheck will too, not necessarily leaving a huge buffer to invest and save in gold. That's similar to how wages today aren't anywhere close to long term subsistence worthy for the common folk. I admit it may not be as simple as that, but there was a world before fiat printing where gold worked as a harder form of money. It worked for 1000s of years. Everybody thinks that inflation at 2% is healthy etc, but if let to their own devices, tech, food etc. is deflationary and would be substantially cheaper.
Well you would be right if upu only averaged out yearly inflation over large periods of time. However this stability you’re talking about is just an illusion.
Year to year it was much worse e.g. during the 19th century yearly inflation in excess of 10% was much more common than after WW2 however it was usually followed by similarly high deflation when the current bubble burst.
The problem is that the deflation thinking has lead to two world wars.
The Austrians are famous for committing extreme austerity before world war two.
First hand experience with tough deflation probably caused Hitler to leave Austria and move to Germany where he promised a quick fix through worker programs. His goal to conquer Europe was basically equivalent to trying to rebuild the Roman empire which was dependent on conquering more land to grow its economy.
The gold standard has no history of success, it lead to the rise of feudalism and countless of wars, revolutions and conflicts.
The only logical answer is to stop the articial price controls on the interest rate and let it fall negative when the economy declines.
I am not a historian, but to tie world wars to gold standard is very very questionable. Weimar Germany failed due to a variety of reasons (reparations etc) but also because they printed away ie QE to "save the economy". Hitler rose on the promise of a radically better future.
The fall of empires in history can quite literally be traced in the % of gold in their coinage Eg. Byzantine, Rome. The problem with history is that one can claim fiat led to the Iphone and that users of gold in the 1500s had bubonic plague, but these links are very tenuous. Humans continue to make progress in science and tech. Revolutions were a result of crumbling economies that lost accountability to their own people. The 2 world wars were fought on debt and broke the gold standard[1]. All wars since have been debt wars [2]. Comparing gold to fiat is in my opinion similar to capitalism vs communism. Do people live on communism - yes. Does the system free up the market to chase efficiency - no. Similarly, making the Govt accountable and free market-y (ie not allowing them to dilute everybody's money via printing which is a hidden tax) will in my opinion bring about a step change in human progress
I am glad you bring up the interest rate price control part. I agree. That's one piece of the free market that is missing. The other is the gold standard making the Govt responsible in its spending instead of passing relief acts that package a ton of $ to unrelated expenditures under the name of helping families with children.
For decades computers and related technology have been dropping in price. Yet people still buy and the industry is one of the most prosperous in the economy.
It is difficult to compare because we don’t have apples that have become smaller with higher nutritional value by approximately a factor of two every 18 months.
