Another dumb idea to avoid reducing work time: $5000 for an ounce of gold

This particularly dumb idea is from Paul Brodsky and Lee Quaintance of QB Partners.

They suggest: Rather than reducing hours of work, why not have Washington offer to buy gold at $5000 an ounce:

A coordinated global currency devaluation. The Fed, for example, tenders for private gold holdings at $5000/oz and maintains that bid/offer. As the Fed purchases gold, the gold flows to the asset side of its balance sheet. The Fed funds these gold purchases with newly-digitized money, which flows to banks in the form of net new deposits. This would be a discrete monetary inflation event (devaluation) and a simultaneous deleveraging.

Once the Fed acquires enough gold from the markets, a gold price peg for the US dollar is established. Would this be a gold standard? Yes, if that nominal exchange value is maintained in the open market by the Fed. No, if the Fed decides to periodically adjust that $5000/oz. level following the original exchange. (In fact, tinkering with the official gold price would be a pure example of a monetary agent conducting monetary policy.)

How, you may ask, would buying gold for $5000 an ounce produce jobs? Below, Mr Brodsky and Mr. Quaintance explain how their Quantitative Easing Version 3 would beat back the threat of deflation. We add our own comments to clarify their statements wherever ambiguity arises:

The economic benefits would be immediate and profound. Financial assets would appreciate in nominal terms making balance sheets solvent. The loan books of global banking systems would be secured again.

Translation: the money would pile into the stock market as billionaires, flush with newly minted Federal Reserve Notes, bid up the price of everything from Microsoft to hookers.

Debtors would welcome this devaluation and debt covenants would remain intact.

Translation: Home prices would go through the roof and all those deadbeat sub-prime borrowers would finally have an asset worth more than they paid for it. Of course, they have all lost their homes by now. So the folks who really make out like bandits will be the scum who bought the houses at a foreclosure auction.

Nominal wages and asset prices would rise while debt balances would remain constant. The burden of repaying debt would be greatly diminished, not the principal amount of the debt itself.

Translation: The term “nominal wages” of course is how much you get paid before inflation erases the the actual purchasing power of your paycheck. Instead of $19 an hours for wages on average, you’ll get $20 an hour on average, but the real purchasing power of your wages will have collapsed to $5 per hour.

But, look on the bright side: billionaires, who lease their huge gold hoards to the banks in return for income streams, will find that one ounce of their hoard will now have four times the purchasing power it had before. So they will be able to create even more jobs at Wal-Mart.

Bondholders, dollar reserve holders and retirees would suffer losses in purchasing power; however, inflating away the burden of debt would likely act as a massive economic stimulant, which would, in turn, give policy makers room for fiscal maneuvering.

Translation: Pensioners, whose pension funds rely on government bonds, and baby boomers on the edge of collecting Social Security will be reduced to eating cat food –until they begin eating the neighborhood cats.

Global wage rates in established and emerging economies would track towards equilibrium. Affordability would rise. Prices for goods and services could fall without having a deleterious impact on employment. Workers would naturally migrate where opportunity lay and would again be able to save their wages for future consumption.

Translation: You will be making the same as a Chinese peasant straight off the farm. It will be more affordable to hire you at Wal-Mart to stock shelves. And most of Detroit will move to Brazil in search of work.

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Comments

ah, PPP deflation

That seems to be an ongoing agenda....don't ya know, U.S. workers just "earn too much" and in order to make them "competitive", we need to reduce the United States to a 3rd world slave labor pool.

They have been at this via a variety of methods...

and duh, hello, you're destroying the United States itself with this agenda...
what do they think a national economy is even for?

Super elites/rich/MNCs as some sort of playing card on which to gamble?

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Wages have fallen in value by 87% since 2001...

But, they just won't stop. The sheer stupidity of such suggestions boggles the imagination...

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better quantify that statement

you mean by your theoretical "gold standard" calculations, not adjusted to CPI.

But bottom line, deflating the dollar has been a strategy mentioned many times, also to deflate the debt.

Notice how the U.S. workforce is almost an afterthought by so many? Should be first up in consideration and used to be.

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The gold standard is not simply theoretical

My gold standard calculation is more complex: borrowing from a recent post by FOFOA ("Red Alert: Gold backwardation!!!") currencies compete for gold in much the same way as cereal makers compete for dollars. From the standpoint of owners of gold the question is exactly the same as the owners of dollars: how much purchasing power is represented by my hoard?

Which is to say, for the owners of gold, wages are denominated in gold, not dollars. And, a preference is implied, as in the calculation of cereal purchase, for the currency providing the best "value" - that is, the currency which offers the most wage for the least price. The owners of gold "shop" currencies for the best currency deal. Thus, when wages fall 87 percent in gold terms, this is simply another way of saying the purchasing power of gold has increased 7-fold.

Why is this important?

It confirms what I believe about this crisis: we are in a classic 1930s-style depression, and have been in a depression since 2001. The deflation has been horrific, but concealed behind the deliberately misleading veil of dollar prices. It is precisely during bouts of such deflation that the purchasing power of gold rises.

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we're not on the gold standard

I'm pointing out that when one talks about wage deflation, they normalize it to CPI, or at best PPP.

I understand you are extending the gold standard and comparing it, but for information sake, for our readers, others, quoting wage deflation numbers, one needs to quantify that you are using your gold analysis, not official metrics, to claim wages have fallen by 87%.

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Hmmmm...

I see what you mean. In order to avoid confusion in the future: I always use the gold standard and will explicitly state such.

The measurement of real value by gold has a longer and better track record than government statistics. It allows one to link to a dataset back to when prices were actually denominated in the gold standard, and it is not subject to political interference.

Gold has no agenda and need not run for office. It is just a dead metal.

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Gold vs. PPP

How about looking at PPP vs. Gold? The reason I mention it is because the U.S. for almost 40 years has not been on the gold standard, as well as the rest of the world, I suspect the PPP is not exactly correlated, simply because the correlation to floating (and our illustrious pegged! currencies) isn't there anymore.

PPP is about the closest thing I can think of to showing clearly, Americans can now longer buy the same amount of stuff, eat as well, fund retirement, living in good housing....as they used to. Maybe GDI too.

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THe problem with PPP

We are not on a PPP standard either, so economists have to explain why it is superior index to gold for comparing currencies.

The problem with PPP is

1. It is a manufactured measure with great latitude to the compiler who arbitrarily establishes a benchmark.

2. Economies evolve over time so there is a built in tendency toward error in the measure.

3. Black swans - we don't know what we don't know about the relation between economies.

4. PPP cannot tell you when the economy is in a depression, nor when all countries together are in a depression.

5. It includes what should be excluded: the loss/gain of purchasing power resulting from inflation/deflation.

Gold differs from PPP in that it does not imply a relation with a particular national currency, but with the real value produced by the national economy. Since currencies no longer have a fixed peg to gold, the currency price of gold will fluctuate over time owing to any number of factors, including the one the authors of the post on which I commented consider important: the amount of currency available to circulate in the economy.

There may be a good argument for not using gold this way, but PPP is certainly no substitute.

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PPP is a relational index

It's just purchase power parity and it's relational, so I have no idea what you are talking about. Gold is divorced from currency.

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Gold is divorced from currency

I'm sorry, but perhaps I am not being clear: What makes gold a good measure of the value of the dollar - its purchasing power - is precisely the fact that gold is divorced from the dollar. In order to objectively measure the purchasing power of a currency you need something other than the currency which also has purchasing power. You suggested I use PPP, as it compares dollar purchasing power with other currencies. So I gave you several reasons why I thought PPP was an inferior measure to gold.

The common prejudice is that gold is not money. This is true to the extent you cannot use gold to shop for groceries. But, in London, gold is being lent out every day and collecting interest - which is misleadingly called its "lease rate." Quite simply gold is "money's money". It is the money used to purchase the various currencies on the world market. It is, therefore, a natural measure of the purchasing power of various national currencies, including the dollar.

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Four Deformations of the Apocalypse, NYT op-ed

Four Deformations of the Apocalypse is an op-ed that reads like Stockman is reading this site.

He goes through how destruction of the U.S. economy started with Nixon and then goes through the major events which got us to this point.

Paul Farrell, over at Market Watch picked it up and expanded in Reagan Insider: How the GOP destroyed the U.S. economy.

They also blast Democrats, but as many on this site will say, we haven't had a real Democrat, what the party supposedly stood for, since LBJ for the most part, a New Deal Democrat.

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Stockman and the Austerity - What Else?

Austerity is always someone else's , not me, of course, I got mine and let me be saved and one of the elect. But the Revolution part shows he and his class is starting to get it. The instability of the system and the rending of the social contract is not indefinite.

On gold, just use Jefferson's playbook - gold standard with a National Bank (Fed) under strict political control. Not the Hanna Republican gold conspiracy of 1896.

As in Jefferson's time, the nation's finances were equally disastrous. All the Founders loathed 'Free Trade'. Does any one want to see the French repeat what they did to the gold based dollar in 1968? Just continue to convert dollars to gold until Nixon gave up in 1971 ( I was in London when the gold window closed, holding Amex dollar traveler's checks!). No can do gold until you get trade working for us not against us.

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Burton Leed