James Grant: Requiem for the Dollar | Hacker News Reader

James Grant: Requiem for the Dollar

online.wsj.com

43 pointscwan34 comments

Interesting article, but not terribly useful or pragmatic. I was also hoping for a little more self-awareness. The author is essentially railing against the US policy of printing money to get out of crisis (which is a valid point) by advocating a solution that would send the entire world economy into a recession that would make this one look like the 2001 dip. Because it's the WSJ, I guess I should have expected at least some conservative rhetoric, but I found it a little too naive.

What would have been a more interesting question to consider is what can be done to address the trade deficit and inflation problems with our current monetary system. Although it's valid to suggest that minimum viable product wouldn't work for macro and international economics, it has a lot less practical application.

I think the article serves as a call for urgency for the approaching inflation. One of Grant's biggest followers is Seth Klarman. Klarman runs the Baupost Group, which is a hedge fund comprised mostly of endowment fund money. His fund is using interest rate caps and swaptions to hedge inflation instead of using TIPS.

I don't know if calling Grant naive is correct. He has been ahead of the curve on spotting bubbles in the past and runs a well reputed magazine ($850/year subscription)

can you back up your statement that his proposed solution would send the entire world into a recession? I always find it interesting that people say this and yet don't give any reasons why. I'm not financial genius myself but surely just collateralizing the dollar with something automatically cause a recession. What exactly is the mechanism you think would cause this? Asking cause i genuinely don't understand myself.

it comes down to your economic philosophy.

a keynesian will say that if you need to stimulate the economy, government spending will help get us out of crises.

the problem that arises with a collateralizing program, like the gold standard is that the monetary supply would be inherently confined by physical discoveries and captures of gold. If it is the Great Depression and you cannot find any more gold, you'd be pretty screwed.

The argument is that if it's a strict commodity currency, there's no Great Depression. No cheap money boom, no depressions. Free market interest rates naturally rise and fall to control the extremes of the business cycle.

It's bizarre these so-called conservatives at the WSJ have abandoned Chicago style economics for gold-bug reactionary alarmism.

The monetarist theory--now the dominant theory of monetary policy--is that one of the biggest, most economically important features of a recession is a flight to liquidity. In such a situation, the demand for tangible money--and, under US law, there is none more tangible than the dollar--will drastically jump, despite a limited supply. Nobody doubts the tangibility of the dollar when they are forced to pay taxes, and if they do, they might find themselves in a cell with a tangible lock and 6 by 6 tangible feet.

The correct thing to do, then, is to expand the money supply. This might happen by a seemingly alarming amount, especially given the highly leveraged nature of our economy. But otherwise a flight to liquidity will shut down the financial system, cause huge losses in "safe" bank accounts and funds, cause massive deflation as money becomes scarce, and cause a nasty depression--which is what happened from 1929 to 1932.

The money supply has expanded from about $800 billion to $2 trillion. Alarming? Maybe, but

1) we're not seeing inflation yet

2) most economists agree that the Fed contracting the money supply was a major cause of the 1929 Depression

3) the Fed is perfectly willing to stall the economy to prevent inflation, which is what they did in 1979 when a shameless monetarist finally was given power. See: http://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_Fe... . It's worth noting that Volcker is one of Obama's chief economic advisors: the guy in charge of economic recovery board.

4) the amount of paper cash has increased by a "mere" 120 billion or so. Most of the remaining cash is sitting in Federal Reserve bank accounts, not being used.

So I wouldn't dump greenbacks yet. If you're like most people few of your assets are in greenbacks anyway.

Finally, if I keep seeing articles like this, I'm buying puts on gold. You heard it here first, folks.

If you claim that you haven't seen inflation, then I am going to guess that you are not the one in the household that is buying groceries. Example: Wheat-based products like pasta used to sell on sale for 50 to 80 cents /lb; now a sale price is $1/lb; or an increase of over 20% over the past 2 years.

Ok, but I don't measure inflation solely by wheat prices. The government puts a Fisher index on personal consumption expenditures, which include a lot of non-wheat items.

Also, I am single.

And yet in the real world wheat prices peaked in 2008 (along with oil) and are now back to 2006 prices of ~$200/metric ton.

http://www.indexmundi.com/commodities/?commodity=wheat&m...

Don't base inflation on your local Safeway.

Why not? For the average citizen prices at the local store are the thing that immediately effects their daily lives and will in turn cause them to change their spending habits accordingly subsequently effecting other parts of the economy beyond basic needs.

Because how much you spend for wheat is not what inflation is (unless the only thing money was used for was to buy wheat). The price changes of any one good is an inaccurate look at inflation. Oil tripled last year but that doesn't mean we went through 300% inflation.

The government doesn't use food or fuel to track inflation prices anymore. They were thrown out for being "volatile," price-wise - to make it all look rosy when it definitely was not. (One would, logically, think that if food and fuel prices are volatile, that would indicate that something is sour in the fridge, so to speak)

http://en.wikipedia.org/wiki/Core_inflation

Again, the Fed uses a Fisher index on personal expenditures (the PCEPI), not any basket of goods. Their inflation numbers track everything that people buy for themselves.

Core inflation and CPI are different beasts, not used by the Fed.

Interest rates are zero but global credit outstanding is still crashing. Monetarism is dead. Mises has been proved right. "There is no means of avoiding a final collapse of a boom brought about by credit expansion".

We are in for a period of deflation despite the central banks' best efforts. After the deflation, hyperinflation isn't out of the question if governments give up on credit money and just start spending freshly printed cash.

It sounds like a lot of guessing to me. I still don't understand why expanding the money supply is the right thing to do. I grant you that the demand will increase but why is meeting that demand a good thing?

The other option is deflation and lot's of it, which causes most people with long term loans to default. The great depression saw ~50% deflation which means all your debt and debt servicing costs double. Which causes most people to walk away from any loan they can which creates a huge downward spiral.

It seems to me that many (most?) people I know just can not cope with the truth about our economy, but there is some real nervousness. I have had friends who have lost over 50% of their retirement funds in the last two years - they tend to be more realists than other friends and family members who get (or will get) government pensions. The pensioners tend to have faith in the US and local governments that seems to me to be outside the bounds of clear thought and common sense.

I may be over simplifying this, but I think that in addition to the obvious greed and avarice of the elites, that we have a basic problem with fear. Fear can keep a society from making sacrifices now rather than postponing the pain and making the future more difficult.

I think that the next ten years will be interesting to live through (in negative and in positive ways) but facing problems head on seems like a better approach to what our leaders are doing now.

A much deeper article by software entrepreneur "Mencius Moldbug":

http://unqualified-reservations.blogspot.com/2009/12/gold-an...

"If gold will eventually be remonetized, gold is insanely cheap. If gold will never be remonetized, gold is insanely expensive. It's one or the other. Therefore, if you guess right about this question, you will make huge profits, and if you guess wrong take huge losses."

"The reason I still expect gold remonetization to happen - in the long term, not tomorrow! - is that there's simply no other viable alternative. Everyone knows that the global economy needs a new currency. Most can see that the dollar cannot be saved or replaced by any other sovereign currency or basket thereof - because no central bank could tolerate the economic effects of the upward revaluation that would result if its currency replaced the dollar in C[entral] B[ank] portfolios"

Gold isn't a viable reserve currency. The supply of gold is dictated by mining operations, not by the liquidity needs of the world economy.

And there is a viable alternative reserve currency: http://en.wikipedia.org/wiki/Special_Drawing_Rights

The supply of gold is irrelevant as long as the above ground gold stores dwarf what is mined every year. A single ounce of gold is theoretically sufficient to run the entire economy. The value of that ounce would just shoot up as the economy grew more productive.

What exactly do you mean by "liquidity needs"? If people need cash they earn it or save it. That cash is supposed to represent real wealth someone saved. If it's printed out of thin air it just represents a theft from people who have actually produced and saved.

The value of that ounce would just shoot up as the economy grew more productive.

Which is a coy way of saying "there would be massive, uncontrollable price swings".

With a gold standard and modern economies you don't get wild inflation, but you do get wild deflation, with effects just as bad (since inflation and deflation are isomorphic to each other).

Steady deflation is natural and good. As technology and business grow more productive prices generally fall. Prices fell for most of the 1800s (pre central bank).

The problematic deflation associated with depressions is simply the consequence of fiat money credit bubbles collapsing. That deflation is an indictment of artificial interest rates and fiat money.

But a gold standard, today, wouldn't produce steady deflation, so you're not really arguing with what I said.

(a gold standard, in this modern world, would tend to produce periods of wild price fluctuation, ending with a significant deflation from the previous status quo)

Yes, gold money would result in steady deflation as the economy grows. We have wild price swings now. Look at chart of any major commodity over the last 10 years. Gold would stabilize it as there would be no hot money flows on a gold standard.

I've explained this before, and probably will have to explain it again:

http://news.ycombinator.com/item?id=629390

If you're right, basic economics is wrong. More likely, basic economics is right and you're wrong.

You didn't explain anything. Why would the value of a constant amount of money increasing in proportion to productivity growth lead to "wild fluctuations"?

You seem to take it as given that the opposite imbalance (rapid inflation) would lead to wild fluctuations. I'm inclined to agree, since actual prices do not move in perfect lockstep and there will be a great deal of uncertainty in all markets.

But that's the same as an admission that rapid deflation (a necessary consequence of the effectively fixed amount of gold) would do so as well. This is true because, logically, the effects of either type of imbalance should be similar, with the only difference being the direction of the final stable point (up in the case of inflation, down in the case of deflation).

The US economy grows by about 3% a year, give or take a point. With gold money and a constant supply of gold, I fail to see why this would lead to "wild" deflation. It seems that deflation should mirror economic growth, which is hardly wild.

The problem isn't the average year over year. The problem is the outliers: we live in a modern world where massively game-changing events can occur and spawn whole new industries almost overnight without correspondingly wiping out old industries in the same time period (once such event -- the Internet -- is how you're talking to me right now). These events cause sudden huge upward swings in available goods and services, while gold remains stable. The only thing that can happen to a gold-standard economy in such a situation is crippling deflation.

I didn't see this for a week so you probably won't either, but here goes:

Productivity has grown a few percentage points a year, give or take, consistently, for a long, long time. One industry may boom for a decade, but the economy as a whole is relatively stable. I'm still not seeing anything wild.

Here's a CPI (estimate) chart going back to 1784:

http://nothirdsolution.com/wp/wp-content/uploads/2008/07/cpi...

When the dollar was defined as a specific mass of gold, the prices of goods tended to fall slightly each year, which is what you would expect with productivity gains.

With inflation you lose not only the nominal inflation rate, but also the wealth-enhancing effects of those productivity gains. "That which is seen, and that which is not seen."

The use of coercion, including war, forced devaluation, asset seizure, and forced centralization of financial services, results in wild price inflation, volatility, bubbles, and crashes. This is because coercion moves wealth to its least productive use and hampers the discovery of true prices.

For another example of increased price volatility, see this 200 year chart of the Dow/Gold ratio:

http://www.sharelynx.com/chartstemp/DowGoldRatio.php

Note well that you're looking at a logarithmic chart there, so the wild swings you see after about 1920 or so represent actual, sickening, and deadly phenomena and are not just optical illusions.

One thing I haven't seen mentioned recently, though some of the comments here reminded me of it, is the effect of fairly steady deflation, the kind enforced by a gold standard, on savings rates. Deflation boosts savings and depresses borrowing, because the value of the dollar will be higher in the future, so you are getting higher interest (ie, benefit more) from savings and losing more in interest (ie, paying more) on loans.

I must say, the value of the dollar is depressing. Take a gander at this comparison I did of the Yen and Yuan compared to the dollar (btw, falling is a bad thing in this chart!)...

> http://finance.yahoo.com/echarts?s=CNY=X#chart3:symbol=cny=x...

In my opinion as a US citizen, we need to enforce the currency law and enact the death sentence upon all who have perpetrated this upon our country and our fellow citizens. These persons have committed mass fraud, manipulated financial markets, and have almost irrevocably destroyed our prosperity. Off with their heads: we must make an example of them!

It's high time we return to the gold/silver standard.

China's got a lot more to lose with a strong Yuan that we do. They'll price themselves out of their entire manufacturing chain.

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