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Old 03-21-2012, 12:22 PM   #1
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Bernanke - Gold standard will not solve problems

http://www.reuters.com/article/2012/...82J17A20120320

I think it's pretty cool that the chairman of the fed is even talking about this. Seems to be his line is basically that the fed couldn't do it's job if there were an objective value for a dollar. There apparently is enough rancor out there about it that he feels compelled to address it, however. I think that's a good thing.

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Old 03-21-2012, 12:59 PM   #2
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Re: Bernanke - Gold standard will not solve problems

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"Under a gold standard, typically the money supply goes up and interest rates go down in a period of strong economic activity - so that's the reverse of what a central bank would normally do today."
misquote?

However a Gold Standard is effectively price fixing. That does not work, and that's the main reason it is a bad idea imo.
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Old 03-21-2012, 01:11 PM   #3
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Re: Bernanke - Gold standard will not solve problems

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Originally Posted by BurningSquirrel View Post
misquote?

However a Gold Standard is effectively price fixing. That does not work, and that's the main reason it is a bad idea imo.
Not really. It's simply using a different form of currency, not price fixing.
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Old 03-21-2012, 05:22 PM   #4
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Re: Bernanke - Gold standard will not solve problems

OP, I agree with you that it's cool that he is even addressing it.

Couldn't a central bank technically still do pretty much the exact same kind of monetary policy under a gold standard though? That is, if at all times they held excess gold reserves, and then release them when they need to ease and accumulate when they need to put the breaks on? Only difference is, this would put a ceiling on the amount of easing they could do.
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Old 03-21-2012, 09:09 PM   #5
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Re: Bernanke - Gold standard will not solve problems

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Not really. It's simply using a different form of currency, not price fixing.
most gold standard have been price fixes. the major problem comes from the fact that they typically dont restrain fiduciary media growth entirely, so its not a full reserve standard, and trying to maintain initial fixed ratios with gold becomes unsustainable overtime.
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Old 03-21-2012, 11:03 PM   #6
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Re: Bernanke - Gold standard will not solve problems

There is no need to stabilize the economy. When the economy enters into a depression it is because resources have been misallocated to capital goods industries as a result of bank credit expansion confusing entrepreneurs about how much savings is occurring (interests rates being determined on the market by consumer savings). During the depression these resources are reallocated to consumer goods industries. Efforts to prevent this reallocation are bound to exacerbate this situation.
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Old 03-24-2012, 01:34 PM   #7
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Re: Bernanke - Gold standard will not solve problems

Oh no! The fed cant intervene in the economy with a gold standard? How awful.
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Old 03-24-2012, 01:53 PM   #8
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Re: Bernanke - Gold standard will not solve problems

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(Reuters) - Federal Reserve Chairman Ben Bernanke on Tuesday took aim at proponents of the gold standard, saying that such a system handicaps the government's ability to address economic conditions.
That would solve the problem.
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Old 03-24-2012, 02:31 PM   #9
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Re: Bernanke - Gold standard will not solve problems

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Originally Posted by Exsubmariner View Post
http://www.reuters.com/article/2012/...82J17A20120320

I think it's pretty cool that the chairman of the fed is even talking about this. Seems to be his line is basically that the fed couldn't do it's job if there were an objective value for a dollar. There apparently is enough rancor out there about it that he feels compelled to address it, however. I think that's a good thing.

Comments?
From my rudimentary understanding of economics and the gold standard, the primary appeal of a gold standard is that it forces fiscal discipline upon a society. When "money" is backed by a scarce commodity (such as gold) nations and their leaders are forced to live within their means. Politicians can no longer "buy" votes by printing money. The downside of a gold standard is that it limits the ability of a nation to respond to certain types of crisis, such as war or a depression, where the ability to "temporarily" increase spending (and/or borrow money) is required.

A nation can function without a gold standard as long as politicians and public officials behave responsibly. The problem starts when politicians (and their constituents) begin adopting reckless spending as the norm.

It's very entertaining (in a sick and perverted sort of way) watching Chairman Bernanke testifying before Congress. In a weird rendition of kabuki theatre, Chairman Bernanke warns the pols that current entitlements and current spending are "unsustainable" and Congress must get its fiscal house in order - meaning "Cut, cut, cut!" The Congressmen and senators stare right back at Mr. Bernanke and effectively say, "Please save us from ourselves, Mr. Chairman!" Not particularly interested in slashing their own throats by imposing austerity on their constituents, most of our elected representatives want Mr. Bernanke to solve the problem. It's fairly obvious from his demeanor and his blank stare that Chairman Bernanke knows where this train is headed. Sooner or later the bond vigilantes will get fed up and there will be a crisis in the financial markets. Our creditors will start demanding higher payment for agreeing to take on our debt, thus forcing the Fed to raise interest rates. That is what Ben Bernanke is hoping to avoid - and why he keeps pleading with our elected representatives to be responsible. So far, his pleas seem to be falling on deaf ears. I'm no expert, but I sense that our politicians will not act - in any meaningful way - until a gun is (figuratively) put to their heads. There's no easy way out of this mess.

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Last edited by Former DJ; 03-24-2012 at 02:49 PM. Reason: Added a paragraph.
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Old 03-24-2012, 04:01 PM   #10
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Re: Bernanke - Gold standard will not solve problems

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Originally Posted by Redgrape View Post
Oh no! The fed cant intervene in the economy with a gold standard? How awful.
It actually is.
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Old 03-24-2012, 04:08 PM   #11
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Re: Bernanke - Gold standard will not solve problems

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Originally Posted by Former DJ View Post
From my rudimentary understanding of economics and the gold standard, the primary appeal of a gold standard is that it forces fiscal discipline upon a society. When "money" is backed by a scarce commodity (such as gold) nations and their leaders are forced to live within their means. Politicians can no longer "buy" votes by printing money. The downside of a gold standard is that it limits the ability of a nation to respond to certain types of crisis, such as war or a depression, where the ability to "temporarily" increase spending (and/or borrow money) is required.

A nation can function without a gold standard as long as politicians and public officials behave responsibly. The problem starts when politicians (and their constituents) begin adopting reckless spending as the norm.

It's very entertaining (in a sick and perverted sort of way) watching Chairman Bernanke testifying before Congress. In a weird rendition of kabuki theatre, Chairman Bernanke warns the pols that current entitlements and current spending are "unsustainable" and Congress must get its fiscal house in order - meaning "Cut, cut, cut!" The Congressmen and senators stare right back at Mr. Bernanke and effectively say, "Please save us from ourselves, Mr. Chairman!" Not particularly interested in slashing their own throats by imposing austerity on their constituents, most of our elected representatives want Mr. Bernanke to solve the problem. It's fairly obvious from his demeanor and his blank stare that Chairman Bernanke knows where this train is headed. Sooner or later the bond vigilantes will get fed up and there will be a crisis in the financial markets. Our creditors will start demanding higher payment for agreeing to take on our debt, thus forcing the Fed to raise interest rates. That is what Ben Bernanke is hoping to avoid - and why he keeps pleading with our elected representatives to be responsible. So far, his pleas seem to be falling on deaf ears. I'm no expert, but I sense that our politicians will not act - in any meaningful way - until a gun is (figuratively) put to their heads. There's no easy way out of this mess.

Former DJ
That's very reminiscent of the situation in the Eurozone now (and in the past year or two).

BTW, Gold standard wouldn't prevent government borrowing--people can still lend gold coins to each other, so there's nothing preventing the government from borrowing either. The main thing that's prevented is the printing of money by the Treasury. The Federal Reserve could actually do what it does with a gold standard, but it might not be as effective.
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Old 03-24-2012, 04:37 PM   #12
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Re: Bernanke - Gold standard will not solve problems

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Originally Posted by Exsubmariner View Post
http://www.reuters.com/article/2012/...82J17A20120320

I think it's pretty cool that the chairman of the fed is even talking about this. Seems to be his line is basically that the fed couldn't do it's job if there were an objective value for a dollar. There apparently is enough rancor out there about it that he feels compelled to address it, however. I think that's a good thing.

Comments?
Haven't read the article but Bernanke wrote many papers about this subject during his academic career so it doesn't surprise me he's talking about this. I've used a few in papers I've had to write.

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Originally Posted by BurningSquirrel View Post
misquote?

However a Gold Standard is effectively price fixing. That does not work, and that's the main reason it is a bad idea imo.
Not so much price fixing but exchange rate fixing is one of the main reasons he's against it IIRC.
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Old 03-24-2012, 05:04 PM   #13
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Re: Bernanke - Gold standard will not solve problems

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Not so much price fixing but exchange rate fixing is one of the main reasons he's against it IIRC.
it only begs the question... why he is in favor interest rate fixing?

he once gave Paul an answer during a Q&A which amounted to saying its necessary because prices are sticky. Oddly enough, this dates back to an argument Hayek made in that labor unions artificially raising the price of their work could technically be combated with inflation via money's illusory effects.

I've written about this before:

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Hayek’s contentions, unfortunately, missed at least the emphasis of a major point... Namely, the problem of inflating in practice.

Money expansion in modern banking has always been designed to distribute the expansionary fruits unevenly through the economy. New money enters at a particular point in space and time and must traverse through these dimensions unevenly as the money circulates via transactions. This means monetary inflation in itself always causes problems like the money-induced business cycle, wealth transfers, accounting distortions, among other inflation related costs.

Furthermore it is near impossible to decide by what magnitude to counteract the problem of wage rigidity by determining continually and precisely how much to inflate, and when and where to distribute the funds so as to perfectly nullify the negative effects of wage controls and avoid any overstretching.

In theory the money illusion and inflation can be utilized to combat political pressures on wages, or other sticky prices, if the economy can just adjust to a larger nominal base AND remain fooled by the disintegration of the wage pressures. In practice the central bank does no good to this end and as Hayek realized, the government would be far better off if they fought wage rigidities that are within our control in order to increase price flexibility rather than induce more price rigidities/controls.
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Old 03-24-2012, 05:21 PM   #14
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Re: Bernanke - Gold standard will not solve problems

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Oddly enough, this dates back to an argument Hayek made in that labor unions artificially raising the price of their work could technically be combated with inflation via money's illusory effects.

I've written about this before:

Hayek’s contentions, unfortunately, missed at least the emphasis of a major point... Namely, the problem of inflating in practice.

Money expansion in modern banking has always been designed to distribute the expansionary fruits unevenly through the economy. New money enters at a particular point in space and time and must traverse through these dimensions unevenly as the money circulates via transactions. This means monetary inflation in itself always causes problems like the money-induced business cycle, wealth transfers, accounting distortions, among other inflation related costs.
For unanticipated monetary injections, sure. Even then there's an unanswered question in that writing, and that is "How fast does the economy adjust, and what are the effects of a short versus long adjustment period"? Or more specifically, one needs to examine deeper how the money circulates unevenly.

For anticipated monetary injections, the answer isn't nearly as neat as outlined in the quote. If something is anticipated (and one could argue that most modern monetary policy can easily be predicted--and except for QE has been done slowly and gradually), then the discovery process can be immediate. No need to wait for the extra money to happen to show up in a certain market to know that prices should adjust. We would know that the money supply has been inflated and could make immediate changes.

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Furthermore it is near impossible to decide by what magnitude to counteract the problem of wage rigidity by determining continually and precisely how much to inflate, and when and where to distribute the funds so as to perfectly nullify the negative effects of wage controls and avoid any overstretching.
I agree with the statement, but disagree wholeheartedly with the (implied) conclusion. I don't think that if it turns out that we can't do something "perfectly" that means we ought to do nothing. If we can make things better, I believe we ought to do so. Even if that isn't getting to "perfect". Sometimes second-best solutions should be adopted, even knowing it isn't optimal.
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Old 03-24-2012, 06:35 PM   #15
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Re: Bernanke - Gold standard will not solve problems

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Originally Posted by coffee_monster View Post
For anticipated monetary injections, the answer isn't nearly as neat as outlined in the quote. If something is anticipated (and one could argue that most modern monetary policy can easily be predicted--and except for QE has been done slowly and gradually), then the discovery process can be immediate. No need to wait for the extra money to happen to show up in a certain market to know that prices should adjust. We would know that the money supply has been inflated and could make immediate changes.
Agree completely. Since Volcker, the Fed has made sure to signal heavily what its intentions are well in advance of actually carrying them out. I think I'm missing something though. Is the relation between using interest rates to fight artificially fixed prices and using them to fight prices that are sticky up or sticky down the same?
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Old 03-24-2012, 06:54 PM   #16
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Re: Bernanke - Gold standard will not solve problems

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Agree completely. Since Volcker, the Fed has made sure to signal heavily what its intentions are well in advance of actually carrying them out. I think I'm missing something though. Is the relation between using interest rates to fight artificially fixed prices and using them to fight prices that are sticky up or sticky down the same?
I was also thinking (for the signaling/predicting part) that some form of a Taylor rule works well for predicting the Fed's target federal funds rate. A Taylor rule takes as inputs current interest rates and unemployment rates and outputs a target interest rate. They do very well in tracking the actual target. As a concrete example of what Semtex mentioned, the federal reserve has come out and said that it intends to keep the FFR low for the next year or two (well, depending on when that announcement was made).

If you're asking me the question in the second part--I'm not sure what you mean by fighting prices (either fixed or sticky.) To me, it is more that the fed uses the sticky prices/wages/whatever to achieve its goals. In the long run (several years out +) I believe everyone agrees monetary policy does very little to nothing. The reason is everything can adjust, so doubling the money supply would just halve all prices (ignoring velocity and other such issues). In the short run though, some things can't adjust, and those are what causes real effects in the economy. If my output becomes more valuable, but the wages I have to pay my employees doesn't go up (because of contracts or the like), I'll decide to produce more. That has a real effect on the economy.

BTW, real changes means changes to real variables--unemployment rate, Real GDP, etc. Rather than price levels, Nominal GDP and that sort of stuff.
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Old 03-24-2012, 07:27 PM   #17
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Re: Bernanke - Gold standard will not solve problems

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I was also thinking (for the signaling/predicting part) that some form of a Taylor rule works well for predicting the Fed's target federal funds rate. A Taylor rule takes as inputs current interest rates and unemployment rates and outputs a target interest rate. They do very well in tracking the actual target. As a concrete example of what Semtex mentioned, the federal reserve has come out and said that it intends to keep the FFR low for the next year or two (well, depending on when that announcement was made).

If you're asking me the question in the second part--I'm not sure what you mean by fighting prices (either fixed or sticky.) To me, it is more that the fed uses the sticky prices/wages/whatever to achieve its goals. In the long run (several years out +) I believe everyone agrees monetary policy does very little to nothing. The reason is everything can adjust, so doubling the money supply would just halve all prices (ignoring velocity and other such issues). In the short run though, some things can't adjust, and those are what causes real effects in the economy. If my output becomes more valuable, but the wages I have to pay my employees doesn't go up (because of contracts or the like), I'll decide to produce more. That has a real effect on the economy.

BTW, real changes means changes to real variables--unemployment rate, Real GDP, etc. Rather than price levels, Nominal GDP and that sort of stuff.
What I thought Zygote was saying, that you were responding to, was that Bernanke had said that the Fed fixes interest rates because it has to combat price stickiness (which would be a short run problem). I could have misread that.
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Old 03-24-2012, 07:50 PM   #18
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Re: Bernanke - Gold standard will not solve problems

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What I thought Zygote was saying, that you were responding to, was that Bernanke had said that the Fed fixes interest rates because it has to combat price stickiness (which would be a short run problem). I could have misread that.
Ah, I see now. I think over the next day or so I'll look some stuff over. I'd like to see the quote from Bernanke to get everything in context--not that I don't think he said that, but I'm not quite getting why he'd say that, so I would like a little more info before saying 'maybe he meant this or that'.

Though I think I might do that anyway. The general thought is that if we go in a recession firms (by definition) are making less. The natural response in a competitive market would be that the wages of laborers drops--the demand for labor shrinks, moving the equilibrium down and to the left, representing a lower wage and a lower number of people hired. But with sticky wages those wages don't decrease. So we wind up with even less hours of labor demanded but more supplied (compared to what the equilibrium 'should be', without price controls). This means even fewer people are employed with those price controls.

Lowering interest rates would increase the demand for goods, since it makes buying big ticket items cheaper--and that could affect smaller ticket items as well. This would increase the price of goods, which would increase the demand for labor. Thus the 'equilibrium wage' would increase, and if it gets high enough the stickiness would no longer affect the market, and we'd get to a point where everyone how wanted a job could have one (minus the frictional, unavoidable employment). That's the natural level of employment which maximizes growth--and is where we'd expect to be in the long run.

So maybe that's what Ben was talking about...

(edit: you could make a similar argument with sticky prices instead of wages, but the same idea applies--the stickiness of prices causes us to enter a disequilibrium condition that reduces the level of output)
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Old 03-24-2012, 08:01 PM   #19
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Re: Bernanke - Gold standard will not solve problems

Poor Bernanke. This is like Phil Galfond trying to explain poker to a donk by explaining ranges and equity while the donk is all like "naw man, you just gotta go with your gut," completely self assured.

The best lack all conviction, while the worst are filled with a passionate intensity.
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Old 03-24-2012, 08:11 PM   #20
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Re: Bernanke - Gold standard will not solve problems

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Originally Posted by coffee_monster View Post
Ah, I see now. I think over the next day or so I'll look some stuff over. I'd like to see the quote from Bernanke to get everything in context--not that I don't think he said that, but I'm not quite getting why he'd say that, so I would like a little more info before saying 'maybe he meant this or that'.

Though I think I might do that anyway. The general thought is that if we go in a recession firms (by definition) are making less. The natural response in a competitive market would be that the wages of laborers drops--the demand for labor shrinks, moving the equilibrium down and to the left, representing a lower wage and a lower number of people hired. But with sticky wages those wages don't decrease. So we wind up with even less hours of labor demanded but more supplied (compared to what the equilibrium 'should be', without price controls). This means even fewer people are employed with those price controls.

Lowering interest rates would increase the demand for goods, since it makes buying big ticket items cheaper--and that could affect smaller ticket items as well. This would increase the price of goods, which would increase the demand for labor. Thus the 'equilibrium wage' would increase, and if it gets high enough the stickiness would no longer affect the market, and we'd get to a point where everyone how wanted a job could have one (minus the frictional, unavoidable employment). That's the natural level of employment which maximizes growth--and is where we'd expect to be in the long run.

So maybe that's what Ben was talking about...

(edit: you could make a similar argument with sticky prices instead of wages, but the same idea applies--the stickiness of prices causes us to enter a disequilibrium condition that reduces the level of output)
Right, this makes total sense and I agree with it. What I'm not getting was Zygote's problem with all of this.
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Old 03-24-2012, 08:11 PM   #21
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Re: Bernanke - Gold standard will not solve problems

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Poor Bernanke. This is like Phil Galfond trying to explain poker to a donk by explaining ranges and equity while the donk is all like "naw man, you just gotta go with your gut," completely self assured
Ha so true.
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Old 03-24-2012, 08:27 PM   #22
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Re: Bernanke - Gold standard will not solve problems

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Poor Bernanke. This is like Phil Galfond trying to explain poker to a donk by explaining ranges and equity while the donk is all like "naw man, you just gotta go with your gut," completely self assured.

The best lack all conviction, while the worst are filled with a passionate intensity.
I'll second Semtex's +1 on that. It's funny how so many people can read just a little bit (and maybe from questionable sources) and think they're experts and completely confident that they have it right. A few years ago I would have said it's mainly econ where that happens, but I've seen it with Physics, Biology (particularly evolution), and a host of other things.

That's not to say discussion doesn't or shouldn't occur--I was just reading a blog post by Taylor (yes, that Taylor I mentioned above) talking about how he disagreed with Krugman and how Krugman misquoted/misapplied his work. It's amazing how many people would put themselves in Taylor's shoes without Taylor's knowledge and expertise.

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Right, this makes total sense and I agree with it. What I'm not getting was Zygote's problem with all of this.
Cool--thought so, but figured it would give Zygote a good launching point for Zygote to explain what he meant--hopefully it was something along the lines of what I was talking about, but if it was different, then it'll be quick for him to say 'nope, something else' and hopefully explain it.
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Old 03-24-2012, 09:19 PM   #23
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Re: Bernanke - Gold standard will not solve problems

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Originally Posted by A_C_Slater View Post
Poor Bernanke. This is like Phil Galfond trying to explain poker to a donk by explaining ranges and equity while the donk is all like "naw man, you just gotta go with your gut," completely self assured.
The best lack all conviction, while the worst are filled with a passionate intensity.
Let's see what the tale of the tape has to say about the bolded...
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Old 03-24-2012, 09:22 PM   #24
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Re: Bernanke - Gold standard will not solve problems

"Since the gold standard determines the money supply, there is not much scope for the central bank to use monetary policy to stabilize the economy," Bernanke said. "Under a gold standard, typically the money supply goes up and interest rates go down in a period of strong economic activity - so that's the reverse of what a central bank would normally do today."

I think reality is opposite from what he says. Henry George states, "Thus, there is a certain relation between wages and interest, which changes slowly, if at all. Hence, interest must rise or fall with wages." During low economic activity wages are low, so interest is low too.

Last edited by steelhouse; 03-24-2012 at 09:30 PM.
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Old 03-24-2012, 09:52 PM   #25
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Re: Bernanke - Gold standard will not solve problems

Do you have any proof or arguments for what you think, or is it just stuff you think? At least you could have quoted that argument (from the mid-1800's!) instead of just the conclusion.

And based on the time period of the person you're quoting, I bet you think the Aether exists, no?
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