here is what bernanke said fwiw (fast forward to 7 minutes):
http://www.youtube.com/watch?v=6jUED...layer_embedded

in isolation you can technically deal with the stickyness of wages but only if its directly the result of the money illusion... but what we can't do is measure the quantity of this stickyness that is directly the result of psychological effects and design a cogent plan to attack to it. Who is disillusioned, by how much, and how do we drive just their wages to the right new nominal level without causing unintended further discoordination with other prices in the economy? Its also a moral hazard to those who are disillusioned and could decrease the long run robustness of the economy by eliminating the economy's ability to reach a higher state of price fluidity. Furthermore the disillusion is not entirely remedied even if you succeed in the first stage, because its entirely likely if they are fooled by the money illusion that people's spending/saving preferences will misalign in real terms when their nominal wage is restored with a lower real income. In such a case people consume more of their income in real terms because they dont realize that replacements cost are higher than before. also whose to say those demanding labor will not be affected by the same illusion when their incomes are inflated to pay for the higher wages? You could have liquidity traps, or higher spending on other things. Its unpredictable how people will react to money injections' effects. In short, I just dont think its practical for a central bank to attack the illusions some people have to varying degrees in the economy regarding money.

It's part of the Fed Chairman's mandate to always say the economy is good or getting better, and I hope you know why. Also, I'm not talking about gold as investment, just its use as a currency. Something that has volatile jumps or dips in value makes for a terrible currency. It is actually much easier to maintain price stability with fiat. I know goldbugs don't like that because they are closet rent seekers looking for a free lunch. Just save some money and earn 12% ROI by letting it sit in the bank, easy game. For the future I advise you to go long on labor and short on capital. The era of receiving returns on mere deposits is over, deal with it.

I think the term "gold standard" needs to go away.

It needs to be replaced by "gold redemption"

A gold "standard" implies a fixed exchange rate. Yes, this is bad. Therefore the re-introduction of a "gold standard" would intelligently be one that allows gold to fluctuate in value as it relates to the money supply. Forget inflation, thats another idiots argument about gold.

Devalue all you want under a floating rate, you don't need to worry about "running out of gold" and all the other nonsense people talk about "not having enough gold to do it"

it would be interesting to measure the dollar's volatility in purchasing all other goods/serivces versus gold's volatility in purchasing all other goods/services over time.

its important to remember that we do want price volatility if supply and demand are dynamic. we just dont want price volatility due to the monetary side of the price.

I nailed it...so some of what I'll say will refer back to one of my previous posts.

This doesn't matter. If we're in a recession and we have 7% unemployment instead of the usual normal level of 4-5%, that's a sign we're out of equilibrium--that there is an excess supply of labor, which is at least partially caused by sticky wages. Now, the actions of the fed do NOT drive their wages back in the short term. In fact, in some of the things the federal reserve has said recently indicate they're NOT doing anything about inflation since the measured rate isn't bad. So they aren't looking at what happens with nominal wages or real in the short run when they're combating the unemployment problem.

Further, they don't try to set or adjust wages relative to other prices either. Those issues are left up to the individuals in the market. There's no direction from the fed about what wages should be relative to the price of anything. As far as prices go, the Fed is (for the most part) just interested in the aggregate levels.

So as I said in the previous post. The federal reserve isn't 'combating' sticky prices/wages. Rather it sees them as a cause of the problem but in a strange twist also sees them as a means to a solution.

What does this mean? Eliminating price fluidity? Who is eliminating price fluidity? And what exactly is "price fluidity"?

restored? What process are you talking about?

Second, you seem to be implying that people can't (eventually, in a year or two) renegotiate/get raises/etc.

Huh? People don't realize prices are getting higher? I don't believe you'll find many people who thing that's true.

Does it matter? Don't you think that most people who demand labor can do simple calculations to see whether they're profitable or not?

How does that enter into this discussion? I don't believe I saw any AEists take up the question in another thread about defining what a liquidity trap was...
And? (taking that as a given for the sake of argument, I as "so?")

The main goal of the FRB is not to help the people of the United States, it is to help in the following order.

1. the FRB itself (they get the jobs and fancy daycare)
2. the member banks (they get the 1% interest so they can charge 10% on credit cards)
3. congress (jobs, loans, and kickbacks)
4. the people (they have to keep the system going, on the edge of the collapse, while the above 3 get the rest).

The reality is a car loan at $20,000 for 5% interest is different than a car loan at 7% interest.

The present value of a car loan at 5% interest might be $19,000. The present value of the car loan at 7% interest might be $19,900.

By using interest and setting the rates, the FRB effectively steal from the bank depositors. Setting interest rates low is nothing more than taking from savers of the world and giving it to those that buy on credit. Thus as time goes on more people decide to live on credit as the purpose of savings has no value.

Capital is a form of labor and if you don't treat capital with respect, the the ramifications are for a poorer country.

why wouldn't the if they are trying to attack sticky wages with monetary means? Unnatural unemployment is the result of the labor market not clearing, i.e. supply demand mismatches at available prices. Since we're dealing with an abundance of supply the implication is that the equilibrium price is below the current rate but there is downward rigidity working against the market being able to reach the equilibrium. Its the demand side that is facing real costs while the supply side is disillusioned by prior wage rates and refuses to to work at lower nominal levels, even if there is no change in real terms. At the present higher costs, the demand side refuses to participate, thinking in real terms, while the supply side refuses to take a nominal fall.

If they aim to improve unemployment they must elevate demand for labor, which entails increasing the bids for labor, which raises nominal wage rates. I think its reasonably obvious that they are trying to buoy wage rates by enabling them to clear at higher levels rather than letting them fall as the means of reaching equilibrium.

the fed has two mandates, general prices and unemployment. the only distinction of the second aspect of their mandate is effectively price of labor.

aggregate prices are where the Fed wants them but unemployment is still elevated. Its a long discussion but dealing with aggregate prices when you're not assuming the problem is evenly distributed among all prices, and the new money is not introduced evenly, is bound to be problematic. there is no aggregate price in the economy, as there is no exchange rate for everything. There is just averaging techniques to determine a general price.


Factors that contribute to sticky prices, whether menu costs or the money illusion would tend to dissipate over time if left to their natural devises. Subsidizing those affected by the money illusion does not allow for real factors to dominate on the forefront, and there will be no more people who can break through the illusion for next time and its likely there are more people who will be affected by it in the following instance.

if sticky wages are the problem and the Fed thinks this problem justifies stimulative monetary policy, you'd presume they are trying change the nominal range of the economy to dissipate the stickyness.

not sure what renegotiating wages has to do with it.

Much of the notion of sticky prices (that are within control) are the result of people not realizing things are getting cheaper. I dont think its unreasonable that if they are not thinking in real terms, which is the base assumption, they will be fooled.

No. Its not easy or obvious how to factor in replacement costs. Especially because those demanding labor were thinking in real terms to begin, an increase in nominal income can easily be mistaken for an increase in real income. this is especially because true because price changes are asymmetric in time and space.

a liquidity trap is usually when money injections are used to restore the capital hole of early receivers rather than circulate. More generally its just a high liquidity preference by those who are early receivers of new money.

well then its difficult to target sticky prices. IF you give your child money hoping he'll save more, but he takes the additional money and buys candy, you have not reached your end. Unless under direct command, we cannot predict how people will respond to increases in income, even if they are being restored to a previously recorded level. Its not accurate to necessarily anticipate identical spending/savings patterns.

No, it's more like Phil Galfond making dumb/blatantly false public statements about poker and a bunch of decent micro/small stakes players bursting up in flames about how dumb it is while ignoring the fact that Phil Galfond is getting a lot of money from a sponsor to say these things and that if he didn't say these things noone would sponsor or broadcast him.

(Disclaimer: I am not actually saying that Phil Galfond specifically does this, lol. I don't know much about him. But you get the point, he could do this.)

Vantek, I'd have a little more confidence in your analogy if the AEists/micro or small stakes players actually knew what they were criticizing. The original analogy was apt--a lot of criticism of modern economics shows a complete lack of understanding of what modern economics is saying. Hence in the original analogy of just 'going with your gut'. That seems to be what a lot of the stuff of mises.org and such is like. There was someone in another thread who posted a mises article that seemed to back up what they were saying, but a brief read of the article showed that it wasn't actually a logical argument, but rather a series of somewhat related statements (that happened to be true but didn't lead to any logical conclusion). But since it 'seemed true', or 'felt right in one's gut', it was accepted.

Zygote, I don't include you in that--I enjoy our discussion, and I'll get back to it later (I've got a lot of stuff I really need to get done today...)

Except Bernanke said all the same things when he was an academic and a professor of economics at Princeton and wasn't getting "sponsored" by anyone with a beneficial interest in having him say what they wanted him to say (the Fed doesn't work like this either btw).

The fact that you think someone saying the gold standard wouldn't work is "dumb/blatantly false," indicates to me you need to research a little about the history of the standard. I don't think you are aware it was an abject disaster in the period pretty much after WWI started.

I am not saying that Bernanke is wrong/right about the gold standard specifically. But he is a political figure, and because of that it's hard to take anything that he says seriously. Don't think that I'm unfair, I would advise everyone to take everything that Ron Paul says with a pinch of salt as well. Politics make everything horrible, you cannot appeal to a wide audience without constantly making hypocritical or dumbed-down statements. My point is, there can be a good reason to criticise Bernanke, it is not necessarily like donks criticising Phil Galfond. Though it still could be the case I guess.

As for the gold standard, you are right that I am not too familiar with its history or arguments for and against it, but I am not so sure that you are either, and it certainly seems a reasonable way to look at it that the disaster was not the gold standard but failure to stick to it. When Germany went off of the gold standard, they ended up in hyperinflation. Which one was the problem here, the gold standard or fiat?

Germany had hyperinflation because they lost World War 1 and were forced to pay massive reparations to France as part of the Versailles Treaty. This led them to devalue their currency, cutting off their own nose to spite the French, economic scorched Earth. The victors France and England were also off the gold standard and did not experience hyperinflation... because they won the war, imo. Note had they all been on a gold standard Germany would still have been ****ed as they would have to pay the reparations with almost all of their gold.

I'm not going to say I'm an expert, but the research I've seen shows this is flat out wrong. One of the reasons the US ended up in depression was the Fed tried to stick to the standard. Recovery in the US only began when the Fed abandoned it. AC pointed why Germany ended up in hyperinflation. One by one countries stubbornly tried to stick to the standard and each were forced to abandon it. The research shows that those countries that stuck to it the longest ended up in the deepest depressions and had the longest time till recovery.

Fixed exchange rate regimes (of which the gold standard is a part) always fail the moment the moment there is the slightest hint that the country will not be able to maintain the peg, which happens pretty much any time there is an economic downturn. Governments often stubbornly fight devaluation b/c its a political landmine and pretty much always make the situation ten times worse when they are eventually forced to devalue. Argentina in 2001 is a good recent example (that same thing has happened to them like 5 times in their history and no one learns)

As far as I can tell, it can only happen if too much paper has been printed.

You know, maybe Bernanke is right and this argument about gold standard really is pointless. The real argument is about fiscal and financial responsibility and sustainability, and also about that rare thing called common sense. If governments have no discipline or common sense, reinstating the gold standard will hardly make a difference, because it will just be set on a path of erosion again, and disappear again one day. And if governments had discipline and common sense, fiat would be perfectly OK too.

Then again, maybe having hard-coded rules like the gold standard help to preserve discipline a little bit. Maybe having hard-coded rule like NEVER EVER DRINK ALCOHOL helps an alcoholic stay off the booze. Even if there is still a chance that he will simply disregard the rule one day, perhaps it is a little bit less likely.

No. Prohibition got Al Capone and a huge crime wave in the middle of the Great Depression. Having a gold standard would be similar. Post WWII, the US was printing more money than was backed by gold. It wasn't public knowledge, it was clandestine. The french got wise. They started demanding their ounce of gold for every $35 they had and there was no way that the US could give it to them without emptying the vaults. This is why Nixon had to get off the gold standard.

Just because there is a gold standard doesn't mean that a central bank isn't going to just print their way around it.

Close.

A gold standard does not stop banks from accepting securities to give out "money" for it.

A fixed money supply is an obsolete idea.

I think this post from Pater Tenebrarum's "Acting Man" blog does a nice job of summing up Bernanke's numerous and significant failures.

The whole idea of a "gold standard" as defended by most free market advocates is the idea that there should be competition on money. That's why I put gold standard in quotes because while it's a likely outcome that gold based money will come out ahead (due to gold characteristics) it is not neccessary.

In essence what gold standard advocates (not all but many) want is competition in central banking or I guess decentralize central banking, and a resulting currency that wins out in the marketplace. Most belive a commodity backed currency would win out.
Said winning currency could be challanged by any new currency at any time.

It would (maybe?) be great if one currency wins out in the marketplace. However, historically that didn't happen. From the SF Fed's website on the history of money: "By 1860, an estimated 8,000 different state banks were circulating "wildcat" or "broken" bank notes in denominations from ½ cent to $20,000". The number of currencies that were in circulation was higher than that even--I remember (though don't have time to find) that the Federal reserve claimed in a video that a Drugstore issued currency.

So you can definitely get competition in currency. If there is a winner, it can definitely be challenged by others (from the previously mentioned competition). However, historical evidence shows one currency wouldn't win out. And with technology today, it is probably easier to start a currency, and arguably easier to keep one going. I just don't see a single currency emerging.

I think in the age of the internet it'll play out a bit differently. Information travels very fast these days...probably a lot easier to run a fraud bank in the wild west without anyone knowing for a long time.

I do a agree that it is very possible we'll have a bunch of currencies but I don't think that's bad as long as fraudulent ones are weeded out efficiently. I mean if there's gold in one guy's vault and platinum in another guy's vault I could care less. I also don't care if a drugstore issues its own currency as long as it's transparent, easy to see if it's fraudulent and I can convert other currencies in a transparent manner...if that's not the case that store is very likely to lose my business.

I mean I'm a computer science guy so decentralized stuff is what I tend to favour.

I know the cite talked about fraud, but my point was more that there were a huge number of currencies in existence. Obviously some will be fraudulent, and the internet can (probably) weed those out quicker (but does it really matter? If there's bad currency out there, it's just a game of hot potato). Point was the 10,000+ currencies in existence, and whether things would play out any differently now.

I think you mean couldn't care less . I sort of disagree with that though. Not that one is backed by X and the other by Y, but if in my day-to-day dealings I have to be prepared to deal in thousands of currencies , worry about price fluctuations (after all, to convert from a random currency to my preferred one I need to find someone to trade with) and other things I'm probably not thinking about would be huge headaches and likely pretty costly, even with the internet. I am reminded of people complaining that on a train through europe (before the Euro, of course) that they had to exchange their money when they entered a new country, since the train only accepted the local currency which depended on which country they were in.


But again, that's not the issue. That's just an example to show that currencies can and did come from everywhere, so there's almost no limit to the number of currencies one may have to deal with. Or, if you're a business and don't want to handle certain currencies, then you're just giving your headache to the consumer (who may decide to go elsewhere). So please don't focus on the fraud or who exactly issued the currency or if they're trustworthy. For the sake of this discussion, I'll grant that all currencies are sound (I mean non-fraudulent). The point was the vast number of currencies. It seems like it's *almost* going back to the barter system.

I think transaction costs will be sufficiently low. I'll just use my magic debit/credit card and it autoconverts. I'll have an app to double check if I like the conversion rate.
If that's too much hassle for too many people...I'm fairly confident larger scale currencies will arise.

In fact that's exactly why something becomes a money in the first place (unless it's brought into existance by law). It has some value as a consumer good but also some value for conducting trades (divisible, doesn't rot, storable etc. pp). Low transaction costs are part of what makes something a good money candidate.

I think ignoring the fraud issue when discussing the "there were thousands of currencies" is a mistake. The reason so many currencies existed might very well have been because people tried to commit fraud by launching their own currency or because they didn't trust other currencies (because they expected them to be fraudulant)

Electronic, you have a point. Physical paper, no. My issue wasn't knowing conversion rates or looking them up (though that's a cost too, even if it is quick to look up), it's what happens before the transaction--needing to have change for all these different currencies and after--physically having these different currencies and dealing with them. Those costs are necessarily borne by somebody.

Again, history. What's so different now? Why would you expect something completely different from what happened in the past?

So out of the tens of thousands of currencies there were thousands of currencies that wound up being fraudulent. Some may have started that way, some may have become that way. That doesn't address the tens of thousands of currencies that were started for NON fraudulent reasons (and weren't fraudulent).

Well my hope is that people will get sick and tired of our lolbad financial system eventually. It's a pretty naive hope though.

As far as physical money goes...I think that's a pretty outdated concept. I'm favouring a strong crypto, anonymous electronical and commodity backed currency.
Once again pipe-dreamy for lots of resons (tax evasion 11!ONE!, people are very unlikely to ever give up physical currency)

I like to scifi-daydream though. Technically even multicurrency systems with physical currency could be possible if you'd just put some chip inside the money (I'm thinking NZ style polymer money) which can be read and shows that some vault entry in this domination exists or something.
(obviously if you claim lots of currencies people will just do other stuff regardless)

I think I need to collect and systemize my thoughts on the topic a bit though. Money isn't really a topic that interests me all that much (somewhat atypical for an Austrian I guess) aside from having some ideas about it and the basic issue of lol-monopolies.

The (typical) line of argument "monopoly works reasonably well, non-monopolies looked kind of crazy in the past -> let's keep the status quo" is very offending to my sense of aesthetics. That's probably the best way I can put it.

I tend to agree with you, here, for several reasons. Before I get into those, instead of the word "print" what word would you use instead?

I think that a problem inherent in lending against assets is commoditizing and capitalizing those assets in terms of currency. The dollar amount of all property in the world far exceeds the actual amount of currency in circulation. Therefore, as banks make more and more secured loans against various kinds of property, they are going to need more and more currency. The problem really comes when the loan payments can't be made. Which leads us into a discussion about bad debts infesting a mature economy and the collapse that inevitably ensues.