Returning to the Gold Standard is a Return to Lunacy

Rand Paul and his father, Ron Paul, have many quotes and attributions stating they favor returning to the stable economic days when the United States backed all of its currency with either gold or silver.

I think before anyone jumps on this bandwagon to CrazyTown, we need to really examine the Gold Standard.

Gold and silver are like many things, they are commodities. Commodities have value because we, people, specifically brokers, assign those things "value." For example, we could use sand for currency, but that would be a bad idea. Sand is pretty much ubiquitous. For sand to have any value, sand would have to be protected, isolated, and sequestered in order to control the scarcity of sand. If everyone had sand, then sand would have very little value. If we control the amount of sand, then we control the value. We control the scarcity.

In 1805, the United States had considerable debt from fighting with the British. Gold and silver were in high demand since the U.S. didn't have the gold or silver to pay debts. People hoarded gold and silver as they saw the value go up. I'm sure some people even speculated in gold and silver, thinking that as long as the U.S. had a debt, the value of gold and silver would continue to climb.

Thomas Jefferson, in order to inflate the value of silver, told the government presses to stop minting silver coins. Scarcity drove the value of silver higher, and the market was manipulated by controlling the government minting of coins.

In 1857, more "manipulation" occurred as the U.S. struggled to find gold to buy more silver. Silver had become the preferred currency among countries for doing business. The hunt for gold created the Gold Rush and people headed West to discover sources of gold that could be sold to the government. The government would then use the gold to buy silver. The silver would then be used as currency by our country to pay debts to other countries.

Again, people would hoard gold and silver, as the demand for each metal would rise and fall, depending on what the United States needed to pay its debts.

World War I would come along and force countries to examine how to pay for war needs. European countries were boxed in, not having enough gold or silver to use in order to buy weapons. Some countries had already abandoned the Gold Standard. Others countries, to pay for World War I, went off the Gold Standard in order to run up some debt to pay for war supplies.

And therein lies the rub. Countries needed financial flexibility in order to pay for stuff they could not afford without incurring some debt. Having to constantly maintain a physical store of gold/silver to pay for stuff was very limiting.

Around the turn of the 20th century, most countries either had a Central Bank or were thinking about developing a Central Bank. A Central Bank would establish the value of paper currency, and control the amount of paper in circulation, thereby controlling the value of currency.

Essentially, a transference of value has taken place. Gold has no more value than that which we give it. It's really an arbitrary and artificial value. So the same for paper money. But, paper money is much more easier to come up with than gold or silver. More on that in a minute.

Value is Faith.

People around the world trust the value of the U.S. Dollar. And the value of the English Pound. And the value of the Chinese Renminbi. And the European Euro. They trust these currencies because people have faith that these currencies will be traded and accepted.

Now, more things about the Gold Standard to think about.

In order for Rand Paul's Gold Standard to work, he has to be able to control the supply of Gold. Again, supply is tied to value, and value is tied scarcity. If gold is commonly available, then gold cannot be worth very much, i.e. gold is not scarce.

When the U.S. was on the Gold Standard, personal gold was against the law. The average U.S. citizen could not own more than 4 ounces of gold. We can't have everyone owning gold, if gold is the Standard. In order to control the amount of gold in circulation, Rand would (a) have make the ownership of gold illegal, (b) and collect the amount of gold already in circulation. People must not remember that only after 1972, when Nixon finished off the Gold Standard, was the ownership of gold really made legal.

Gold markets can be manipulated just like any other market. Suppose China decides to flood the market with gold to undermine the value of U.S. gold value. Or Russia. Simply moving the U.S. to a Gold Standard does not make the U.S. financials immune to manipulation.

All countries currently use a Central Bank or Banks for moving currencies around. Germany, France, England, Italy, all have Central Banks. These banks keep money markets stable. While they may not seem stable now, markets could be much worse. All countries Central Banks know how to deal with financial markets, how to conduct country-to-country business. That is our global standard. Moving backwards to a Gold Standard would mean that all countries would have to figure out how to work with our finances. Not as easy as it sounds.

Furthermore, the U.S. is the world's most powerful economy. It is our currency against which oil is priced. If someone really wanted to upset global financial markets and create worldwide chaos, let him destabilize the current U.S. financial markets by changing all the rules of finance.

Gold and silver are also valuable commodities in the technology sector. Consider your smartphone, your laptop, your LCD monitor, every bit of technology you can think off. These devices contain precious metals, gold and silver, among them. How will changing the economy of gold and silver affect the cost of production of the most ubiquitous devices in human history?

In summary:

1. Ask Rand what he thinks about all other countries still using Central Banks. Will they have to return to the Gold Standard, too?
2. Ask Rand how he plans on controlling the supply of gold, and maybe silver. Will he make personal gold ownership illegal?
3. Ask Rand how he feels about manipulating the price of gold, and how that might affect the cost of materials in the Technology Sector.
4. Ask Rand how the Gold Standard is supposed to make financials more stable when historically the price of gold has undergone several manipulations.

The Complicated Geography of Labor

 

Americans are an ignorant lot. Though pained to state this, I believe that by-and-large Americans are pretty ignorant. Ignorance does not mean “stupid,” ignorance simply means, “uninformed.” Lest you think I am above being ignorant myself, I am not. I realize I am ignorant, though, and the more I learn the more I realize the depths of my own ignorance.

Americans are becoming more ignorant, I fear. Despite the increasing prevalence of technology in our lives, we are becoming increasingly fragmented in our knowledge. The Internet allows us entry into an enormous world of information. Sort of. Sifting for Truth on the Internet is very much like searching for a precious item in a New Jersey landfill. And, what is “Truth,” anyway. Let’s avoid that debate.

Politicians, and Corporations, deliberately or unwittingly, take advantage of our ignorance. Our lack of knowledge works to their advantage, and against ours. Also, our politicians are not immune to being ignorant or vacuous. Many of them seem to lack wisdom to truly understand dilemmas faced by the United States, especially when it comes to Unemployment, Employment, Labor, and Education.

As a result of their lack of knowledge, wisdom, or, perhaps, malevolently they hide their knowledge knowing that they can leverage the ignorance of their districts of their own benefit, politicians pander to Americans, furthering economic myths, and establish bad economic policy.

Here is an example of what I mean by saying “politicians pander.” A politician who says, “We need to bring jobs back to America,” might illicit a nice response from his constituency, and people will rally around a politician who proclaims that the “government needs to protect American jobs and punish those companies that move manufacturing to other countries.” This is pandering, potentially bad economic policy, potentially bad for America, and bear with me and I will explain why.

For this essay, my focus is manufacturing. Specifically, shoes. I am really discussing Globalization – the interconnectedness and dependence among various people, places, things, and ideas driving global development. But I want to couch my discussion of Globalization in terms of shoes.

For the record, I do not view Globalization as a good thing or bad. Guns are neither good nor bad; their use can be used for good or ill. Same as money. Money can be given to charity, or used for buying drugs, or people. Question the motives of anyone who says “globalization is _____” (bad / destructive / harmful / etc.) That person has an agenda and is distorting information for his/her own purpose.

Let’s get started.

Nike’s international headquarters is located in Beaverton, Oregon. In 2010, Nike made $19 billion in gross profits from its different business ventures. Nike has over 30,000 employees working in 160 countries. Including their suppliers, shippers, and retailers, Nike employees over 1 million people world-wide.

Nike does not make shoes, per se. Nike designs shoes. Nike sells shoes. Nike markets shoes. Nike contracts with factories around the world to build their shoes. Nike does not own the factory. Nike simply finds a shoe factory, perhaps in Brazil, China, Viet Nam, and contracts out the job of building the shoes. Nike may help find the raw materials for building the shoes. Nike might assist in finding rubber from Malaysia. Find cotton from France, or the United States. Locate leather from Brazil or Argentina.

Nike does not hire the labor that works in the shoe factory. Those workers are hired from local pools of labor by the managers of that shoe factory. Those local workers need employment and are willing to work. Willing to work for $5-$10 per day. Those workers do not protest for vacation days. Generally. Those workers do not protest for health care, for dental plans, for eye care. Those workers do not protest for retirement plans. That is the fact on the ground. For the time being. We may see changes in labor in Southeast Asia over the next 5 years or so.

Yes, yes, you say, you know that. People work for 1/10th of the wages of an American. In the U.S., our Minimum Wage is $7.25 per hour. The minimum average wage in Viet Nam (2009) was $1 per hour for an 8-hour day.

Now, place yourself in the shoes of a business owner. You are going to pay the same transportation costs as your competitor. You are going to pay the same raw material costs as your competitor. Those are economic truths, not my truths. Raw materials like cotton, leather, rubber, etc. are traded on global markets. The global markets determine those prices. You and your competition, Reebok, Asics, New Balance, will be buying from the same pool of resources.

You can try to find better labor costs, however. If you were building shoes in the U.S. you were paying one employee $54.38 per day to build shoes. In Viet Nam, you could pay almost 7 workers for one day’s work for the same job, and arrive at the same product, with 7x’s as many shoes. And, as the case is, those workers are not yours, you do not have to worry about them. Remember? You are contracting with a factory in Viet Nam. You will pay that factory based on the shoes produced. In turn, that company will pay workers.

 

Your U.S. workers will cry “foul!” and complain, and protest, and picket your office.

You, on the other hand, will still employ people, designers, engineers, chemists, advertisers, salespeople, lawyers, accountants, etc. Plus, you will also indirectly employee people around the world. In other words, skilled employees that make decent money.

People who buy your shoes will be happy because they will still be able to afford to buy your shoes because you have managed to control the overall cost of your shoes.

Consumers, you and I, push companies to relocate to find cheap labor. When we buy devices, clothes, and shoes at Wal-Mart, or Target, or CostCo, we are telling Nike, Reebok, Levi, Lee, Magnavox, etc., we want cheap clothes and cheap electronics.

By preventing the movement of manufacturing jobs abroad, the cost of our clothes, shoes, DVD players, iPhones, Droids, XBoxes, LCD TVs, will all go up.

“Yeah, but paying people high wages to assemble that stuff will put money in their pocket to buy those things!”

No, not really. Remember the cost of paying those American workers is going to be passed along to us, the consumer. If a company could save 90% of its labor costs by shifting the production to Viet Nam, and chooses not to, well, that is not really in the interest of the company, is it? That company is not maximizing capital, human capital, therefore not acting efficiently. The costs of labor will be passed along to us, the American consumer. Prices will inflate to match the increased cost of labor, thereby putting these devices, clothes, etc. out of reach of many people aka The Middle Class.

Another bad side effect is Inflation. If wages did go up, then companies tend to increase prices. Companies feel people can afford to pay more, since they are making more money. And, another economic “law” is that as the amount of something goes up, its value goes down. Put more dollars into circulation, the value of a dollar decreases and what you can buy with that dollar goes down.

Goes like this: Say all Americans gets a 20% pay increase. Sounds good, right? Wonder Bread, seeing this, thinks, oh wow, everyone is making more money now. Let’s sell a loaf a bread for $1.20, instead of $1.00. Wonder Bread bumps the price of bread up 20%, not because their costs increased, but because consumers can now afford to spend more.

“No fair, that isn’t right! Wonder Bread just negated my raise because now my grocery bill just went up 20%! Government, you need to stop this!”

What are you, a Communist? Who are you to tell Wonder Bread how to run their business? What business is it of the government to tell Wonder Bread what they can charge for bread?

Maybe the good isn’t bread, it is a Blu-Ray player. Let’s revisit the earlier notion of passing along costs of production to the Consumer, you and I. For the sake of argument, consider from before the example of the U.S.-made Blu-Ray player versus an identical Blu-Ray player available from China.

The increase in cost of that Blu-Ray player from being made in the U.S. with U.S. wages now is $200 versus $150 for the China-made version. Now, if you are standing at Target, and two equal Blu-Ray players are shelved beside each other, and the U.S. Blu-Ray is $200, and the China Blu-Ray is $200, which one are you going to buy? You also think, if I save $50 I can go back and buy 5 of the Blu-Ray DVDs off the $10 rack.

History has already proven what Americans will do. That is why shoes are made in China, and TVs are made in China. In the 1970s and 1980s, Americans opted for the cheaper devices made in foreign countries over the same products made in the U.S.A.

“Yeah, the government opened up the trade floodgates! It’s the damned <insert political party here> fault!". They are the ones who destroyed manufacturing!”

Yes, you are correct. The U.S. government opened trade with China, and Japan, and Taiwan, and Singapore, and India, and Bangladesh, and wherever. And, you benefited. You ran right out and bought that LG LCD TV, that XBox, that iPod Touch, that microwave oven. Or, your parent’s did; or, grandparents. Doesn’t matter. Americans saw the value of the products, the savings they were able to achieve, and how they could better use their money for other things.

Let me get this straight: you would rather pay an extra $50 for that Blu-Ray player to keep an American employed? In other words, you want the U.S. government to place a $50 dollar tariff on the China-made Blu-Ray player so that the cost is the same? $50 is a lot of money. Are you sure you would do that?

If you answered “Yes,” then you are advocating for government involvement of Labor, which is primarily a platform of the Democratic Party. Are you a Democrat? Then, you are also advocating for tariffs to protect domestic economics, throwing a wrench into Free Market economics, and that is a Socialist tenet. Are you a Socialist?

Listen to the news, and listen to political pundits from all parties. Politicians speak from all sides of their mouths. They want to keep costs down, yet prevent jobs from going off-shore, yet want to reduce education spending that builds a healthier economy. Right …

And, Americans seem to want it both ways, too. We want cheap phones, and cheap TVs, and cheap cars, and cheap whatever. Yet, we also claim to want good, high-paying jobs. Well, remember folks, that someone has to pay for that high-paying job, and that someone will be you and I.

Americans need to be aware of the repercussions of their “calls to action.” Like “fix unemployment!” or the cry for “we need jobs!” That is why you need to stay awake in Microeconomics and Macroeconomics; this is where we learn about these topics. But most of us are like, “man, these supply and demand curves are freaking boring.”

Yeah, well ignoring those Supply and Demand curves allow corporations and politicians to work their magic at our expense.

And, ignoring your math class allows corporations and politicians to run a numbers games against Americans as our ignorance grows.

We have jobs, 3.5 million that have gone unclaimed.

Those jobs have gone unclaimed, in part, because Americans do not pay attention to educating themselves to the Job Vacancies or Employment Growth Sectors. We educate ourselves for stuff that sounds fun. Like “Sports & Leisure,” or “Journalism,” or “English.” There is nothing wrong with those degrees in and of themselves. The U.S. doesn’t need them right now. We need computer programmers, nurses, health care workers, chemists, engineers, database managers. Those are good jobs. High paying jobs.

Educated people will always have a distinct advantage over those that have fewer skills or lack formal education.

As the Election Season begins, we will have to listen hard and well to sift through the BS from all sides. Take nothing said by anyone for granted. Do not fall victim to Confirmation Bias, believing what you hear or read from people who seem to think as you do. That is borderline Fascism.

Question.

Technorati Tags: education,unemployment,nike,reebok,globalization,democratic party,republican party

Thoughts: Tea Party v. Federal Reserve Banking System

The Tea Party has some good ideas. Eliminating the Federal Reserve is not one of them.

People blame the Federal Reserve Banking System (FRBS) for such things as devaluing the dollar and causing the Great Depression. People actually do those things, through their misguided notions of trying to help - not the FRBS. That is like blaming the gun for killing people, not the people holding the weapon.

Americans have a dangerous form of myopic ignorance. First, we don't really understand governing processes very well. To compensate, we listen to allegedly smart people to tell us how we should think. These politicians, or WannaBe Politicians, get people worked into a lather, based some some truth, half-truths, and lies. The Tea Party is fomenting ignorance about the FRBS and advocating for its abolition. Second, not only do we not understand our own governing processes well, we do not understand the relevance of these processes to the Global Economy. I call these the Downstream Effects. Dump your garbage in the stream and who cares about the effects of your actions downstream.

Besides controlling monetary policy within the United States, the FRBS also engages with other countries. The FRBS is how countries pay each other for services or products rendered. Yes, that's right, that is how the United States buys and sells things on the global market. I'm not talking about Wal-mart, or IBM, I am talking about the money that the U.S. borrows from other nations to meet our own budget needs. Elimination of the FRBS throws uncertainty into the balance of payment equation as countries no longer understand the value of American currency.

People also need to understand this, too. Most all other developed nations, Japan, China, Russia, Germany, all have their own Central Banking System (CBS). These CBSs pretty much work the same way our FRBS works; controlling the money supply, interest rates, etc. Thus, not only does the United States have Fiscal Management Policies centered on a CBS, but all of our trading partners do, as well. Again, by going our own way, other countries now no longer have a basis of valuing American currency. Our trading partners expect and anticipate that everyone essentially operates in fundamentally the same ways, by the same set of predictable rules.

Consider this allegory for a moment. Imagine that each of our 50 States has its own currency. As long as each state operates by the same rules for circulating currency, each state understands the value of its own currency, and the currency of surrounding states. That is not to say that the values are equal. A California dollar may be of higher value than an Idaho dollar, or a Kentuckiana dollar may be more valuable than a Tennessean dollar. Exchange rates would be tabulated each day so people and businesses would know the differences in value. But, the market rules would be the same across the board. Now consider what happens when Kansas decides to eliminate Corn-backed monetary policy and instead impose a value based on Faith and the amount of Kansas dollars in circulation. People, being familiar with currency backed by some commodity, would have no idea what the value of the Kansas dollar might be. The Kansas dollar could become worthless, making life miserable for Kansans. The Kansas Government could peg the value of their dollar to the California wine-backed dollar, thereby saving the value of their currency. Kansas changed the rules for its currency. Our American lives are much better off that the individual state currencies alive before the Civil War did not survive after. Change the rules of our National currency has the potential of ruining the Global Value of our currency.

Another caveat to toss out: in order for the dissolution of FRBS to work, ALL OTHER COUNTRIES WITH CBS MUST DO THE SAME. Ron Paul-R (TX) states this in his book, "End the Fed," but states it in passing. All countries must agree to allow their currencies to float in the same way U.S. currency would float, or the process immediately fails, the American currency then becomes worthless. Now, what is the likelihood of all countries trashing their CBS in favor of free-floating currency. About the same as Satan converting to Catholicism, I'd wager.

Next, for our currency to have any value whatsoever, our money must be backed by something other than Faith (which it is essentially backed by now). That means returning to a precious metal supported monetary framework, like Gold. Again, another problem arises. In order to maintain the value of Gold, that means control of the Gold Supply. All Gold mines in the United States must then become wholly-owned, nationalized, by the government. Private ownership of Gold would also be severely restricted. In 1933 & 1934, in order to control the Gold supply, Executive Order 6102 required all people to sell their gold to the United States Treasury at a fixed price. Only since 1975 have Americans been able to legally own gold beyond a wedding ring.

Allowing U.S. to be backed by a precious metal and managed by market forces may seem like a good idea.
Actually, to me, this is a horrible idea. I should say, to the inattentive it may sound like a good idea. Or to those that are frustrated by current events, the removal of the FRSB may seem like a good idea.

The problem is that proponents, the Tea Party, especially Ron and Rand Paul, do not adequately describe the pitfalls of FRBS dissolution. I can only assume these proponents fall victim to Downstream Ignorance. They only see current events through a very small "lens" lack perspective regarding the repercussions of their ideas, and either have not fully explored all effects or simply do not care.