Teach Kids 'Financial Responsibility' Not Debt

[Gear300]

"As good as gold." - Charles Dickens
"You cannot teach debt to children." - anon​

So I read not too long ago a bit on the debate on returning to the gold standard during the Reagan administration and the issuing of gold bonds by the Treasury. Then I began questioning the nature of the gold market. Pegging the price to gold would weigh the dollar on a gold market which would have its own volatility. Was the intention behind this gold market strictly supposed to be a "private US Treasury market" not exposed to gold bought and sold in other markets, like for phones and stuff? Where was the price and longevity of gold coming from?

 

[Trysse]

Just heard this Podcast about the Gold Standard. Found it very interesting and it gives a quite differentiated but still compact discussion about the topic.

https://www.bbc.co.uk/programmes/m0013hh7

 

[BWV]

The history of industrialized economies under gold standard contains far more severe downturns than the modern fiat era. No mechanism exists for tapping the credit of the sovereign other than an international fight over the fixed gold supply. This lead to sever deflations that wiped out banks and impoverished working people ,not just in the 30s but also 1900s and 1870s. The Song Dynasty issued the first fiat currency which worked great initially, but then the government began abusing the printing press, China switched to a silver standard which under later dynasties exacerbated its economic backwardness. Fiat beats gold due to its flexibility and ability to smooth out economic disasters like 2008, with the caveat that fiat depends on the creditworthiness of the sovereign issuer - money is just another form of debt.

 

[f95toli]

Where was the price and longevity of gold coming from?​

Because it is relatively rare and shiny. As far as I am aware, gold was of very little practical use until the 20th century where thin films started being used in (mainly) electronics. Before that the high price was due it being a desirable, rare, luxury good which made it into a status symbol. That is, it was expensive because people thought it it should be expensive....
As with every other valuable item, the value stems from the fact that people assume that they can if they so choose exchange it for something else they want. That is, it has to with with trust.
If everyone one day collectively decided that gold was ugly and not desirable, the price would drop very sharply.

The fact that some people seem to think that gold (or anything else) has some sort of "natural" intrinsic value is one reason for why discussions about gold standards often ends up being quite silly,

 

[Gear300]

I take it that the relative value of any currency is prorated by the country's gross national product GNP?

 

[phinds]

If everyone one day collectively decided that gold was ugly and not desirable, the price would drop very sharply.

Your general idea is of course true, but it's not nearly as true for gold, specifically, today as it once was. Gold is, as you said, highly utilitarian today, in electronics.

 

[phinds]

I take it that the relative value of any currency is prorated by the country's gross national product GNP?

Not even remotely. The GNP of the U.S. is about 50 times that of Switzerland, but the Swiss Franc is roughly as trusted (and has the same value) as the US dollar.

 

[phinds]

The fact that some people seem to think that gold (or anything else) has some sort of "natural" intrinsic value is one reason for why discussions about gold standards often ends up being quite silly,

 

[f95toli]

Your general idea is of course true, but it's not nearly as true for gold, specifically, today as it once was. Gold is, as you said, highly utilitarian today, in electronics.

Indeed, but from what I understand only about 10% of the gold produced annually is used in industry. The rest if jewellery and investments.
It is true that gold is used in nearly all microfabricated circuits. However, the amount (in weight) used in each chip is tiny; typical film thicknesses is something like 10-100 nm (depending on application) meaning even if you cover a whole 200mm wafer you are only using a few tens of micrograms. A typical wedding ring would be enough for a LOT of CMOS circuits.

 

[BWV]

I take it that the relative value of any currency is prorated by the country's gross national product GNP?

no, it depends on the country's credit. Money is debt and government debt is a claim on future tax receipts. Argentina GDP is higher and grows faster

 

[BWV]

Indeed, but from what I understand only about 10% of the gold produced annually is used in industry. The rest if jewellery and investments.
It is true that gold is used in nearly all microfabricated circuits. However, the amount (in weight) used in each chip is tiny; typical film thicknesses is something like 10-100 nm (depending on application) meaning even if you cover a whole 200mm wafer you are only using a few tens of micrograms. A typical wedding ring would be enough for a LOT of CMOS circuits.

the caveat being that new gold production is less than 2% of the circulating supply. Almost all of the gold that has ever been produced remains in circulation

 

[MinorFret]

Was the intention behind this gold market strictly supposed to be a "private US Treasury market" not exposed to gold bought and sold in other markets, like for phones and stuff? Where was the price and longevity of gold coming from?

I tried to start answering this question, but it's really very complicated. You might say we already had and still have a private US treasury market since most buyers of debt are (as far as we know) private entities (the US congress doesn't buy treasuries). The federal reserve is a bank. It has congressional oversight but so does everything else ultimately. But it does have a different mandate than an ordinary bank. So maybe this would indicate a dominant public component to the treasury market. Also, you can't have a buyer without a seller so the addition of new debt via government spending is needed to keep the supply of treasuries from slowly drying up as they're paid off over time. So what is a "private US treasury market"? I don't really know what that means.
If you mean that US gold producers could control the value of the dollar by choosing not to mine as much gold, this doesn't seem likely. There are many producers of gold around the world and if it goes up in price there are more than enough other sources to fill the demand. Perhaps some short term manipulation may have been possible (enough to make a few people rich) but as a long term scheme to control the economy, it probably isn't feasible.
The London over the counter market, the US futures markets and the Shanghai gold exchange apparently account for 90% of global trading volume in gold. So these three places would have a controlling influence over price relative to some artisanal mining operation somewhere in Africa or Indonesia or even industrial demand for things like cell phones since so little gold actually gets used in those applications.
The price for gold is largely a matter of custom but it may also be a matter of survival. On a small scale it's influenced mainly by how much money people have to spend and how badly they want something. In this case it was gold futures traders that set the price based on their sense of where the market's animal spirits were trending. If inflation is going up then they trade dollars for gold. Increasing inflation can be a sign of a thinning market. Only relatively wealthy people have money to spend so they become the primary influencers of market price. If the thinning continues the market can collapse, political turmoil can result and gold and shotgun shells become more valuable. People's faith in the future of the economy, their confidence in investing in it will dry up. They might seek to put their money in other parts of the world where business isn't denominated in dollars. So dollars get cheap. If the US dollar is in trouble though, this usually means bad things for the rest of the world since the US economy is so large. So there may be no better place to go than gold. There are other possible causes of inflation (chiefly, runaway government spending). There are cases where commodities prices all rise due to inflation, but gold can rise due to dangerous scenarios like this even if it becomes clear that the economy is going to tank or has tanked. Gold prices went up dramatically during the great depression.
So to go on for so long, but it is complicated. There might have been some scheme to try to exert control over things in some people's minds. But it isn't likely to have worked for very long if at all. I think in the case you're citing it was probably just politically motivated by people who liked how a gold standard sounded. Fiscal conservative types. Probably they were just naive.

 

[Hornbein]

Also, you can't have a buyer without a seller so the addition of new debt via government spending is needed to keep the supply of treasuries from slowly drying up as they're paid off over time.

Suppose the US gvt. had a balanced budget. The thirty+ trillion in debt would still exist and would likely never be paid off. It would be "rolled over" instead, with new bonds sold as the old bonds were retired.

 

[MinorFret]

No, I think it would be paid off. If we had a balanced budget long enough and continued to make payments on the treasuries, they would all only last another 30 years at most. That's how they work. Also, I'm assuming you and I mean the same thing by "balanced budget". Under a balanced budget, spending is funded by taxation, totally. There's no need to keep issuing new debt. The question is would be it be possible to have a balanced budget and still do all the other things we want to do? I think it will be eventually, I just think it will require a lot of political growth that is currently unlikely, though that could change. I don't think there's anything intrinsically wrong with revolving debt as long as interest rates can go to zero (or at least close to it). Why should I have to pay a bank so much money? A simple fee should suffice. After this last hiccup with covid I think interest rates will (eventually) resume their downward death march as reality continues to assert itself. Gold has put in an epic double top. I wouldn't be a buyer. Miner threat? Also, jewelry probably also contributes significantly to the price of gold. I didn't realize how much was used for that purpose (what with me being a subsistence researcher and all).

 

[jbriggs444]

There's no need to keep issuing new debt.

"Need" has little or nothing to do with it. No matter how much you spend, the voting citizenry always wants more. No matter how little you tax, the voting citizenry always wants less. The party that can pander to this has an edge. We vote and govern based on sound bites, not on the big picture.

Politicians are very good at manufacturing needs for that which they are in a position to provide. The last time I remember that the U.S. claimed to have balanced the budget, the result was like a dinner bell attracting a renewed spending frenzy. The press does not maintain focus on a problem long enough to keep it solved.

 

[BWV]

No, I think it would be paid off. If we had a balanced budget long enough and continued to make payments on the treasuries, they would all only last another 30 years at most. That's how they work. Also, I'm assuming you and I mean the same thing by "balanced budget". Under a balanced budget, spending is funded by taxation, totally. There's no need to keep issuing new debt. The question is would be it be possible to have a balanced budget and still do all the other things we want to do? I think it will be eventually, I just think it will require a lot of political growth that is currently unlikely, though that could change. I don't think there's anything intrinsically wrong with revolving debt as long as interest rates can go to zero (or at least close to it). Why should I have to pay a bank so much money? A simple fee should suffice. After this last hiccup with covid I think interest rates will (eventually) resume their downward death march as reality continues to assert itself. Gold has put in an epic double top. I wouldn't be a buyer. Miner threat? Also, jewelry probably also contributes significantly to the price of gold. I didn't realize how much was used for that purpose (what with me being a subsistence researcher and all).

How would gov debt be paid off with a balanced budget? The gov just makes interest payments, it would have to come up with additional funds to pay the principal amount at maturity?

 

[Vanadium 50]

One of the items of the US budget is paying off maturing Treasuries, so I fail to see how a balanced bydget leaves the debt intact (with any reasomable definition of "balanced:)

Granted there are 30-year trasuries and 50-year savings bonds, so this doesn't happen overnight.

I also fail to see how this connects to the gold standard. The US had some high periods of debt while still on the gold standard.

 

[MinorFret]

"Need" has little or nothing to do with it. No matter how much you spend, the voting citizenry always wants more. No matter how little you tax, the voting citizenry always wants less. The party that can pander to this has an edge. We vote and govern based on sound bites, not on the big picture.

Politicians are very good at manufacturing needs for that which they are in a position to provide. The last time I remember that the U.S. claimed to have balanced the budget, the result was like a dinner bell attracting a renewed spending frenzy. The press does not maintain focus on a problem long enough to keep it solved.

If you can't pay your obligations through taxation then you do need to borrow to avoid default. That's all I was saying. It's not clear that to me that the electorate will always want more to the extent that it will require continued borrowing...forever. We could reach a steady state. But I understand your skepticism. In the meantime if they want more, and if they aren't willing/able to find the tax revenue to cover it, and if they can't haggle a better price for what they want, then we will need to borrow to avoid default barring some other innovation like say the trillion dollar coin idea (which may be worse than paying your debt in pennies).

I share your frustration with the short attention span theater press. But they have their own set of constraints to work under. I don't think politicians manufacture needs. I think people have needs that politicians, if they wish to continue working as politicians, pay attention to.
Good night Schultzy :)

 

[MinorFret]

I also fail to see how this connects to the gold standard. The US had some high periods of debt while still on the gold standard.

The original post speculated on the possibility of manipulation of the treasury market by the use of a gold standard. If I read it correctly. Then someone took issue with my claim (made while trying to deduce the meaning of a "private" treasury market) that new treasuries are required to sustain the treasury market over the long term. James Burke would be proud.

 

[Vanadium 50]

But Treasuries are an auction. If the "correct" rate is 4.5% and someone is "manipulated" to bid 4%, that's all they get. And they were willing to bid 4%, because they did.

But this still is at best only tangentially related to the price of gold. There is a schoolm of thought that the only true measure of value is gold - not silver, not oil, not real estate, not labor, not anything but gold. It might not be fair to talk about tinfoil hats, but this is definitely an extreme minority view.

It's aslo orthogonal to the issue of debt. (And if 1.0x the GDP is a problem, personal debt averaging 1.4x income is surely a bigger problem)

 

[MinorFret]

But Treasuries are an auction. If the "correct" rate is 4.5% and someone is "manipulated" to bid 4%, that's all they get. And they were willing to bid 4%, because they did.

But this still is at best only tangentially related to the price of gold. There is a schoolm of thought that the only true measure of value is gold - not silver, not oil, not real estate, not labor, not anything but gold. It might not be fair to talk about tinfoil hats, but this is definitely an extreme minority view.

It's aslo orthogonal to the issue of debt. (And if 1.0x the GDP is a problem, personal debt averaging 1.4x income is surely a bigger problem)

I think the idea was that if the dollar was pegged to gold and less gold got produced (or more got hoarded) then the value of the dollar would go down relative to gold and this would be a means by which goldfinger could control the economy. If the value of the dollar went down, then maybe more debt (treasuries) would have to be created than otherwise or else taxes would have to rise. At least that was my best guess as to the original post. It isn't realistic imo but many conspiracy theories (or just theories in general) don't meet that criterion.
And I don't think tinfoil hats would be too unfair. Goldfoil, however...
And I don't know if 1x the GDP is a problem (or 1.4x income). It depends on growth and policy and other stuff I don't know about. My personal debt is way bigger than 1.4x personal income. I haven't gone into default yet. If you mean new debt being acquired at a rate of 1.4 x income, then yes that's probably not sustainable for very long on a personal level.
I'm relieved to see the FED's treasury holdings are going down though.

 

[Vanadium 50]

Full disclosure - I use T-bills where most normal people use CDs.

I also notice that the OP disappeared 2 days after the initial post. "Toss a stink bomb and run"

I maintain debt and the gold standard are largely uncorrelated. The US has had periods of high and low debt when both on and off the gold standard. Is the debt too high? Well, one could argue back when Treasuries were paying essentially zero interest was the time to borrow.

I might argue that when times are good, it's the time to borrow because the rates are good, and when times are bad it's the time to borrow because the economy needs a stimulus, well, this is unsustainable. But what does that have to do with gold?

 

[MinorFret]

Full disclosure - I use T-bills where most normal people use CDs.

I also notice that the OP disappeared 2 days after the initial post. "Toss a stink bomb and run"

I maintain debt and the gold standard are largely uncorrelated. The US has had periods of high and low debt when both on and off the gold standard. Is the debt too high? Well, one could argue back when Treasuries were paying essentially zero interest was the time to borrow.

I might argue that when times are good, it's the time to borrow because the rates are good, and when times are bad it's the time to borrow because the economy needs a stimulus, well, this is unsustainable. But what does that have to do with gold?

I haven't thought much about this, but I would expect there to be more debt in the absence of a gold standard assuming you have a functioning central bank. So I'm saying here that I would expect a causal relationship, not just correlation due to the madness of crowds. Of course with economics it's hard to control for that.
If everyone enjoys the right to trade their dollar for a fixed amount of gold because they think gold is "the answer" and then this ability is taken away, they would naturally react to this by demanding more dollars (greater interest) to cover their perceived greater risk. That in itself is a proximal reason to suppose a correlation. Whether things actually played out that way would depend on the actual state of the economy. If economic activity was currency constrained then increasing currency (by reducing gold equivalence) would actually improve demand, supply, profits, tax revenue and then interest rates and debt could actually be expected to go down. If we haven't seen a clear historical correlation between the gold standard and debt maybe its just due to there being a diversity of opinion on where things actually stand.
The US left the gold standard in 1971 and certainly our debt has accelerated since then, so in the most general sense there is a correlation.
There's a lot of worry about the sustainability of national debt. So far it's been sustained. It might be interesting to consider the sustainability of no national debt. I think that would have been much less sustainable. And if this sounds reasonable, it becomes a question of what is the right amount of debt? And how do you gauge this?

 

[Vanadium 50]

It might be interesting to consider the sustainability of no national debt.

Can't happen. The governments revenue is not in time phase with its expenditures. The government must lend and borrow just to operate.

I would encourage you to look at the US Debt/GDP vs. time - lots of structure, not clearly aligned with the gold standard. Yes, debt is high today (on par with what it was in WW2) but the US went off the gold standard 50 years ago.

 

[Office_Shredder]

Can't happen. The governments revenue is not in time phase with its expenditures. The government must lend and borrow just to operate.

This can be handled with cash reserves (which the US has, the borrowing is not just-in-time borrowing to make sure they make payroll)

 

[Grelbr42]

The problem with gold is the same exact problem as with toilet paper money we use now. The government can and will and does manipulate it.

One of the major causes of the Great Depression was the US Fed playing jim-jam games with gold. Cite to Milton Friedman's financial history of the US. When gold was in short supply they were extra tight with it, pushing the price further up. And when gold supply was ample they were dumping it, pushing prices further down. This put a lot of pressure on banks, just as an example.

There were several other causative factors, all of them sourced at government. The problem isn't gold. Nor even specifically fiat money, though fiat money is pretty horrible. The problem is government hands on the economy.

 

[phinds]

The problem is government hands on the economy.

And what do you suggest as a viable alternative?

 

[Vanadium 50]

This can be handled with cash reserves

Sure it can be. But it won't be. Today we put our money in banks, not mattresses,

Further, it would take a legislative change, not just executive action, to do this.

 

[Office_Shredder]

Sure it can be. But it won't be. Today we put our money in banks, not mattresses,

I don't understand. Cash in a bank is exactly what you need to pay your bills. If you're going to hold onto a reserve of money for the purposes of paying outflows, you keep it in the banking system. That's how cash reserves work.

 

[Vanadium 50]

And what do you suggest as a viable alternative?

Zinc!

There was an idea that money was too important to leave to governments and thus crypto was born. I think it's fair to say that has its own set of problems.

 

[MinorFret]

Yeah, and that missed the point of what I was trying to say really anyway. The point is that people (myself included) freak out at the debt but it's fairly clear that we wouldn't want a zero debt (or zero spending) government. People who think they'd do just fine under such a scenario are generally out of touch with where their money is coming from. We can't go back to frontier days and most people can do without a lot of stuff they buy. So in the absence of government spending (and/or debt) things would deteriorate pretty badly for most people. So when thinking about sustainability of debt (an entirely valid question) it helps to calibrate by considering sustainability of no debt. I hate being in debt. But it's basically a necessity. The question is what's the right amount? And that's a political and economic question. What they used to call political economy.