“First they ignore you, then they laugh at you, then they fight you, then you win.”
-Mohandas Karamchand Gandhi


As gold holders with fairly comprehensive views of global monetary policies and central banking we were asked to comment about the first of four installations of Ben Bernanke’s lecture series at George Washington University, entitled “The Federal Reserve and the Financial Crisis”. Despite thinking the lecture was woefully incomplete, diversionary and oftentimes quite disingenuous, our initial reaction was to let it go. We think our anticipated macroeconomic outcome will be ignored and denied by public policy makers up until the time they are forced to adopt it and take ownership of it. The math and political expediency behind future inflation and hyperinflation are too compelling to ignore.

However, while our business is not to debate publicly, especially the Fed Chairman who must navigate multiple constituencies with various dissenting social, economic and political views, we take seriously false claims that serve to undermine our business. In our opinion the consensus view of the forces behind the general price level, borne from misconceptions about money and banking, is fundamentally wrong. Mr. Bernanke went out of his way last Monday to perpetuate that myth. (That the myth happens to be self-serving for central banks, including the Fed, and for the global banking system should not be dismissed.)

Mr. Bernanke’s lecture series is being delivered under the guise of reaching out to the public to explain better how central banks work and, we presume, promote the public good. This is an assertion we think is diametrically and obviously contrary to the facts. We have no idea whether or not Mr. Bernanke actually believes this yet determining that is not important. Most of the public believe central banks take the rough edges off unadulterated capitalism where greed, fear and inequitable resource distribution would dominate. We presume such must be the rationale behind very smart political economists saying very dumb things in public.

Chairman Bernanke promoted central banking, implied it is more powerful than natural economic functions, and spent quite a bit of time implying gold is a barbarous relic when compared to the nuances sophisticated monetary policies offer. Our business, as fiduciaries, is allocating capital based on relative value within the macroeconomic environment we see as likely. In our opinion Mr. Bernanke’s lecture last Monday perpetuated bad or unimportant data, implied impossible outcomes, and was quite self-serving in its conclusions. His description of history was incomplete, his extrapolations were baseless, and his arguments were quite weak. (Ultimately we believe Fed policy will migrate — or be suddenly reversed — to meet the consequences of its current policies.)

As we pointed out only a few weeks ago following Warren Buffett’s unsolicited gold comments, (“Golden Boy”), and in December 2009 following Nouriel Roubini’s assertion that a gold bubble was about to pop (“Roubini Rebuttal”), gold is simply money – a savings (not investment) vehicle, a means of storing purchasing power in a time of paper money dilution. That’s it. Central banks compete directly with gold ownership because they manufacture competing savings vehicles in the form of baseless paper money. For the past twelve years global wealth holders have been converting their savings from paper media of exchange (or financial assets denominated in them) to gold because central banks must dilute the purchasing power of their currencies to de-lever the global banking system. Has anyone asked why so many powerful people are going out of their way to discredit an inert rock? We think it comes down to maintaining power and control over commercial economies.

After professionally watching Fed chairmen cajole, threaten, persuade and manage sentiment in the markets since 1982, we argue this latest permutation is understandable, predictable and, for those willing to bet on the Fed’s ultimate success in saving the banking system (as we are), quite exciting. Gandhi’s quote above rings true. Gold is no longer being ignored and gold holders are no longer being laughed at. “The Powers That Be” have been fighting quietly in the markets for almost four years and they now seem to have begun a frontal campaign against gold. By our reckoning, the current and future shape of the global monetary system is at stake. Ben Bernanke stands at the highest bully pulpit defending the current regime.

Below, we address specific points the Chairman raised in his lecture last Monday. It was a…

Tour de Farce

Chairman Bernanke’s first lecture in the series included a long discussion of gold. This is as it should be because up until forty years ago global money was always backed in some way, shape or form with precious metals. Since 1971 the Fed and other central banks have been the monopoly issuers of their economies’ currencies which have not been exchangeable into gold. We will not spend time here recounting what we have already taken 150,000 words over the last five years to discuss; suffice to say US dollars and all the world’s currencies are backed by the full faith and credit of their treasury ministries and central banks, specifically backed only by their ability to print more of them. In this we truly trust.

The question before us today is: how many new paper currency units are necessary to secure banking systems and protect against deflation? To which we answer: probably somewhere around 15 trillion new dollars and about 75 trillion new dollar-equivalent currencies across the world. Within that context we can proceed with deconstructing the lecture.

The quotes below were taken from Ben Bernanke’s slide presentation. We take issue with the following:

BB: (Slide 6) “A central bank is not an ordinary bank, but a government agency.”

QB: As we understand it, a central bank is neither an ordinary bank nor a government agency. It is a privately-held for-profit bank (owned by its member banks, not funded with tax revenues) that has the exclusive power to print unlimited quantities of currency and take unlimited amounts of assets onto its balance sheet.

BB: (Slide 7) “All central banks strive for low and stable inflation; most try to promote stable growth in output and employment….Central banks try to ensure that the nation’s financial system functions properly; importantly, they try to prevent or mitigate financial panics or crises.”

QB: In the current baseless monetary system central banks actually create inflation and there is no other entity or economic dynamic that can create systemic inflation. (Increasing aggregate demand relative to supply does not create a sustainable increase in the general price level. Only an increase in the stock of money does.) That central banks may “strive for low and stable inflation” implies central banks strive for low and stable money printing.

Fair enough, but their consistent performance shows they do not abide by their objectives. In fact, they have been quite negligent. By maintaining easy credit within the banking system for decades, central banks promoted bank asset accumulation (and economy-wide debt accumulation) that would someday have to be serviced and paid-down with money that did not yet exist. Central banks would have to manufacture it. A cynic could argue central banks exist to help banks cover their naked currency shorts embedded in their assets (i.e. loan books).

As for financial panics, they can only arise from systemic credit deterioration. Systemic credit deterioration can only occur following a great systemic credit build-up. A great systemic credit build-up can only occur through the banking system, which the central bank regulates. Thus, trying “to prevent or mitigate financial panics or crises” implies central banks try to prevent their own contemporaneous negligence and then try to mitigate the consequences of that negligence through…money printing, which is necessary to offset credit deterioration.

BB: (Slide 8) “”In normal times, central banks adjust the level of short-term interest rates to influence spending, production, employment, and inflation… Central banks provide liquidity (short-term loans) to financial institutions or markets to help calm financial panics, serving as the lender of last resort.””

QB: By “normal times” BB is referring to a credit build-up in which the banking system creates and promotes its own assets in the form of credit, which is also systemic debt. The tertiary consequences of this process are the credit build-up’s impact on the commercial economy, including the levels of consumption, production and employment (and the general price level). Central banks provide systemic liquidity to financial institutions or markets but not directly to the commercial economy. Finally, yes, central banks are lenders of last resort; however, central banks do not advertise that they are also buyers of last resort. As we are witnessing today, the Fed is buying dubiously-marked assets from banks.

BB: (Slide 11) “Financial panics are sparked by a sudden loss of confidence in one or more financial institutions, leading the public to stop funding those institutions, for example, through deposits….Panics can cause:

• Widespread bank runs
• Restrictions on depositors’ access to their funds
• Bank failures
• Stock market crashes
• Economic contractions”

QB: Well, we would argue financial panics are caused by the realization by a quorum of the population that there is not enough money in existence to back outstanding credit. (What “sparks” the panic is of secondary concern.) BB’s implication is that financial panics and sudden losses of confidence are always unwarranted. We disagree. As for the consequences of financial panics that BB sites, please note access to depositor “funds” – not money. Over 80% of bank deposits in the US are not money but electronic credits. Money (bank reserves) would have to be created if all depositors wanted to withdraw their funds.

Further, by being the source of financial panics (through promoting easy credit conditions), and by listing economic contractions as a negative consequence of financial panics, BB is (properly) indicting central banks as the source of the “economic cycle” (in reality the credit cycle). So then, rather than titling his presentation “The Federal Reserve and the Financial Crisis” we think BB should have considered a more apt title: “How the Federal Reserve Caused the Financial Crisis.”

BB: (Slide 13) “Short-term loans from the central bank replace losses of deposits or other private-sector loans, preventing the failure of solvent but illiquid firms.”

QB: Short-term loans made by central banks to depository institutions may be rolled over, in perpetuity, by central banks because in aggregate they have no balance sheet constraints (and their balance sheets are not audited). If BB’s use of the phrase “short term” was used to imply “temporary funding”, logic and evidence shows this to be not true. Central banks continue rolling overnight loans and the possibility that they will be able to extinguish them, which would hit bank reserve ratios (not to mention bank earnings, share re-purchase plans and dividend policies) seems remote.

It would also be inconsistent with the Fed’s treatment of its member banks to impose restrictive policies. Overnight repurchase agreements increased consistently over 12% per year from 1994 to 1996. (The economy-wide debt accumulation and bank system funding mismatch this promoted would be soon felt.) Finally, bank illiquidity is the same as bank insolvency. There is no asset illiquidity at the market clearing prices of “illiquid” bank assets (there is always a price for everything). Thus, central banks promote term-credit creation by targeting accommodative overnight funding rates, then provide perpetual funding for over-valued bank assets resulting from that mismatch and, in a pinch, provide a balance sheet for member banking institutions on which those member banks may sell their over-valued assets.

BB: (Slide 16) “If financial firms can borrow freely from the central bank, using their assets as collateral, they can pay off depositors, avert “fire sales” of their assets, and restore the confidence of their depositors.”

QB: In a fractionally reserved banking system maintaining depositor and bank shareholder confidence is necessary at all times, whether or not the assets and future income of banking institutions warrant such confidence. A reasonable person should conclude that executives of banking institutions, central bank representatives like Chairman Bernanke, and politicians charged with overseeing financial and economic matters will unite in trying to promote public confidence and funding for financial institutions in times of great stress (including at times just prior to sudden systemic credit de-levering).

Thus, it makes complete sense that The Powers That Be would become less concerned with intermediate and long term consequences of monetary policy and more concerned with perpetuating short-term public confidence. (The question becomes; “can they succeed even if commercial and consumer incentives do not warrant such confidence?”)

BB: (Slide 20) “Financial panics in 1873, 1884, 1890, 1893, and 1907 led to bank closings, losses by depositors and investors, and often to broader economic slowdowns… The 1907 financial panic led Congress to consider the creation of a central bank.”

QB: The repeated financial panics from 1873 to 1907 were discrete and contained within the banking system. They did not lead to broad or lingering economic contractions. Banks that leant too much over their reserves or that made poor loan judgments failed. In 1907, credit deteriorated and banks stopped lending. The broader economy was threatened with less credit, but that would have been resolved quickly once bad banks failed, new banks offered new credit collateralized by the very same assets marked down from the values at which they were held by the bad banks. Quickly finding market clearing prices would have solved the problem. (Instead, J.P. Morgan – the man — led a syndicate that injected new money into the banking system, which calmed public fears and avoided a run.)

As for bank depositors, they used to care about the creditworthiness of bank balance sheets and they sought to save at banks they thought had adequate reserves. This, and the fact that bank failures tended to bankrupt its owners, served as a discipline on bank balance sheet leverage.

Most people today do not understand that a central bank still cannot insure the purchasing power of bank deposits. (Depositor insurance, such as the FDIC is unfunded and so the Fed would have to manufacture currency that the FDIC would then credit to bank balances). Central banks can only backstop the nominal balances of depositors. Thus, in the US, most of the $9.7 trillion of bank deposits supported by $1.6 trillion in bank reserves are nominally safe; however, these figures imply the purchasing power guaranteed to depositors could be as low as 16.5% of what it is today ($1.6 / $9.7).

A reasonable person would conclude that a system where a saver could diversify her savings among deposits in a few solidly-reserved banks would be far safer in real terms than holding one’s savings in one banking system that is insolvent in real terms.

BB: (Slide 22) “The gold standard sets the money supply and price level generally with limited central bank intervention.”

QB: More accurately, in the gold standard BB is referencing, the government sets a fixed exchange rate of its economy’s media of exchange to an ounce of gold. This fixed exchange rate forces banking systems to be more careful about issuing unreserved credit denominated in the media of exchange. It also makes governments less able to deficit-spend. Extreme unreserved credit issuance or deficit spending would give incentive to holders of the paper media to exchange it for gold, which would not be diluted.

[It is important to understand that BB’s definition of the gold standard, while an accurate portrayal of past gold standards, is not market-based because the government is setting the fixed exchange rate. A true gold standard would treat gold as the collateral for all media of exchange, which in turn would be exchangeable at an exchange rate set by the markets. This would differ from today’s regime in that physical gold would be considered “money”, not subject to taxes of any kind, and there would not be a gold futures market in which issuers of the competing baseless currencies could potentially suppress the “floating” exchange rate (i.e. gold price) without limit.]

BB: (Slide 23) “The strength of the gold standard is also its weakness too: Because the money supply is determined by the supply of gold, it cannot be adjusted in response to changing economic conditions.”

QB: Frankly, this is a straw man argument the Chairman seems to be using to mislead. It is true that the supply of money could not be adjusted in response to changing economic conditions. However, in a gold standard system with a floating gold exchange rate the price of money would adjust in response to changing economic conditions. In other words, the value of money – determined by both its quantity and price (exchange rate to media) – would accommodate any economic environment. BB chose to pick on a government-priced and managed gold standard.

BB: (Slide 24) “All countries on the gold standard are forced to maintain fixed exchange rates. As a result, the effects of bad policies in one country can be transmitted to other countries if both are on the gold standard.”

QB: Who would force countries to maintain fixed exchange rates? Governments. In a gold standard with floating gold exchange rates, governments would compete for money with the private sector. They would not be able to create money and so they would have to tax citizens to pay for government projects, wars, and any debts they may accrue. This inherent discipline would likely give great incentive to politicians to solicit the will of taxpayers more earnestly, which implies governments would be loathe to cede power over spending to the private economy.

(This is probably the reason gold advocates have developed a reputation as “strict constructionists” or even “anarchists”. Framing money in political terms is no doubt accurate. After all, it would be naïve to think that governments in liberal democracies would allow the private sector to control the terms of commercial and financial exchange. However, as we will show shortly, it seems obvious that government control over private sector exchange has begun to be quite regressive, not in the best interest of the vast majority of populations.)

BB: (Slide 25) “If not perfectly credible, a gold standard is subject to speculative attack and ultimate collapse as people try to exchange paper money for gold. The gold standard did not prevent frequent financial panics.”

QB: BB offered a gold standard that is not credible, and so as he suggests, it was (and would be) subject to speculative attack. This is no different than the current baseless monetary system, which is not credible and is, as we are seeing today, also subject to speculative attacks. The only reason today’s baseless currencies did not collapse in 2008 (or before) is because central banks can manufacture money, which delays reconciliation between the amount of debt denominated in that currency and the amount of base money in that currency (delays de-leveraging). This is the benefit (?) and justification for a system of central banks that may create unlimited quantities of currency when deemed necessary.

It is true that fixed-exchange rate gold standards did not prevent frequent financial panics; however, they did repair them far more quickly and with far less damage to broader commercial economies. Wage earners and savers benefitted. Creditors suffered.

BB: (Slide 26) “Although the gold standard promoted price stability over the long run, over the medium run it sometimes caused periods of inflation and deflation.”

QB: Really? This implies BB thinks the raison d’être of central banks is to avoid periods of inflation and deflation in the “medium run” that might occur “sometimes”? This is certainly inconsistent with past and current policies, which show an overwhelming emphasis on solving for short-term crisis management. And please recall that the general price level is purely a function of the supply and demand for goods and services, ONLY UNLESS THE STOCK OF MONEY OR CREDIT RISES OR FALLS (inflates or deflates) MORE, in which case the supply of money determines the GPL. Blaming gold for inflation and deflation is, well, either sloppy or a pre-meditated deception.

BB: (Slide 27) “In the second half of the 19th century, a global shortage of gold reduced the U.S. money supply and caused deflation (falling prices).”

QB: There cannot be a global shortage of gold because everything is relative. There can only be a shortage of gold at a certain exchange rate to government-issued media. If the gold price were to have risen then the U.S. money supply would have risen too, not have been reduced. (The elegance and obviousness of this logic makes one question the institutionalized intelligence of, or motivations behind, contemporary economics.) Demand for food and other inelastic items remained relatively constant. Falling prices were caused by consumers starved of money and credit and suppliers starved of working capital. (We can understand why banking systems and governments do not like fixed exchange rate gold standards. We cannot understand why wage earners at all levels do not demand floating rate gold standards.)

BB: (Slide 28) “William Jennings Bryan ran for President on a platform of modifying the gold standard.”

“You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.”
-William Jennings Bryan, July 9, 1896

QB: We agree that the gold standard, as practiced, was a political construct, as is the current monetary system. (We would also agree that politicians tend towards drama and populism, if that was BB’s point in including this frame.) However, if Mr. Bryan were alive today we are quite sure he would argue the following:

“You shall not press down upon the brow of labor this yolk of debt, you shall not shackle mankind to serve the banks.”
-The Ghost of William Jennings Bryan, 2012

Bryan was a populist and we would argue that the vast majority of populations in developed economies are not being served well by the current debt-based global monetary system. In today’s baseless monetary system labor cannot save its wages because banks may issue infinite credit that raises the general price level (GPL) above where it would naturally gravitate. If left to its own devices, prices would naturally fall, not rise, due to population growth, innovation, economies-of-scale, and productivity improvements. This would benefit all wage earners because a lower GPL would make wages more competitive vis-à-vis the goods, services and assets available for purchase. Affordability would rise for all economic participants, and would be especially beneficial to those at the lower end of the wage scale.

Obviously this is not the monetary system we have, which is premised on continually rising prices and policies that seek to ensure that. The current monetary regime issues credit and creates systemic debt. In this system asset price growth can outpace wage growth for long stretches of time. Asset prices, however, may be driven higher by the availability of credit, not rising demand or productivity. The debt build up that goes hand-in-hand with the credit build up creates a drag on demand and productivity. Unemployment rises. Debt cannot be serviced or repaid easily through wages.

Central banks must ultimately dilute the purchasing power of their currencies by manufacturing more currency with which debtors can repay their debts or with which creditors can extend new credit to debtors so they can roll over their debts. Any saved wages lose their purchasing power if held in that currency. This gives incentive to laborers not to save in the currency in which they are paid. Rather, they are forced to speculate in financial asset markets (directly or indirectly).

Clearly, today’s global monetary system is built for the global banking system. We think Mr. Jennings Bryan would argue it is a system of financial servitude and we are quite certain he would be as passionate about ending it as he was about ending the government-controlled fixed exchange rate gold standard.

BB: (Slide 32) “The 1920s-the “Roaring Twenties”- was a period of great prosperity in the United States. Elsewhere many countries struggled to recover from World War I.”

QB: The U.S. entered WWI late and as a result it did not deplete its gold stock. As a victor, the U.S. also did not have to pay reparations. This introduces a very big topic beyond the scope of this paper, but the U.S. remained a creditor with much of the world’s gold at a time when other developed economies were debtors with empty purses. Off-the-charts central bank generated inflation occurred in the Weimar Republic in 1922, causing the baseless currency to fail.

BB: (Slide 33) “In 1929, however, the world was hit by a Great Depression. The U.S. stock market crashed in October 1929, and the largest bank in Austria failed in 1931. Output and prices fell in many countries, and many experienced political turmoil. The Depression continued until the United States entered World War II in 1941.”

QB: BB frames these events as though they are beyond the influence of monetary policies. They are not, in fact central bank monetary policies in the twenties contributed greatly to them.

The stock market crash in October 1929 was the precise moment when a quorum of creditors and debtors acknowledged there was not enough money in the system to service and repay systemic debt. Throughout the 1920s, the Fed, the Bank of England and many other central banks maintained very easy monetary policies for their banking systems (“credit policies” would be more accurate, even today). “The Great Depression” that followed was in reality “The Great De-leveraging”. Because money was exchangeable for gold at a fixed exchange rate of $20.66/ounce, the only way to de-lever the system was to allow credit to deteriorate (rather than manufacture more money). Obviously this bankrupted most banks, which were fractionally reserved and saw the value of their loan books decline dramatically, and bankrupted many debtors who did not have enough gold in reserve against their debts.

Output contraction and political turmoil naturally followed, as BB suggests. The “Great Depression” was only made possible because there was a “Great Deleveraging” that took place in the “Roaring Twenties”.  Banking systems greatly exaggerated natural commercial processes through unreserved finance then, just as they did from 1982 to 2007 (and did so in earnest from 1994 to 2006). The only difference between then and now is that economies can now de-lever by manufacturing money. This, policy makers aver, is why gold should be thought of as a “barbarous relic”. (Larry Summers likes to say the gold standard is “the creationism of economics”, implying he thinks econometric models and smart guys and gals can supersede commercial incentives over time.) We shall see.

BB: (Slide 38) “What Caused the Great Depression?
There were many causes, including

-economic and financial repercussions of World War I, including the effects of reparations (sic) payments
-the structure of the international gold standard
-a bubble in stock prices
-financial panic and the collapse of major financial institutions”

QB: We covered most of this above but feel it is important to address BB’s inclusion of “the structure of the international gold standard” in his list of causes of the Great Depression. This is true; the discipline of the gold standard did not allow the Fed or other central banks to print money in order to de-lever the banking system, as they are doing today.

However, four critical things should also be understood:

1)    Money, per se, cannot cause economic or business cycles. Neither can monetary systems, including a gold standard. Money and monetary systems that do not reflect the real value of wages, goods, services and assets can and do cause business and economic cycles. The problem in the 1930s and today is that the value of money (not money and credit) is entirely inconsistent with the value of all things money is supposed to value.

2)    Fractionally-reserved banking systems can and do cause economic and business cycles (in effect, credit cycles in which unreserved bank credit is built up into the system and ultimately reconciled through the de-leveraging process). BB blamed a money system when he should have blamed the unreserved banking systems.

3)    Had bank asset values been allowed to decline immediately to levels at which they could be sold to savers (gold holders), output and unemployment would likely have rebounded with great haste. There would have been a shift of wealth from creditors to savers. This was not allowed to occur.

4)    The jury is not yet out about the success of de-levering the economy through money manufacturing today, though we think it is safe to assume enough money will be made to fully reserve bank assets. We are unsure whether enough new money will be manufactured and distributed directly to debtors to meaningfully reduce the burden of repaying their debts. Rather, central bank precedent suggests necessary liquidity for debtors will be executed through the soon-to-be-well-collateralized banking system in the form of abundant new credit.

Rather than falling prices, we think the likeliest outcome from this type of de-leveraging is substantially rising prices, followed by even more substantially rising prices, followed by the demise of the baseless monetary system and a reversion to a hard money system. (We doubt the political exists to do away with fractionally-reserved banking.)

BB: (Slide 41) “The Fed kept money tight in part because it wanted to preserve the gold standard. When FDR abandoned the gold standard in 1933, monetary policy became less tight and deflation stopped.”

QB: The remark above is misstated. The Fed kept money tight because if it didn’t then dollar holders would have exchanged their dollars for Treasury’s gold, to the point of complete depletion, which would have bankrupted the government. When FDR abandoned the gold standard in 1933 (and forced all US citizens to turn in their gold to the government at $20.67), monetary policy became less tight and deflation stopped because dollars could no longer be exchanged for gold. (FDR then de-valued the dollar to $35.00 per ounce.)

BB: (Slide 48) “We will want to keep these lessons in mind as we consider the Fed’s response to the crisis of 2008-2009.”

QB: Indeed.

Kind regards,

Lee Quaintance & Paul Brodsky

Category: Federal Reserve, Gold & Precious Metals

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

17 Responses to “BB Gun”

  1. MayorQuimby says:

    1. Gold is NOT money. Money is artificial. There is no money for bears, ants and bees. Anything can be made to be money….cigarettes in prisons, rocks, leaves, widgets, anything. Gold IS a commodity and that is it.

    2. Fiat money is NOT baseless or unbacked. You cannot get a loan from a bank without collateral BECAUSE fiat IS backed by THAT COLLATERAL making the things we build, manufacture, develop what backs our money.

    Gold in the other hand is backed by the color yellow.

    Look….the same bs scam played over and over and over again. Because central banks have abused and misinterpreted fiat currency GOLDBUGS are going to try and CAPITALIZE upon this situation by getting everyone to agree to MAKE THEM ÜBER WEALTHY by backing dollars with gold.

    This will accomplish nothing except make THEM richer. I will agree to use gold as money when every last gold bug gives all of his gold to the new monetary powers (for real not pretend).

    Do not fall for goldbugs and their scams. They have no solutions (1929, 1873 occurred with metals standards) because the problem is the accrual of debts which forces the debasement of currency to pay these debts back.

  2. cognitive dissonance says:

    Angry MayorQuimby — you are right and wrong.

    Saying “Gold in the other hand is backed by the color yellow” is silly. Gold has been money for centuries and that alone gives it standing as a universally accepted currency. Certainly it’s not perfect but it has characteristics as Brodsky points out ad infinitum that command respect.

    It is relevant that you say “cigarettes in prisons” because this is absolutely perfect. CIGARETTES IN PRISON REPRSENT CURRENCY AND A STORE OF VALUE BUT — irresponsible governments that have recklessly debased their fiat currency is tantamount to WET CIGATETTES!!! They once had value but now are a mere representation of what once was = a smoke-able treat or a certificate exchangeable for gold.

    Gold is the universal currency this is indisputable. If you don’t believe it you owe it to yourself to do some travelling.

    The question of timing is what remains and I fear for a good person like Brodsky who is smart and trying to educate people the timing of gold’s recognition may not work for his investment thesis. Good men like Brodsky get broken by Central Bankers before they can be proved right.

    What is currently uncertain is how far can a government debase? Japan tells us we may have much farther to go. Reinhart and Rogoff would argue at 100% of Debt to GDP currencies begin to die…

    Where is Kyle Bass’s “Keynesian endpoint”? I suppose we will find out. But my advice to you is drink some decaffeinated and take a calm look at gold. You don’t want to be without when and if TSHTF. Good luck to all of us and God Bless America.

  3. opensourcecurrency says:

    The Fed has “constituencies”? Who voted?

  4. Greg0658 says:

    “Good luck to all of us and God Bless America.”
    for the frame of mind it sets .. don’t forget the magic word .. God Bless America, please.
    oh heck “with brown sugar on top.” :-)

  5. mdradar says:

    “Gold is the universal currency this is indisputable.”

    I thought that dollars were the universal currency. When hyperinflation strikes, people want to be paid in dollars. That’s what’s happening on the street in Iran right now. It’s been the case in South American countries when crises hit for a long time.

    As MayorQuimby states, there is nothing about gold that makes it any less arbitrary as a standard than silver, or cigarettes, or Full Faith and Credit.

    But let’s get to the point – the motivation of most people promoting the gold standard is that they dream that it will limit the power of the state. And usually, the gold standard is just one facet of a broader Utopian dream that consists of a whole host of beliefs – for example, that Market Discipline will magically reign in the worst aspects of greed and the excesses of the free market system. I’m not sure exactly how they extrapolate these things from the history of free markets or human behavior. I’d like to see someone point to an actual point in history when a regime based on a belief in “market discipline,” rather than laws backed up by jail time, led to an extended period of general stability, rather than the wealthy consolidating more wealth and power and general economic instability for the great majority of people. Seriously, please provide an example or two. Maybe you have an example from some remote canton in Switzerland? Maybe the Hanseatic League? Maybe somewhere in ancient Greece? Bonus points if you can show that some sort of a gold standard played a significant role in that success, and that the lessons from this example are applicable to the modern United States or the global economy in general.

  6. Blissex says:

    «QB: As we understand it, a central bank is neither an ordinary bank nor a government agency. It is a privately-held for-profit bank (owned by its member banks, not funded with tax revenues) that has the exclusive power to print unlimited quantities of currency and take unlimited amounts of assets onto its balance sheet.»

    This is based on the deepest ignorance of the difference between the Federal Reserve System and the Federal Reserve Board, a difference that is very important indeed. I have explained that difference here:


  7. AHodge says:

    nice esp the last para and whether the Fed is in any way responsible for booms.
    I asked Bernanke that in a Q n A after he had spoken in 2003, well, that the 2001 recession was a CAPEX boom and bust.
    He prefaced by saying, you are probably not going to like my answer, Man was he right. It was a long babble about the millions of micro decisions during a boom and how the Fed could not overjudge them.

  8. cognitive dissonance says:


    what is the point of this request:

    I’d like to see someone point to an actual point in history when a regime based on a belief in “market discipline,” rather than laws backed up by jail time, led to an extended period of general stability, rather than the wealthy consolidating more wealth and power and general economic instability for the great majority of people. Seriously, please provide an example or two.

    Gold is not magic fairy dust. It’s a currency. go ahead and look up what that means. you could learn something… (this link is for you: http://en.wikipedia.org/wiki/Currency)

    gold’s unique properties (such as: universal demand) make it such. That’s all nothing more.

    Should those that hold it be rewarded for their position any less than those who bought stocks at a 12 p.e. that then traded to a 15 p.e.? I don’t know. But it is the universal currency. Perhaps in God you trust (which in your case of the U.S. dollar is tantamount to a corrupt political system)…but for others they trust in gold. It seems to last longer.

  9. MOIDALIZE says:

    How about a gold/tungsten mix — Is that “universal currency” too?

    What is it about banking and fiat currency that so frightens and confuses goldbugs? Are they all unfrozen cavemen?


  10. mdradar says:

    I will agree that gold is a store of value, always has been, and will remain so. People who own gold now have something that will still be valuable in 5 years, 50 years, and in 5,000 years. But that is not the same thing as saying that gold currency is different from any other medium of exchange. In the end, X amount of gold is worth 10 cows or 1,000 chickens or 100 hours of my labor because you and I agree it is. Just as X amount of dollars are worth 10 cows or 1,000 chickens or 100 hours of my labor because you and I agree it is.

    The point of my request was that most of the people I speak with see the gold standard as means toward the end of radically shrinking the power of government. My question was meant to challenge the thought that a gold standard would actually do that, as well as the idea that radically shrinking the size of government would increase human welfare at all. In reality, people have a variety of reasons for supporting a gold standard, I get that. Yet I haven’t seen a convincing argument that the gold standard would do anything but replace one set of human imperfections and potential for bad decision-making with another set.

  11. [...] Gold bug’s rebuttal to Bernanke. I have at least one quibble – when talking about falling prices in the late 1800′s the dramatic increase in productivity isn’t mentioned. Very similar to the drops in computing prices over the last 30 years, that even tripling general prices couldn’t erase. Falling prices are the natural result of a free market with hard money. [...]

  12. mwatsous says:

    MayorQuimby, mdradar,
    You guys are not following the simplest point about the gold standard (or any fixed commodity/ fixed resource-based standard) that I believe Mr. Quaintance and Mr. Brodsky and “Goldbugs” and sound money advocates are trying to make. It is a fixed commodity that cannot be conjured into existence by the whims or beliefs of human beings. Money is a representation of wealth, a marker of something real, of things that are valuable to people, such as houses, land, cars, a days labor, food etc. It is a convenient exchange medium so we don’t have to drag bags of wheat to the car dealership to buy a car.

    Gold is not the only possible representation vehicle, and there are some valid points about the inflexibility of gold in that only a limited amount is mined each year and perhaps “real” wealth (as opposed to fabricated electronic wealth i.e. credit on a computer hard drive) grows faster than gold mining can keep up. But the core of the argument, to put words in BB’s mouth, is that central banks like to how the power to pull the marionette strings on the economy with their ultimate tool- freshly printed dollars. In all their dollar forms such as loans, purchase of Treasury debt, purchase of assets such as mortgage-backed securities. It’s all ‘new-money’ dollars! Sound money advocates (I assume include Quaintance and Brodsky) don’t want them to have that power. Let the market decide the correct price for goods and services. Money supply should be a boring occupation since it should require simply a census i.e. enumeration of actual wealth followed by adjustment in dollars. The BB’s of the world don’t want bust cycles simply because they are painful and difficult (especially for bank creditors, but also for lendors and investors), and (to give them the benefit of the doubt) I assume they want to avoid pain. Boom and bust is part of the fabric of the world. It is natural like forest fires and regrowth. Unfortunately their manipulation avoids the pain in the short term but creates much greater pain (blows bigger bubbles) in the long term. And creates a greater misallocation of resources in that we loose time in finding correct markets. Transparency in market exchanges and sound money create much shorter bust cycles and much more efficient resolution of market misallocations unecumbered by Mr. BB’s “belief” system or any other individual’s belief system for that matter.

  13. Prinicipal Programmer says:

    >> BB blamed a money system when he should have blamed the unreserved banking systems. <<

    Exactly. Let's ignore the elephants in the room of "TOO MUCH UNPRODUCTIVE DEBT" and "RICH PEOPLE WANT TO BUY THINGS AT FORECLOSURE PRICES". You don't see them either Bernanke? Oh right – your job in 'studying' the great depression was to find EVERY OTHER excuse you can find to make the bankers look innocent in both means and motive.

    Bernanke is just a stooge, we all know that, but we also know that the bankers will always win. I vote for gold to at least give the 10% of the population that DOESNT want to play the game of borrower and lender (aka pitcher & catcher) a chance to save money without constant government and wall street confiscation.

    Biggest housing bust in us/world history (is that price stability?), most indebted government in 'peace' time ever, 1 trillion in student debt, heckuva job bankers.

  14. Prinicipal Programmer says:

    I almost forgot. The one thing that does concern me with gold is technology. Some day there may be a way to synthesize gold using some nuclear process or such. They’ve only been trying for 5000 years, maybe they’ll end up succeeding some day. So that’s why I diversify.

  15. cognos says:


    This is a sad post. I feel dumber having read it.

    I feel even dumber having read the comments. BUT! – they are much much smarter than the original post. The simplicity with which some of them dissect silly, stupid flaws in the original piece is quite amusing.

    Bernanke shows that he understands economics like a Princeton professor and the post is just a whiny, annoying, misfit. Specifically:

    - A central bank is a government agency. (Bernanke 100% correct)
    - All central banks strive for low and stable inflation; most try to promote stable growth in output and employment (Bernanke 100% correct)
    - Etc, etc.

    Its weird. He’s trying to pick a fight with economics 101, banking 101. Nothing interesting here.

    On the other hand, our resident idiot writes:

    QB: The repeated financial panics from 1873 to 1907 were discrete and contained within the banking system. They did not lead to broad or lingering economic contractions.

    Hmm… so 34 years of “repeated financial panics”… “did not lead to lingering economic contractions”.

    Sounds great, can we promote this moron? So many other items dissected by other, better comments. I particularly like, “gold is backed by the color yellow”, and “cigarettes are money”. More true than anything written by our author.

    The point of money (and thus the central bank) is simply to promote social good. To encourage economic development (wealth!) and personal development (employment). To help us produce lots of stuff and lead happy stable, interesting lives. There is no greater reality than this. It is the point of family, government, education, law and courts, roads, etc.

    Its natural and necessary that the government regulates money! (In fact, its odd. Our simpleton writer thinks “central banks” print money… but governments don’t. Hmm? )

    PS – Sorry for being so mean. But arrogance and lack of respect, combined with lack of knowledge and a childish application of even the small bits of meaningful contention (they are hard to even find!). It just so ill conceived. What was this writer thinking?… “I’m going to go take issue with Bernanke’s “what is a central bank?” He doesn’t even know its not a government agency at all!” Really?


    BR: I posted Bernake’s comments and a series of bullet points. This was the counterpoint

  16. ssc says:


    >>When hyperinflation strikes, people want to be paid in dollars. That’s what’s happening on the street in Iran right now<>But let’s get to the point – the motivation of most people promoting the gold standard is that they dream that it will limit the power of the state.<>As MayorQuimby states, there is nothing about gold that makes it any less arbitrary as a standard than silver, or cigarettes, or Full Faith and Credit.<<

    That's simply wrong. You smoke your cigarette, and it's gone, if you get it soaking wet, it's probably beyond savage. With gold, even in small amount, such as "used" in circuit boards, can be savage and it does not change it's value (even when it's been "used"). For anything that even attempts to claim as "currency", it has to be scalable, reusable, relatively easy to store. Cigarettes, diamonds, fine arts, …do not qualify, as none are scalable, i.e. the value of cigarette probably depends on its potency, diamonds depend on the cut, a Rambrant cut into 10 pieces does not mean each piece carries 1/10th of the original art value, 50 pieces of half carat diamond does not equal in value to one 25 carat piece, etc, etc… As fort silver, it was used as currency in at least old China, not to mention silver coins, it has lower relative value to gold probably due to the relative abundance, which also makes it hard to store (say you may have to store 50 pieces of silver to be equivalent to 1 piece of gold).

    In my opinion, we are the richest and most powerful country/empire, ever, but we are also very young and have a "young" view of things. Start counting from 1776, we are not quite 240 years old. The last dynasty in China was the Ching dynasty, which lasted for 280+ years, and there were plenty of dynasties before that. In traditional Chinese as well as Indian weddings (most likely other cultures too), gold jewelry is a popular gift from matriarchs and elders. To me, those are thoughtful gifts from centuries of experience, marriage is hopefully a life long, if not generational enterprise, and there's little (if any) competition to gold for ease of transport, store and value keeping. Not the rupee, not the yuan, not the pound, not the yen, not the euro, and certainly not the dollar.

    40 years ago, I came across a $2 bill, somewhat unusual, as it had been discontinued for sometime. I am not a currency collector, but I kept the bill around as a little curiosity item (still have it). In 1971, $2 would buy me 9 gallons of regular gas (yes, it was 21 cents a gallon at the corner independent gas station, Apollo), half a steak and lobster dinner at the upstart Sizzler ($3.99 steak and lobster was their gimmick then)..In these days, 2 bucks doesn't do much of anything. I think instead of a $2 dollar bill, I came across a $2 equivalent gold coin (I think in 71, dollar was still fixed at $42 per troy oz) and keep it to this day, even at today's highly inflated price, I am pretty sure I can buy 9 gallons of regular or even have a full steak and lobster dinner with the then $2 equivalent gold coin, comfortably.

    At this point, one may think I am one of those that thinks paper currencies are totally worthless, well, not quite, the follow was told by the former Minnesota Vikings great Jim Marshall (I hope I got the name right):

    "We were exploring this area early spring, and was caught by a fierce snow storm, being experience outdoors men, we know we have to wait it out… It was getting real cold and things are pretty wet, highly unlikely that our matches and lighters can start a fire. Luckily, between us, we happened to have a few thousand dollars in cash, those papers were enough to use as starter to light a fire and save all our lives…".

    For the record, and I think I stated this here before, I have no physical gold other than a handful of coins and jewelry that I received as gifts when I was a child, ditto silver. No position in GLD or any of the gold etf. Small SLV position, sold half today.

    Why am I spending so much "ink" on this when I really have no dog in this fight??

    I spent most of my life in California and lived through the 1989 Loma Pieta(sp??) quake, as well as the Rodney King riot, I know first hand how social order can completely and totally disappeared with no warning. I know that there are millions more smart phones in the Bay Area than basic survival kit(no, I do not have one either), yet everybody knows the big quake is not a matter of if, but when. Me and a lot of people live a somewhat "cavalier" life, BUT, to judge people that prepare and worry, and think I am smarter??? That's a pretty silly attitude..

  17. mwatsous says:

    I’m sorry you feel dumber, in contrast, I appreciate the thoughtfulness of Mr. Quaintance and Mr. Brodsky in providing clear and well thought out responses to each of Mr. Bernanke’s assertions. Let’s agree that economics is not a physics experiment where all variables are highly controlled, so cause and effect is for discussion, but I am compelled by the evidence presented that the Fed is more disruptive and produces at least as much boom and bust as an alternative.

    Regarding your specific points
    - In the technical sense, the Fed is not a government agency. Government agencies are the Centers For Disease Control, the Natl Institute of Health and fall under a clear organizational chart leading to one the branches (executive, legislative or judicial). The Fed is better described as an ‘agent of the government’. It’s only connections are that the President appoints the leaders, and the Congress has “oversight” i.e. can haul Fed staff in to testify. But these testimonies are FYI- the Fed can do what it wants. The Congress does have the power to legislate the Fed operations, and potentiallly eliminate or significantly reform the Fed if it chooses. It is not a transparent organization- it took Bloomberg several years and many court hearings to simply get a (partial) accounting of what’s on the Fed’s balance sheet. No other government ‘agency’ works that way, they all have transparent budgets, public meetings and policy publications etc. I find it interesting and seems a bit defensive that the Fed is just now publishing some minutes of its meetings i.e. it is fighting a PR battle.

    - According the Federal Reserve Act, the Fed should not be engineering any type of inflation- “The Congress established three key objectives for monetary policy—maximum employment, stable prices, and moderate long-term interest rates—in the Federal Reserve Act.” (wikipedia.org)

    Webster definition of “stable”: not changing or fluctuating : unvarying
    To quote Karl Denniger of market-ticker.org “2% constitutes “Stable Prices” eh? That’s a 143% inflation rate over a working man’s life! If this is “stable prices” then can I ask what unstable might be defined as?”

    - Your definition of the point of money “to create social good” is concerning. Lots of very evil folks in history thought they were doing ‘social good’. I think it is firmer footing to simply see money as a tool, as an instrument of exchange. We all know intrinsically how important money is and what it affects in our lives. The question at hand what is the most reasonable, transparent, consistent way of creating money. Given the central role of money as a tool of commerce, the goal should be (and has been in the past) to make money the least manipulable as possible. I fear the government with the Fed has created one of the most manipulable forms of money. Money creators often talk publicly about the wonderful things all this flexibility allows them to do. History shows that most often ‘flexibility’ gets used to the benefit of the puppetmaster, not the puppet. I think the question raised is should this critical tool be controlled and flexibly manipulated by the ‘belief system’ of a small handful of fallible, corruptible, bias-prone human beings.