Age of Gold, Age of Paper

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It lasted for more than a thousand years. Its Great Palace was the seat of imperial and religious government for as long. It claimed to encompass the Roman Empire, and often did. It was the largest and greatest court in Christendom. In its Chrysotriklinos, its Golden Hall, hydraulic engines powered fountains, large organs, golden birds that sang in jewel-drenched trees, and golden lions that roared. Ambassadors bowed to its emperor as his throne magically rose to the ceiling. Gold mosaics dazzled visitors to its court and cathedral.

It was Byzantium.

I’m reading Judith Herrin’s history of that empire. She is a good historian but perhaps not much interested in economics. In her book, Byzantium: The Surprising Life of a Medieval Empire, an essential fact of Byzantine economy gets a fleeting mention as a caption to an illustration: “Byzantium preserved a gold coinage of reliable fineness over 700 years.”

Many empires have been laid low by the degradation of their currency. I think ours is next. No historian will ever say that the US dollar preserved reliable fineness for even a tenth of 700 years.




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Erwin Haas

Rome debauched its currency for 600 years and did just fine, so what’s the problem?

The problem is that Keynesian, Austrian (the libertarians’ darling), Chicago, etc. schools of economics lack empirical support. These are not sciences but rather armchair speculations. Using economics to engineer society simply won’t work.

Libertarians around me are all Austrians and gold bugs. They assume that we are in an inflationary era because the “Fed is printing money”. Putting tin into coinage or printig money worked in the past when folks used physical money. Nowadays credit cards serve as money. Money is borrowed into existence

The Fed creates credit and tries to lower interest rates by buying bonds from banks. The banks now have cash in their vaults and are ready to lend. The problem in modern finance with turning this into money arises when the general public and businesses don’t want to use credit because 1) they are not credit worthy, 2) are afraid to borrow, or 3) anticipate that prices for housing and other big purchases will fall so why buy now if it will be cheaper next year (sound familiar?). In 2011, cash in the vaults of banks remains an accounting entry, and does not function as money. The public is paying off credit cards, going bankrupt and renting, so doing the opposite of creating money. I found a graph put out by the Federal Reserve of St. Louis ( can't find it just now) showing that the money supply dropped in half last year.
As people use less money, demand in the economy remains stagnant or droops, prices fall and we end up like Japan where their Fed has been heroically "printing" money since 1990; despite this they’ve had deflation and stagnation for 20 years. Prices have fallen by around 20 percent.
And remember the Great Depression when consumer prices dropped by around 30 percent. The Fed at that time failed to create credit for theoretical economic reasons.
Fixed income instrument holders have had their revenge for the last 30 years. Rates (http://finance.yahoo.com/chart/flash#symbol=%5ETYX;range=my)(as these fall, bond prices go up) have fallen continuously since around 1980 and I think will fall yet further. Markets do not anticipate inflation.
There is a rough justice here. Borrowers who invested in equities were favored for 75 years because inflation made it easier to pay off their debts. This reached a frenzy in 2007 during the housing bubble, but now talk among the rabble is about underwater mortgages, foreclosures and short sales. During the last deflationary cycle in the 1930s interest rates on long term treasury bonds were negative for a period of time. Theoretically, bond holders would have become infinitely rich. There is no reason why this shouldn't happen again.

Democrats and Republicans were in charge during this recent economic downturn and in a virtuous world would be held accountable for the current unpleasantness. They'll evade responsibility of course.
We libertarians might gain some political advantage pointing out who said and did what when the problems arose. But it might be might be more prudent of us to not make predictions that could come back to haunt us. Economics is really just hot air.
But, I just predicted, didn't I.

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