Тег: Gold

Overproduction of money as the cause of “overproduction crises”

In your note on the Keynesians’ arguments, it says:

In general, the model turns out to be completely counterintuitive: the crisis is caused by the overproduction of goods (according to ABCT it is caused by the overproduction of money, and when there are many goods, that’s actually great, which completely corresponds to the worldview of any ordinary person)

But the gold standard in the USA was abolished only after the main crisis, in 1933. Does this mean that “overproduction of money” could not have been its cause and the Keynesians are right?

Solo 322 (question accompanied by a donation of 322.8 rubles)

To understand the causes of the Great Depression in detail, it makes sense to read Rothbard’s book America’s Great Depression. But that’s 560 pages, and I personally haven’t gotten around to it yet. So my ideas are based mainly on a much shorter essay by Pavel Usanov, The Great Depression and the New Deal – Lessons for Modernity. It’s only 44 pages, including all appendices and the bibliography; anyone can handle that volume.

For instance, it is stated there that in 1926 Keynes wrote that thanks to the Fed’s activities, there would be no more crises (this prediction would later be broadcast by mainstream economists after every major crisis, specifically citing the fact that the Fed has now learned how to deal with them). Hayek in 1927 and Mises in 1929, on the contrary, predicted a crisis, based precisely on the Austrian Theory of the Business Cycle, according to which the cause of such crises is the credit expansion of central banks.

Between 1921 and 1929, the money supply in the USA grew from $45.3 billion to $73.3 billion. This was achieved by lowering the Fed’s discount rate, based on roughly the same fractional reserve mechanisms as today. The inflated financial bubble burst in 1929. Something quite similar happened in 1921, when the stock market crash was fully comparable and was caused by the same reasons—the inflation of the money supply during World War I. But then the Harding administration ignored the crisis, and it resolved itself literally within a year. In 1929, the Hoover administration began fighting the crisis through price regulation, injecting liquidity into bankrupt banks, a public works program, and then introducing protectionist tariffs. As a result, the depression truly became Great.

Roosevelt, who came to power under slogans of deregulation and reduction of government spending, on the contrary, only intensified this policy, which later became known as the New Deal. As a result, the Great Depression lasted until the end of World War II, when Roosevelt finally passed away, and a considerable part of his regulatory measures were repealed, while simultaneously enshrining in the Twenty-second Amendment to the Constitution the prohibition of one person holding the presidential post for more than two terms. As an example, I’ll give just a couple of figures: the share of government spending decreased from 44% of GDP in 1944 to 8.9% in 1947—of course economic growth would happen with such a reduction in government appetites!

Now, what happened in 1933, and what abolition of the gold standard are we talking about? We are talking about the confiscation of gold from citizens and declaring settlements in gold illegal within the country. In international trade, gold retained its significance, and the price of gold in dollars was fixed by the government; that is, the gold standard was preserved, but in a very distorted form: there are pieces of paper, it is stated that they are worth so much gold, they must be trusted like gold, but you cannot get gold for them. When the gold standard was finally abolished in the seventies, gold became an ordinary commodity with a floating price.

Roosevelt’s confiscation of gold was not the cause of the growth of the money supply, but rather its consequence. At that time, the government had gold worth approximately $4 billion, while the demands for exchanging dollars for gold totaled $25 billion. To avoid offending anyone, the government refused to satisfy the demands of everyone)))

Making depression great

What do you think about the recent drops in bitcoin and gold? The most interesting thing is that right now all investors are rushing to buy US government bonds as the most reliable in the world in the event of a crisis. How do you comment on this?

Sea King

Bitcoin is a digital asset designed to perform the function of money, and it indeed possesses a number of properties inherent to good hard money. It is not surprising that among those who actively use Bitcoin, there has been a supposition that it is an excellent safe-haven asset, and that in the event of a financial crisis, money would flow specifically into it. As for gold, it is a safe-haven asset with a centuries-old history, and the fact that it would rise during a crisis was not subject to any doubt whatsoever.

Nevertheless, let us recall how gold behaved during the previous crisis. From March to November 2008, while the mortgage crisis was gradually turning into a financial one, the price of gold fell: everyone needed dollars specifically to plug the holes. And only when central banks began to compete in who could lower interest rates faster and buy up more junk papers did the resulting excess of dollars lead to a two-year rally in the gold market, during which its price reached an all-time high.

Gold in the last crisis: first down, then up

Currently, we are at the very beginning of the crisis. Just like last time, everyone is first running to the dollar. But, unlike in 2008, when quantitative easing was far from immediate, there was no delay in pumping the economy with fiat this time. On the other hand, it must be noted that immediately before the start of the crisis, the price of gold was close to all-time highs, as central banks had been actively buying it for several preceding years. It is possible that a number of countries will now feel the need to sell part of their reserves, and this will put pressure on the price. Thus, on one hand, many new dollars suitable for buying gold will appear in the market, and on the other, there will be a lot of gold sold from reserves. It is impossible to predict with certainty which of these opposing factors will be more significant over a horizon of up to a year. Further on, of course, the factor of the growth of the dollar mass will outweigh it, and gold will begin a new rally.

Today, Bitcoin is gold for geeks. Institutional investors have not yet had a chance to properly enter, and by their standards, the liquidity of this asset is completely negligible: the daily trading volume of Bitcoin is some measly thirty billion dollars, which is essentially nothing by the standards of stock and currency exchanges. Therefore, even a very modest sell-off of Bitcoin is capable of seriously dropping its price. But conversely, even very modest investments from the “big players” are capable of seriously heating it up.

In addition to the fact that the global economy will soon be flooded with dollars and other fiat, the reduction in supply will inevitably influence the price of Bitcoin: there are less than two months left until the halving. Therefore, if you have free fiat, now is a great time to enter Bitcoin. If there is an opportunity to take a fiat loan for about three years, investing that money in Bitcoin could also prove to be an excellent decision. Of course, one should not take microloans for this purpose.

In conclusion, I will comment on why buying US government debt may be more attractive than buying dollars. Purchased dollars sit in a bank, and a bank is an unreliable thing during a crisis. Bonds, however, are registered directly to the investor, and therefore the risk of their loss is incomparably lower. The liquidity of US government bonds is quite comparable to the liquidity of the dollar. So, there will be people willing to hold them even at a negative interest rate, although this seems counterintuitive.