The Gold Standard, Part 4

Joseph Dewey
This entry is part 30 of 50 in the series 2011A

2011A

Einstein’s Greatest Error

“But,” says the gold standard advocate, “you can’t have indefinite expansion. After any period of inflation, expansion and prosperity we have to pay the piper and a period of contraction must take hold. This is the big advantage of the gold standard. Even though, it is painful it causes necessary cycles of contraction.”

But why should a period of contraction even be necessary? Does such an idea correspond to nature? Well, let us look at our universe. It has not only been constantly expanding since its creation over 14 billion years ago, but at the present time the rate of expansion is increasing! Some scientists predicted an expanding universe, but not one expected to find that it is increasing its speed of expansion.

Einstein’s original calculations predicted an expanding universe but this idea went against his belief system so he altered his equations to get the answer he wanted. Later when Edwin Hubble’s observations proved the universe was indeed expanding Einstein admitted that his rejection of an expanding universe was the biggest mistake of his life.

And what caused Einstein’s greatest error?

It was not his logic for his original math and reason told him the universe would be expanding. The cause of his error was his belief system got in the way and prevented him from looking at the math without filters.

Are economists making the same mistake? Many of them are telling us that we can only expand for so long and then we must have a depression or recession. Is their belief that all good things must end interfering with the wonderful truth that we can increase and economically expand indefinitely just as the universe itself is doing?

“But how can the economy expand indefinitely? If we overspend then a correction has to come,” says the skeptic.

The problem is that solid economic expansion does not involve wild overspending as many seem to think. What is overlooked is there are two types of economic expansion. Let us illustrate.

Example One: The Smith Family has been working hard and has been struggling to make ends meet. They’ve wanted to get a new car as well as vacation in Europe but the money to do so never seems to show up. Finally, they decided they deserved some of the better things in life and took out a substantial loan against the equity in their house. This loan was like a windfall and they began spending liberally.

In the eyes of their friends it appeared that the Smiths were experiencing an economic boom.

Then the time came the money ran out and the Smith’s expenditures were more than their income. Instead of taking belt-tightening measures they decided they didn’t want to give up their new lifestyle and borrowed to the max on every credit card they had.

For the next two years their friends thought the Smiths were having a continuing economic boom.

Finally the day of reckoning came and the Smith’s couldn’t borrow enough to pay their bills. At that time their economic world collapsed and they lost everything.

Yes, the Smith’s had to pay the piper for their apparent economic boom, but do all expansions have to end this way?

No.

Example Two:

The Jones family started out in the same situation. They also wanted some of the nicer things in life. They realized they could take out an extra mortgage on their home but decided against it because if this was all they did they would have difficulty in paying it back. They also didn’t like the idea of their hard earned money going into interest payments that merely financed luxuries.

Mr. Jones tells the family, “If we want some luxuries and do not want to suffer the burden of loans we cannot pay back then the only solution is to increase our income. Any suggestions?”

Mrs. Jones spoke up. “I have one. I will go back to work and this will give us the money we need to pay back the loan we are going to take out.”

“But we didn’t want to take out a loan for luxuries,” he said.

“I’m not talking about a loan for luxuries, but for seed money to start that internet business you’ve been thinking of for years. The money from my job can pay back the loan so even if your business fails miserably we will be no worse off financially than we are now. On the other hand, if you succeed then we can not only pay back the loan but we can buy a lot of things we have dreamed of for years.”

The family thought this was a good idea and moved forward with the plan. After two years the business proved a success, they paid back the loan and both Mr. and Mrs. Jones quit their day jobs to work their new business full time.

“Shall we buy some of those luxuries now?” asked Mrs. Smith.

“We could,” said her husband but I have some new ideas for the business that could pay off big time. If we take our extra money and invest in expansion there is a good chance that in a couple more years that we can buy any luxury we want.”

Mrs. Jones was reluctant but agreed and the family continued focusing on expanding and two years later the business and money supply grew just as anticipated.

At that time the Jones took some of their extra money and bought a few things they had wanted over the years. But most important they learned the rules of true expansion and only put money at risk that they could afford to lose.

They continued to apply these lessons and expanded their business, income and savings until they retired. Then they turned their business over to their kids who continued to apply the same common sense approach and the business continued to expand.

Now some may wonder why I am giving simplistic stories illustrating the obvious.

First, I might note that the truth behind these stories must be far from obvious.

Why?

Because our best and brightest that we hire (elect) and send to Congress seem oblivious to the common sense of the Jones family and, instead, act like the inept Smiths.

Secondly, many who are considered the best and brightest in the economic world believe we are eternally doomed to the fate of the Smith family. They tell us that any continued expansion of the money supply is like borrowing money on a credit card and must be followed by either collapse or deflation.

They overlook the fact that there are two ways to increase the money supply.

The first is to copy the Smiths and borrow the money with no sensible way to pay it back. Unfortunately this insane path is supported by the most intelligent people we can manage to vote into office.

Overlooked is the fact that there is a second way. If we increase our money supply using common sense principles, as did the Jones, then the economy never needs to contract but the money supply and economic growth can continue indefinitely just as happened in the story of the Jones and illustrated in the expansion of the universe itself.

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Copyright 2011 by J J Dewey

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5 thoughts on “The Gold Standard, Part 4”

  2. There is a simple to understand reason why human economies undergo periods of expansion and contraction, inflation and deflation. There is a simple to understand reason why economies don’t uniformly expand without these ups and downs.

    Human beings are not perfect and they make mistakes.

    You yourself have used the analogy of driving a car down the road. You have to make constant corrections to keep the care going in the desired direction. Perhaps your attentions wavers for a moment and the car starts to drift off the side of the road and you immediately notice and steer the care back towards the middle.

    Normal human economies are just like that. People, even with the best of intentions, may invest too much effort in one direction but then economic reality intrudes and a correction is required to get the economy “back on the road.” This is natural.

    The real problem is that you get people in power who think the corrections are a problem and tell you they can design an economy without the errors and failures of the past. Grimly holding onto the wheel long after the car is almost in the ditch perhaps they finally pull back towards the middle and put the car into a deadly spin. The history of the United States economy through the 19th century up to the Great Depression of the 20th century (and now the current depression) are perfect examples of this.

    You tried to examine a relationship between whether money was backed by gold or not and believed you had discovered a truth, but in fact missed the greatest factor of all – bad economic “drivers” in government continually trying to drive a car without a proper license to drive!

    lwk

    Reply

  3. Good post JJ,

    This expanded further on what I wrote about economic expansions on part 3. Our current model expands based on credit and debt only so the expansion is false and eventfully contracts back to its original point leaving a path of destruction in its wake. this accounts for every recession and the great depression since 1913 and now the hat will be eventually the greatest depression we are currently in. Expansion has to be naturally and created on real value.

    There is another example too, that is there does not always need to be expansion, Say the Jones family are content and are meeting thier needs and have a few luxuries they desire and choose to just maintain that. Nothing wrong with that.

    The real estate market is the best example of a false credit expansion. By injecting fiat money via mortgage notes into the system this inflated the money supply exponentially greater then ever in our history. Raising real estate prices dramatically. Many people bought into this as an opportunity to increase their wealth based on the steady rise in prices. A few that got in and out did, the rest instead lost wealth by investing time and money into this false expansion and then it contracted and is still contracting. This is why our economy will eventually hit bottom it is entirely built on false credit expansion based on inflating the money supply via mostly mortgage loans and now printing money from nothing also. it is now seeking its original point and will drag any real value with it.

    We need a new model of a sustainable free society based on voluntarism and mutual cooperation, respect, with maximum freedom!

    Reply

  4. How many times have I heard that one? EVERYONE asks, Why cannot our legislators apply simple common sense to government budgets? Good question. We have all asked this question many times. The better question is, HOW will we make them do so? Again, Dr. JJ, we look forward to the part where you prescribe.

    Reply

    1. Larry, the reason legislators cannot seem to use common sense is simply because they have a lot of power to spend money that is not theirs, and they are hugely motivated to do so. By spending other people’s money they can literally buy the votes of those people they consider necessary to get themselves re-elected and in power to spend even more money.

      From many legislators point of view – the point of view of maintaining their power and privilege – what seems to us as insance of insanity is perfectly logical, at least until the whole house of cards comes tumbling down. As Margaret Thather is supposed to have said, the problem with Socialism (some people in charge of spending other people’s money, supposedly for the common good, but usually in the interest of the “ruling class”) is that sooner or later your ruin out of other people’s money to spend.

      lwk

      Reply

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