IF there were a gold standard, the holder of the reserve could decree a different peg.

The holder of the reserve may not decree any peg he likes. Under a conventional gold standard, the state decrees the peg. Even if different gold bankers have different currencies, so my “dollar” is a milli-ounce of gold and your “dollar” is two milli-ounces, we may not repeg our dollars at will, because our circulating notes obligate us to the peg we established when issuing the notes. If our loans are bad, we lose the reserve. That’s the whole point.

That would affect everybody equally and instantly.

It would affect all holders of a particular banker’s notes, if a bankruptcy court allows the devaluation. My point is that your banknotes still lose value in this scenario, because you hold this banker’s notes and not another banker’s notes. You don’t suffer “inflation”, but you still suffer a loss.With a central bank, all “dollars” are the same, and a devaluation (including gradual devaluation from inflation) does affect everyone.

And except for the transient confusion would be meaningless.

It’s not meaningless to the holders of devalued notes, the ones promised two milli-ounces of gold per “dollar” held but now may expect only one.

What REALLY happens, is that the Federal Reserve creates money out of nothing. It then uses that money to buy from its preferred institutions.

Typically (until very recently), the Fed bought short term Treasury securities almost exclusively. I thought I understood the system then. Now, I’m back in the dark.

… those at the end of the transaction chain wind up with devalued money.

I agree with you here.

It is IDENTICAL to counterfeiting in every way except (1) it is legal …

Legality makes all the difference in the world, doesn’t it? What is property? Property is theft, except that it is legal. From Socrates to Proudhon, the story is the same.Of course, “legal theft” (or “proper theft”) is a contradiction in terms, but Proudhon still has a point. Since I favor both private property and markets, I must favor a bit of this legalized “theft”. The question is: which “theft” do I favor?

And don’t forget that high up in the counterfeiting food chain is the federal government who sells its bonds to the Fed’s preferred institutions (or apparently in recent months directly to the Fed).

I see no reason for the preferred institutions at this point. The Fed can buy and sell Treasury securities online at its own web site. If the Treasury wants to sell securities to the Fed, it can use the same web site.

Central bank created inflation–the approximately 3% average annual inflation that we’ve experienced since 1913–is exactly that type of wholesale theft.

If you don’t want to suffer this inflation, don’t hold cash. If you prefer holding gold, hold gold. Hold the bullion itself. At $1000/ounce, how much could all of your gold weigh? If you want to insure the gold against theft, do that. If you want to pay for secure warehousing, do that. Security is not free.

MB, don’t be obtuse, keep the context.

If you want a more specific context, specify one. You wrote “investor class” without further qualification. If you want an ever fatter bank account without investing, including the risks, I have no sympathy with you.

If I could expect my dollars to have about the same purchasing power in 30 years, I could stuff them in my mattress.

You may still bury gold in your back yard if you want. There’s no law against it.

That was the case for a few decades before 1913.

No. Money in your mattress could lose value before 1913, because the issuer of your banknotes could extend credit poorly or suffer other misfortune. Your particular notes might or might not hold their value. “The dollar” held value relative to gold, because the price of gold in dollars was fixed by law, but your particular banknotes could lose value, and it happened all the time. If you want to go back to that, I might even join you, but we mustn’t pretend that our promissory notes will be more secure.

Now I must spend money on accountants, brokers, and financial advisors to figure out how not to lose to the inflation created by my government. Those are the class of investors who benefit at my expense by deliberate steady government-created inflation.

Governments always benefit some interests over others, but they’ll sell you some TIPS if you want them. I wish they wouldn’t, but they will.

Those “slow, steady price rises” that don’t bother you should bother anyone who is bothered by massive theft and wealth destruction.

Slow, steady price rises don’t cost you anything if you hold assets with the same slow, steadily rising prices. Don’t hold cash. Cash is only an accounting device. You aren’t supposed to hold it. I don’t want a monetary system encouraging people to hold cash, to perceive money itself as an intrinsically valuable asset.

Those with large sums at risk know that long before they die they need to assign tax-deferred account beneficiaries, parcel out gifts in small sums over time, set up trusts, consume consume consume, etc. to reduce the impact of estate taxes. That IS what people do, and they do it because of estate taxes.

Exemptions for small gifts, trusts and the rest are all part and parcel of the same established proprieties of which estate taxes are a part. Congress could enact an estate tax without these exemptions, but it doesn’t.A tax deferred account does not imply consumption.

Yeah, financial independence OF those running the state!!

Of course.

Why you bring title holders into this discussion, I have no idea.

Because they’re involved in running the state. What else does “entitlement” mean?

… venture capitalists know how to filter the proposals … they bring a lot of smarts to the table before they disburse their funds.

A venture capitalist has strategies for filtering proposals, but he doesn’t decide the success of his strategies. The market decides. You can’t predict the future when other people are free to make choices.

Furthermore, free markets are efficient. A rational expectation of the value of a particular strategy exceeds the expected value of other strategies only if proprietary information informs the particular strategy, but proprietary information doesn’t remain proprietary for long in an efficient market.

Some strategies outperform others. That’s a separate issue. Some strategies are far more valuable in retrospect without contradicting market efficiency. The issue is what investors know about their investments in advance.

Intelligent investors do contribute information to markets. Intelligent investors contribute all information to markets, and markets are efficient for this reason. That seems like a paradox, but it’s not.

A venture capitalist disbursing funds is not a successful investment. The venture capitalist doesn’t decide the success of his investment.

I make three assumptions here. First, an investment organizes resources to produce things that other people buy. No one is compelled to buy anything. Second, an investor cannot know what other people will decide to buy, because he is not these other people. An investor can only make educated guesses about buyer preferences. Third, an investor learns to make educated guesses in the same marketplace of ideas available to other investors, so he’s unlikely to possess exclusive information for long. Maybe he profits from some exclusive bit of information, but he doesn’t profit indefinitely from it, because the value of the information decays. The value decays precisely because he and others seek to profit from the information.

Yes, many wrong investment decisions are made, and investors learn from those decisions.

It’s not about what you’ve learned in the past. It’s about what free, independent actors choose in the future. An investor profits only by serving these other actors, unless he “invests” to organize resources in a corporative state essentially guaranteeing his profits. To be clear, this flow of funds in a corporative state is not what I call “investment”, but it is what many “capitalists” call “investment”.

But many right decisions are made as well, …

Agreed.

… and my guess is that more right ones are made than wrong ones.

Can’t agree with you here. I’ve heard throughout my life that most “managed funds” underperform market indices for example. This observation led lots of money into index funds, and this trend presumably had feedback effects. The entire S&P 500 begins to behave like a single volatile asset, and the expected value of betting on this asset declines, compared with strategies pursued by many managed funds. The index strategy is a strategy, and the value of this strategy can decay as well.

In this sense, there are no “unmanaged” funds, because index funds are managed by people pursuing the index strategy; however, the underperformance of “managed funds” (relative to particular indices) in the past indicates something about the number of “right” investments vs. “wrong” investments. When many “managed funds” start beating indices, then the index investors are “wrong”, and if this pattern persists, the index investors change strategies. It can’t be true that index investing always beats other strategies. Cost averaging the S&P 500 is not immune to market efficiency.

Large corporations such as 3M, FedEx, GE, Exxon, Walmart, and IBM have made thousands of smart investment decisions worth many billions of dollars over the past fifty years.

At some level, we aren’t discussing market dynamics anymore. Saddam Hussein had golden toilet fixtures in his many Presidential palaces. He became richer and richer all the time he ruled Iraq, even while his rule wrecked the Iraqi economy.

If the rules of the game favor large corporations, then large corporations will emerge, and the more regulated environment in which businesses compete seems to favor larger corporations. I’m not saying that large corporations are “evil”, like Saddam Hussein, but I am saying that forcible decrees of central authorities make them larger. Success then becomes a matter of gaming the decrees.

Walmart can still make more “wrong” decisions than “right” ones, selecting inventory to stock for example. Walmart only needs to be more successful in this regard than competing organizations. It can fail to sell most of the new items it decides to stock at a profit for example. If KMart and Target also make more “wrong” decisions than “right” ones this way, Walmart can still be more profitable, because all organizations on this scale account for these “wrong” decisions as a cost of doing business and set their prices accordingly.

Stalinist expansion or business friendly environment? You decide.

I’m sure most venture capitalists know how to filter the proposals they receive. I’m not saying that they do not learn from their wrong bets. But they bring a lot of smarts to the table before they disburse their funds.

Again, my disagreement is with your claim that:

“‘Intelligence enters the system through disinvestment more than through investment”

Yes, many wrong investment decisions are made, and investors learn from those decisions. But many right decisions are made as well, and my guess is that more right ones are made than wrong ones. I’m not referring to just startups, or to just to individual investors. Large corporations such as 3M, FedEx, GE, Exxon, Walmart, and IBM have made thousands of smart investment decisions worth many billions of dollars over the past fifty years.

The “wrong” ventures are the ones the market does not select, and a greater variety of options provides more developmental paths for markets to explore. There is no predetermined “path to prosperity”, waiting for smart investors to discover it. Beyond subsistence, greater prosperity is a choice. We make it up as we go along. Venture capitalists don’t make it up. They only supply some of the options. The idea that venture capitalists make it up is an illusion of selective hindsight, systematically ignoring all of the options we didn’t choose.

I’m not saying that intelligence is irrelevant to investor success; however, markets are efficient, and even the best informed investors compete with other well informed investors on the margin, so the value of information is marginal. Yet informed investors are the reason markets are efficient in the first place. That sounds like a paradox, but it’s not.

I don’t understand this, martin. Are you claiming that industries only learn through failure? that only the “wrong” decisions and not the “smart” decisions by venture capitalists in funding innovation move us along the path to prosperity?

Either way your non sequitor about creditors pricing in inflation doesn’t debunk anything I said since debtors price in inflation just as surely as creditors do.

If you want to know what I’m talking about, read my posts to others.

Besides, debtors price in expected inflation as well as creditors. What’s your point. If they both expect the same monetary inflation and they both price it in and that monetary inflation comes to pass it doesn’t make a difference if creditors price it in.

Wrong. Creditors price in the expected inflation as well as some uncertainty in its growth.

If the two of us manage to raise the nominal value (price) of the yield of your asset, then we effectively raise the nominal value of the asset as well. Now you can pay me, and we’re both happy. That’s inflation.But I’m the one who decides to extend credit to your customers rather than driving you into bankruptcy. I make this decision for my benefit, not for yours, so I’ll benefit most from it. You avoid bankruptcy, but avoiding bankruptcy isn’t necessarily the best outcome for you.

The people paying higher prices for your yield are neither of us, but they can gain a nominal wage increase in the bargain, because they’re part of the resource organizations, and I can extend credit to these organizations as well. The nominal increase needn’t translate into a real increase, of course.

But that NEVER happens. What REALLY happens, is that the Federal Reserve creates money out of nothing. It then uses that money to buy from its preferred institutions. Those institutions then spend that money etc etc until it diffuses into the economy. When the Fed spends those dollars, the dollars have essentially the same purchasing power as before they created them. Likewise for the institutions they buy from. But after several transactions, it causes all dollars to decrease in value, so those at the end of the transaction chain wind up with devalued money. In other words, the Federal Reserve takes purchasing power away from those furthest way from them.

It is IDENTICAL to counterfeiting in every way except (1) it is legal and (2) it dwarfs any known illegal counterfeiting ring. And the other less common inflationary measures by the Fed have essentially the same effect.And don’t forget that high up in the counterfeiting food chain is the federal government who sells its bonds to the Fed’s preferred institutions (or apparently in recent months directly to the Fed).Central bank created inflation–the approximately 3% average annual inflation that we’ve experienced since 1913–is exactly that type of wholesale theft. “Everyone belongs to the investor class.”MB, don’t be obtuse, keep the context. If I could expect my dollars to have about the same purchasing power in 30 years, I could stuff them in my mattress. That was the case for a few decades before 1913. Now I must spend money on accountants, brokers, and financial advisors to figure out how not to lose to the inflation created by my government. Those are the class of investors who benefit at my expense by deliberate steady government-created inflation. That is therefore an unnecessary expense which by definition is an inefficiency.Those “slow, steady price rises” that don’t bother you should bother anyone who is bothered by massive theft and wealth destruction.”This disposal does not avoid estate taxes.”Those with large sums at risk know that long before they die they need to assign tax-deferred account beneficiaries, parcel out gifts in small sums over time, set up trusts, consume consume consume, etc. to reduce the impact of estate taxes. That IS what people do, and they do it because of estate taxes.”Estate taxes are not simply imposed at death.”I don’t know what you’re talking about. Taxes are almost never “simply” imposed. But they are imposed nonetheless.”Financial independence is hardly the bane of the state. It is the primary purpose of the state. Hereditary title holders are part and parcel of the state.”Yeah, financial independence OF those running the state!! That independence is threatened by an independent population that doesn’t want or need them. Why you bring title holders into this discussion, I have no idea.

Maybe you have some examples.

Government is setting the 0% federal funds rate, and I don’t see 0% interest as representing any fundamental fact about the “economy”. Interest rates should reflect the availability of real resources for investment. A 0% rate pretends that resources are now free.

Well, from creditors to debtors, right? I’m not sure debtors are necessarily closer to the central bank.

And even then it’s not necessarily a transfer from creditors to debtors I suppose – it’s only such a transfer if monetary inflation overshoots expectations. If it undershoots expectation it’s a transfer from debtors to creditors.

But I’m not sure what proximity to the central bank has to do with it, or what being a common citizen has to do with it. If you’re a common citizen with all your money in a savings account it’s bad for you. If you’re a common citizen with debts it’s good for you. It’s not your commonness or elitism that matters – it’s your finances.

Monetary inflation is a transfer of wealth from those furthest to those nearest the central bank.

Monetary expansion does not imply a central bank, but it could have the effect you describe here.

It isn’t about price stability (although central bankers spew all kinds of drivel in their defense).

When I use the word “inflation”, I intend a general rise in prices, so all prices rise roughly in the same proportion, as though every price and the nominal value of every bill of credit were simply doubled. I don’t intend an increase in the money supply, which could be inflationary or not.A decentralized monetary authority, like gold bankers issuing promissory notes for gold, can and will expand the money supply at times. The supply of gold does not limit this expansion. The supply of everything including gold limits it, and this supply can rise. Real value can also appear to rise when it hasn’t, and holders of promissory notes can lose value in this scenario, even if prices do not rise.A decentralized monetary authority subject to a gold standard might prevent the declining value of dollars generally, but it doesn’t necessarily prevent the declining value of the dollars you hold. Under a free monetary system, notes from different banks, all promising redemption in the same quantity of gold, do not trade one for one.

But if you want long term price stability for savings–over terms encompassing the length of a person’s working years–that was abolished precisely when the the central bank was created.

I don’t want it. Excessive inflation is counterproductive, but I have no fetish for price stability. Slow, steady price rises don’t bother me. Slow, steady price declines could be counterproductive and create accounting difficulties. If you want to hold gold, that’s fine, but simply holding cash should not be a winning strategy.

Monetary inflation is also the means by which the state loots its citizens without having to publicly vote for an overt tax increase.

In our system, you’re right, but the solution to this problem is a limitation of the state’s authority to borrow.

Being able to use a currency as a store of value is a great efficiency, because of its abstract nature.

I can’t agree. If you want a store of value, hold a durable commodity, not currency. Currency records current value, not future value.

It means individuals don’t have to make specific investment decisions on hard assets, which requires much diversification and active management.

That’s precisely the problem. If you don’t want to make specific investment decisions, you lose value. I have no problem with that at all. Insecurity is essential to the effective operation of capital markets. If you want security, just be honest about it and openly advocate some statutory entitlement.

Inflation destroys that efficiency for individuals to the benefit of the investor class.

Everyone belongs to the investor class. I make an investment decision every time I get out of bed to go to work. I could also invest in more sleep, but sleep isn’t always the best investment.

Inflation is most definitely the enemy of the common citizen, and one of the greatest confiscatory tools of the state and their corporate cronies.

In our system, I agree that it can be and often is.

The estate tax is an incentive to dispose of assets long in anticipation of death.

This disposal does not avoid estate taxes. Gift taxes are estate taxes imposed before death. To be clear, I favor title expiration, which isn’t a conventional tax. With title expiration, deceased titles are sold at auction but the state receives no monetary proceeds of the sale. Any value exceeding the estate’s liabilities are removed from circulation. We could cremate the deceased’s body on a pire of paper money, a fitting end for someone like Ken Lewis who lives on piles on money.

It is a tax on–and therefore disincentive for–savings in its purest form. Anyone with millions in assets knows that they don’t want to be caught dead with them.

Estate taxes are not simply imposed at death. This is a common misconception.

Of course, inheritance is also one way for people to help provide some financial independence for their heirs. Since independence is the bane of the state, states have always like estate taxes.

Financial independence is hardly the bane of the state. It is the primary purpose of the state. Hereditary title holders are part and parcel of the state. For the statesmen, “freedom” has never meant your freedom. “Freedom” means their freedom to order the world around you, including their freedom to choose their successor to the entitlement.The financially independent are not independent of the state. They are independent of you, i.e. they are entitled to consume your produce without producing anything of comparable value themselves.