Sunday, May 15, 2005

Your Money's No Good Here
Deflating the Legend of the Liberty Dollar

In my travels in the conservative blogosphere, and the blogads therein, I stumbled across this gimmick.

One universal desire of "The Right" is the return to the gold/silver standard and rejection of fed-issued greenbacks. Be they conservative Christians hoarding up for the end-times, a paleo-conservative Idaho militiamen rejecting the "Zionist" economy, fiscal conservatives worried about deficits/inflation/interest rates, or Rand-worshipping libertarians fawning over d'Anconia's monologue on the glorious nature of money, their common belief is that we'd all be better off trading in silver talents and gold shekels. This is one of the “conservative” viewpoints I don’t agree with, simply because it contradicts logic and observable fact.

First off, the NORFED/Liberty Dollar people are selling silver at $10.00/oz, when its market price is $7.00/oz. To their defense, NORFED/Liberty Dollar admits this markup. Their defense is that it’s selling transferable currency and not metals; they openly tell people to go elsewhere if they simply want to invest in specie. Despite some of the odd claims by "Mr. von Nothaus" on his website and the high possibly this could be an outright scam, I'm going to assume that this is a legitimate business. Any google due diligence shows only positive praise for the company.

However, NORFED/Liberty Dollar claim that their currency is not subject to the inflation that greenbacks are, and that their money will maintain it value while the dollar collapses. True, paper money is decreasing in value. True, our currency could collapse. But gold and silver are inflating just as fast, if not fast. Nor is the collapse of the greenback nearly as certain as the value of “precious metals”.

In 1975, silver was worth $5.25/oz. Now it’s worth about $7.00/oz—falling from nosebleed peaks in early 80s. A 35% return on a 30-year investment is paltry. But the investment is a complete disaster when you consider in the inflation you were trying to hedge against. In 1975, $5.25 would have bought the equivalent of $20.00 in 2005. Now $7.00 will buy the equivalent of what $1.87 would’ve in 1975. You lost 65%!

Granted, the “investment” hedged somewhat against inflation. The $5.25 would be worth $1.40 if you had left it under the mattress. But there’s good reason to believe that gold and silver could become base metals overnight, faster than any currency crash. Consider the famous wager between population-bomb eco-nut Paul Ehrlich and economist Julian Simon. Values for precious metals dropped across the board, even disregarding inflation. The possibilities for more gold and silver are limitless: sea-mining, space-mining, mining at the core of the earth, and sub-atomic generation are all possibilities. These possibilities are made more possible by our exponentially growing technology.

I don’t know the future of our dollar, but I confidently say that goods and services that the dollar chases are becoming more plentiful everyday. Our future will be wealthy one, regardless of the form in which that wealth manifests itself.


At 11:12 PM, Blogger Tom said...

The "return to a gold standard" is not a conservative position, or even a uniform position. What Friedman and the Supply-Siders advocated was a Bretton Woods centralized false gold standard in which the gold was only to be redeemed in large denominations by central banks, and thus ineffectual in preventing inflation. Furthermore, all speculation of a change in the monetary system is useless unless a change in the centralized banking system is proposed as well, and on this there is considerable disagreement- the Friedmanites and mainstream conservative public support a centralized banking system, while the Randians and Rothbardians oppose it.

By lumping the various groups into one ad hominem attack, and treating them as all advocating the same thing, it becomes impossible to compare the current monetary system with one which has actually been advocated.

You may have mentioned that after the government repealed the 1933 act prohibiting monetary gold in the 1970's, in 1983 the government issued a $50 gold "New American Eagle" coin which weighed an ounce. When it came out, gold was at $420 an ounce. Each coin contained $420 worth of gold, yet was by force of law only valued at $50. The difference between the value the gold would receive on the market, as a commodity, and the value of the gold as legal tender, is the difference between a commodity money and a fiat money- the force of law. Such coins are fiat money made more dishonest by a golden sheen.

NORFed/Liberty Dollar, as you say, are not engaged in establishing a commodity currency. By divorcing the concept of a commodity money from "transferable currency," they are advocating the impossible: the exchange of metals for other than their market value by voluntary cooperation.

Those who advocate commodity money do not claim that it is a stable store of value- for they do not claim there is any such thing as a "stable price." What they do claim is that whereas a commodity currency alters its values according to the voluntary decisions of individuals, a fiat currency alters its values according to coercion and the interaction of this coercion with the fact that artificially overvalued currency will be driven out by artificially undervalued currency. The production of gold or whatever commodity is chosen by the vast majority of individuals, is determined by their scale of values, and "sub-atomic" gold production, like all other means of producing, will be determined by their weighing of costs and benefits as is only possible by means of a monetary economy. In other words, for the same reason we can prooduce trillions of pairs of shoes if we desire it, yet spend our resources on other ventures because we desire medical care, televisions, etc. more and this desire is communicated by means of prices, so is the production of gold dictated by the will of consumers as transferred through price data. In yet other words, the continued production of gold is an entirely different phenomena than the continued production of fiat money, and is indissolubly linked with all other production, lacking the very features of inflation that mark the production of fiat money.

At 10:39 AM, Blogger Mover Mike said...

You have a number of problems in your post, however one shouts for comment:
"...and thus ineffectual in preventing inflation."
Gold does not prevent inflation, when it advances in price, it act as a signal, a warning sign, telling us that money creation is inflationary.
Mover Mike

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