The September issue of The New Internationalist is in shops now. The theme is all about the rise of gold on both the right and left of the political spectrum. It includes a piece by me on the economics of the whole thing entitled ‘Bunker Economics’. So, if you’re bored, don’t have access to the internet and see a hard copy of the magazine for sale somewhere feel free to pick it up.
I noticed the goldbug trend way back when the crisis started and I’ve been on the front-lines of fighting that nonsense since it started. What I found so fascinating was that many people on the political left were picking up the narrative. But anyone who knows the history and the economics of the gold standard knows that it is an inherently right-wing device. The main rationale for the gold standard is to prevent governments from being able to run large deficits and debt. Thus, with the gold standard much of the counter-cyclical aspect of government spending is automatically reigned in.
If the gold standard were reenacted today most countries around the world would have to engage in extreme austerity of the type we see in Greece. What I found so fascinating about the rise of the goldbug narrative on the left was that the same people who supported it as a means to supposedly stop ‘private banks creating money’ were completely shocked and appalled by what was happening in Greece. Yet they were implicitly calling for it to be applied elsewhere when they demanded a return to the gold standard.
The most interesting outlet for this contradictory narrative was the television station Russia Today. Russia Today generally takes a very left-wing perspective on most issues. But from time to time you will see them drag on some right-wing conspiracy nut. Still, the main editorial stance is generally left-wing. But after the crisis the goldbugs completely took over the station.
What was so interesting about this to me was that it became clear that at the time the left had no coherent economic narrative that it could push. Thankfully this has largely changed due to pioneering blogs (like Naked Capitalism, New Economic Perspectives and The Financial Times Alphaville, especially the work of Izzy Kaminska), David Graeber’s bestselling book Debt: The First 5,000 Years (which I think was the big game-changer on the left and which launched after the interview I conducted with Graeber back in the summer of 2011) and the collapse of the gold market (which I called just before it happened).
I think that the latest issue of The New Internationalist is really the final nail in the coffin of this nonsense. But a few people will likely hold out. That is unfortunate. But many in the financial markets think that gold has a long way to go yet before it reaches a bottom. Perhaps what an appeal to Reason cannot chip away at, a very large hit to their portfolio can.
Fixing the Economists 
A great post.
Another unfortunate brain-bug on the left is the occasional hostility to fractional reserve banking for almost the same reasons as the libertarians (the erroneous idea it must be fraudulent). You see people who claim to be left wing spouting this nonsense: that if only 100% reserve banking were introduced, it would be some panacea for economic problems.
Yes, the two are tied together unfortunately. But I think this is largely waning in influence. Russia Today has been a big influence in this regard. But now Ed Harrison has an editorial slot over there and he’s pretty well clued in.
Unfortunately, you’re a bit optimistic about the intellectual destiny of the fractional reserve banking story Phil, I am afraid. The 100% reserve banking is highly popular amongst ecological economists and nogrowth/degrowth people. This is because they lack a proper understanding of endogenous money and because the starting point of their analysis in fractional reserve banking, precisely. Beyond fighting it from a policy standpoint, I think the fractional reserve banking as an analytical concept must be fought as such: it simply makes no sense since it is a static view of the monetary system. In normal times, at a moment t, a bank will indeed have less reserves than deposits. But the system is dynamic, so should be its analysis. Since banks can refinance as much as they want at a given interest rate there is no fractional reserves banking per se. It is an intellectual construct that – though appealing – does not in any way reflect the way the monetary system works. Moreover, it is inherently tied up to the multiplier fable, which is nothing more than a fable as (almost) everyone knows.
You might be right about the ecological crowd. I’ve always been a little wary of them. Starting from the perspective of scarcity it seems to me they are easily co-opted by the marginalists. Also their ‘no growth’ stuff is very dodgy. I don’t think they understand what is meant by economic growth. They seems to think of it purely in terms of some sort of increase in resource extraction and manufacturing which is completely false.
Ecological economics lacks a proper macroeconomic framework (the field of ecological macroeconomics is taking off though, and PK have a lot to contribute I think) and there is no unified theory of degrowth. However, a lot of degrowth people do talk about sectoral degrowth, implying that some sectors may degrow while some useful others may grow (as do the ecosocialist people, who I think have quite a deeper understanding of the whole matter owing to their marxist roots, see for instance the “no growth capitalism controversy” between ecological economists and ecomarxists people like Smith, Lawn and Blauwhof). It is therefore unfair to them to consider that they only see GDP growth through the lens of manufacturing and resource extraction, although they do focus on the latter, I think most of them are well aware that GDP can increase with a constant/decreasing throughput if value added increases. To give them a point, one may think that thermodynamics laws, the impossibility to reach a complete decoupling between GDP and natural resources and the fact that a service/dematerialized economy cannot do without an industrial base, whether the latter is domestic or abroad, may well force us to degrow in the aggregate one day (Consumption-based CO2 emissions (accounting for CO2 in imports) are quite illustrative of some trompe-l’oeil regarding the so-called decoupling between GDP and CO2 in some developed countries). But whatever its relevance, degrowth does not require a 100% reserve monetary system anyway.
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@levrailouison
The ecological economists may not have a proper macroeconomic framework, but they do know (other than mainstream- and some progressive economists) that everything is bound to the laws of thermodynamics. See this recent Paecon-paper: http://www.paecon.net/PAEReview/issue68/RammeltCrisp68.pdf
Material growth needs energy to perform “work”, money is an abstract principle built on top of that. You receive it for your work done and you’re able to pay someone to do “work” (for you).
If you want to decouple growth (adding value to sth.) from the material world, it’d be completely virtual. I’m curious how to convince people there’s value adding going on when the only place where it is happening is their imagination 🙂
It reminds me to a thing called ‘bubble economy’ – the whole thing being one biiig bubble…
“if only 100% reserve banking were introduced, it would be some panacea for economic problems”
this is only really a logical problem for right-wing so-called ‘libertarians’, who are supposedly in favour of ‘laissez-faire’ economics. Left-wingers might be wrong about this, but at least they are not fundamentally illogical and self-contradictory on this issue.
Can you elaborate please?
@PhilipPilkington – “You might be right about the ecological crowd. I’ve always been a little wary of them. Starting from the perspective of scarcity it seems to me they are easily co-opted by the marginalists. Also their ‘no growth’ stuff is very dodgy. I don’t think they understand what is meant by economic growth. They seems to think of it purely in terms of some sort of increase in resource extraction and manufacturing which is completely false.”
As an economics noob,
I have personally been concerned with this issue of how economic growth is connected to resource usage and how resource sustainability issues tie into it. Would you know of a good starting point to start reading about this? Or would REALLY appreciate if you could write a blog post about it aimed at economics noobs such as myself.
Thanks! 🙂
A good starting point is this lecture from Steve Keen: https://www.youtube.com/watch?v=14vVhhNvWX0
The Rammelt&Crisp paper above is worth a read, it may be tough with no background on the laws of thermodynamics/entropy.
Here’s another piece trying to explain “growth” with these principles in mind: http://www.fraw.org.uk/files/economics/ayres_2005.pdf
Try this…
http://bilbo.economicoutlook.net/blog/?p=28802
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I think the merits and demerits of gold standard currency deserve some more analysis.
Your article makes a point that those wishing to go back from fiat money to a gold standard are selling that idea as a panacea for all our economic ills, without addressing real root causes like inequity and the structures that perpetuate and increase it. While it may be true that there are more fundamental root causes to our economic challenges than the integrity of currencies, it is also true that fiat money is more susceptible than a gold standard to corruption and devaluation, which is almost always a regressive change because the rich have access to stores of value other than cash, and the poor often don’t.
Assuming that we cannot wish away the need for an agreed store of value, isn’t it safer for all of us, that such a store of value is based on something that is hard to corrupt? Gold has performed that role for a reason – it is inert, and so doesn’t naturally degrade, and it is scarce, so that a small quantity (with corresponding reduction in storage and transport costs) can serve to store a lot of value.
There is possibly a third reason, though facts may be disputed here, that gold reserves are naturally growing at a rate that is roughly the same as the rate at which the global economy is growing. This means aside from short term fluctuations, in the long run a hoarder of gold will neither gain nor lose. Today it appears that hoarders win, only because the fiat currency which is used as a unit of measure gets devalued in the long run.
In my view, as long as we don’t lose sight of other root causes of economic ills, and there is no 3rd alternative as a viable store of value, we should consider a gold standard as better than fiat money, and turn our sights to ensuring sustainable mining of it (like we would with other minerals) rather than try to wish it away.
I am happy to stand corrected or debate this further, including hearing how we can do without a store of value altogether, or how some other 3rd alternative could be even better.
I should mention, I am a layman, not an economist, so do be considerate in your reactions!
There is absolutely no evidence for this. Last time we saw massive build-ups of private sector debt and corporate fraud was during the 1920s in the run up to the stock market meltdown of 1929. As any historian will tell you, the US — and most of the rest of the world — was on the gold standard in this era. All the gold standard does is impose inflexible and damaging exchange rates on economies and constrains much needed government deficit spending in times of recession. That is what its proponents want to do with it today.
But Philip, as an economics noob, I wonder why would they want to impose government spending in time when tis needed the most? Is it because – http://neweconomicperspectives.org/2012/08/political-aspects-of-full-employment.html ?
OK, so effectively the assertion is that the flexibility of deficit spending arising from fiat money is more important than the drop (or at the very least slower growth thereof) in real income that poor people face, in part due to perpetually degrading currency …. so how do you propose we solve for “progressive” allocation of the deficit spending? Because unless we can ensure that, the benefits of deficit spending go to the rich, and the inflation impact goes to the poor….which makes fiat money better only in theory but not in practice.