Reply #6: Several Points, Mr. Lisst [View All]

The M3 measure has nothing whatever to do with the amount of money being printed. M3 is a measure of illiquid accounts in dollar denomination already extant in private hands; such things as "jumbo" certificates of deposit on long term, that cannot be accessed as money without great penalty to the owner before their due date, and the largely notional accounts of derivative investments, that are in practice mere side-bets on economic activity, and have no real connection to underlying securities or capital. An attempt to conceal the printing of currency would require suspension of the M1 and M2 measures, which relate to more liquid forms of accounts, and actual currency in various hands.

If there is anything being concealed by the suspension of this measure, it would be the scale of the derivatives market, and the scale of this is indeed uncomfortable. There is something that "feels" wrong about a game in which the size of the side-bets approaches the sums actually staked by participants, so to speak. Such "investments" produce nothing, and are most generally backed not by cash but by paper loans, and there is certainly some danger that collapse of large positions in these "markets" could produce, by the need to make good on such loans, a serious drain on actual capital that could strain some large lenders, and so endanger the security of actual monetary deposits. But this danger is not directly related to the size of derivative activities; instead it flows from the soundness, or lack of soundness, of the calculations made by its participants. It may be true that the larger the sum total involved, the more participants and calculations there must be, and so a greater likelihood some of them are foolish must follow, but there exists no formula which yields a reliable measure of this probability.

It is quite likely there is a bout of inflation coming down the road. The government is tremendously in debt, and governments seldom pay their bills honestly when under great stress, but rather pay up in lower quality currency, this being achieved in the old days by alloying the coin with base metal and in the modern era by policies which make paper currencies worth less in terms of goods and services. But it is far from impossible that a restoration of sound tax policies, and economic growth, could restore the situation sufficiently to avoid this. That would require, of course, a change of administration, and in the composition of the Congress.

Gold is a commodity no more inherently valuable than paper or horse-meat or pistol cartridges, and that was true even in the days when it was officially monetarized, as it no longer is. Money in any form is worth only what it will exchange for, namely the various goods and services that make up the necessities, conveniences, and luxuries of life, and the capital goods and raw materials that enable production. It is the supply of these things, rather than the supply of money, or the form money takes, that determines the value of each unit of currency, and this is as true for a weight of metal as it is for a number printed on paper. The idea that gold represents some independent store of value is delusory, and even if that delusion is widely shared and deeply rooted, remains an illusion. When economic conditions worsen sufficiently, this is always demonstrated, and usually in pretty grim manners. When food is scarce, people are reluctant to exchange it for gold, and reluctant to do services for payment in it, prefering foodstuffs. Those who promote gold as a safeguard against economic troubles are simply preying on ignorance, and usually do so knowingly. All forms in which gold is widely sold to the public for "investment" involve a very high premium to the seller that makes the price of the stuff well above the market rate, and places the purchaser deeply in a hole in investment terms, that requires a stiff rise in the market price of the stuff for the buyer to even break even. You may be sure those who sell the stuff in this manner do not place their profits in the metal; rather, they acquire things of more enduring value, such as land and other capital goods.