A Gold Standard is NOT the Solution - An Interesting take

[AsifAmeer]

I cant disagree with Bill here. Even though I wrote in my article that Pakistan should go to the Gold Standard lekin in the very next para I tackle the Fractional reserve lending. Since writing that paper, my views have evolved. I now believe that money cannot be debt as it adds interconnections and complexities, making the system inherently unstable. Money has to be converted into equity from Debt. Remove a Central Bank from the economy. Govt should have the right to issue equity money.

 

[Vitamin_C]

"Money has to be converted into equity from Debt." USA could never afford that.

 

[guest]

gold standard is completely useless in running a modern macroeconomy like we have today. but this man's arguments are also hugely incorrect. i never understand people who always push for monetary systems which are so inflexible as compared to todays dynamic economic system. what is needed is neither gold standard nor his inflexible monetary system. we just need a system where debt is properly underwritten so that the economy does not due to irrational exhuberence go into the ponzi financing stage as envisaged by hyman minsky, imho the best economist of the latter half of last century.

what people do not realise is that debt like money is also fungible. and in todays economic/monetary system, growth in debt (private and not government) is what grows rapidly and finances mal-investment (what minsky called ponzi financing). So debt underwriting needs to be subect to strict regulation. secondly once you still go into debt overload, the debt needs to be able to be written off with the debt holders (read banks) forced to take huge losses because they are the ones who lowered underwriting standards (like happened in housing bubble, even a dog could get a million dollar loan) and the debtor getting the benefit of the writeoff.

 

[_pakistan]

http://www.siasat.pk/forum/showthread.php?130993-Javed-Ghamidi-%26%231587%3B%26%231608%3B%26%231583%3B-%26%231705%3B%26%231575%3B-%26%231605%3B%26%231587%3B%26%231604%3B%26%231729%3B-%26%231575%3B%26%231608%3B%26%231585%3B-%26%231606%3B%26%231740%3B%26%231575%3B-%26%231606%3B%26%231592%3B%26%231575%3B%26%231605%3B-%26%231605%3B%26%231593%3B%26%231588%3B%26%231740%3B

 

[Wadaich]

(hmm) People trained by educational and financial institutions of the current system ..... ..... may not be able get out of its shackles. Their whole thinking and solutions cannot get out of the vicious circle of this system. ... .... banking .. ... fractional reserve banking.:)

 

[Heart]

I sometimes wonder whether that "Dynamic Economic System" is stable in itself? This dynamic economic system is perhaps the creation of the "Unlimited Economic Wants" that modern economics teaches us. Islam, on the other hand puts certain restrictions on the level of Dynamism and because of this it has forbidden dealing in interest because it is the same desire of Unlimited Economic Wants that gives birth to Interest. The world "Dynamic" looks great, but no system which has dynamism beyond certain boundaries can survive. It has to remain within those boundaries. A boundary less system will ultimately collapse under its own burden.

Islam teaches us to remain within ones financial constraints - not to stretch beyond ones means unlike modern economics. The priority for a state is to regulate that. Allah has created all His Living Beings - not without their basic need in the world. Islamic economics prioritizes basic needs of the Ummah / State over all other financial motives. A state prioritizing this, will never have any of its citizen, dying of hunger or lack of shelter. Yes, because of this priority, certain elites of the society will suffer because their desire of "Wants" will be restricted. But the overall wellbeing of the society is much important than serving the needs of the few.

I think if we remodel our economic system to remain within the bounded Islamic economic system, gold / silver could be a perfect solution. I think it is the divinely ordained solution.

 

[Temojin]

[MENTION=24375]AsifAmeer[/MENTION] It is always good to know that I was wrong in something and that I can learn new things also. There is much to discuss about it so should we use this forum or the facebook? Seems like we have dubbed a debt free economic system as the gold-standard mistakenly. In fact, any system that would be debt free would suffice.

 

[mrk123]

Here is an article from Time Business on the topic. Apologies if folks have already seen this.
[MENTION=24375]AsifAmeer[/MENTION] [MENTION=23319]Temojin[/MENTION]

[h=1]The Strange Allure of the Gold Standard[/h]By DAVID FUTRELLE | August 29, 2012

Some Republicans want to take the country forward by taking us back — way back – to the gold standard. The Republican party platform, approved on Tuesday, warns against the evils of “easy money and loose credit” and calls for a commission to ”investigate possible ways to set a fixed value for the dollar.” This proposal is clearly a sop to Ron Paul, who made “sound money” one of his big issues during his failed campaign, and has about as much chance of being enacted as Romney has of winning the African-American vote. But the mere fact of its existence is significant.

Almost everyone who is not Ron Paul, or at the very least a Ron Paul fan, thinks the idea of returning to the gold standard is daft. A recent University of Chicago poll of top academic economists found precisely zero who thought that was a good idea. Liberal commenters are aghast that the issue is even being raised. Economist and New York Timescolumnist Paul Krugman has described the gold standard as “an almost comically (and cosmically) bad idea.” On The Atlantic, Matthew O’Brien called the gold standard “the world’s worst economic idea.” He conceded that “[t]here might be worse ideas than this, but they generally involve jumping off the Brooklyn Bridge because everybody else is doing it.”
But aversion for the gold standard is hardly confined to the left. Economist Milton Friedman, the late king of the monetarists, argued that the idea was fundamentally “anti-libertarian because what they mean by a gold standard is a governmentally fixed price for gold.”

Yet the gold standard still has its fans. What’s the appeal? True goldbugs have an almost religious faith in the power of the precious metal, and a deep distrust of government. To some, what they call “sound money” is the only moral solution. At a conference organized by the libertarian Cato Institute last fall, speakers denounced our current policy of “fiat money” with the fervor of preachers. As George Melloan observed in the American Spectator,

“the consensus view [as the conference] seemed to be that in these parlous times a return to the gold standard might very well be the only way to restore order in the bawdy house Washington has become.”
​

What worries the goldbug the most is the specter of inflation, which some at the conference referred to as not only harmful but “immoral.” When the government can print money on demand — without having to back up its bucks with real gold — goldbugs warn, the end result can be hyperinflation and economic chaos.
And, as Joe Weisenthal points out on Business Insider, “the ability to create fiat money out of thin air is a stealth form of taxation, because the creation of more dollars diminishes the value of those already in existence.” This makes the gold standard especially enticing to tax-hating conservatives.
The trouble is that the idea of gold as a bulwark against economic chaos is based on illusions. Going on the gold standard would essentially require an instant end to deficits, robbing to government of its ability to fight recessions (and possible depressions) with stimulus money. Moreover, it would link the value of the dollar to the gold supply, leaving our economic future in the hands of gold miners. If miners were to strike, as Noam Scheiber notes in The New Republic,

there [would] be too few dollars relative to the amount of buying and selling going on in the economy. When there are too few dollars, each dollar becomes more valuable, and people start to hoard them. Spending slows and the economy collapses.
​

We all saw what happened when banks started hoarding their dollars during the financial crisis; imagine what might have happened if the rest of us had done the same.
Anyone who thinks the gold standard means stability needs only look at American history to see that theory rebutted, again and again, by the crashes and “panics” of the gilded age and afterwards. As Krugman sardonically notes, “under the gold standard America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933.”
Given all this, it seems likely that any commission tasked with examining the gold standard would return with a conclusion similar to that reached by the Reagan Gold Commission back in 1982, the last time such an exercise was conducted: that a return to the gold standard “does not appear to be a fruitful method for dealing with the continuing problem of inflation.” That’s putting it mildly.

Source: http://business.time.com/2012/08/29/the-strange-allure-of-the-gold-standard/?hpt=hp_t3

 

[AsifAmeer]

blow up the Fed's Balance sheet and the Fed by writing off all its "Loans" as bad. Get rid of the Fed. If Govt needs money, and if the Congress allows, print the money and spend it. Watch Energy prices closely. I know its alot easier said than done. Lekin can you imagine US confiscating all the Gold in the US? If that can happen, why not this?

"Money has to be converted into equity from Debt." USA could never afford that.

 

[AsifAmeer]

Dont you think Debt creates moral hazard if not forced into a default when it goes non-performing? When investors are disconnected from profits and cashflows, it will surely create moral hazard. We saw the same thing with MBS and securitization in US. Plus we saw the same thing with Investment Banks and its management goals after they abandoned the partnership model and went public.

I see a constructive criticism happening b/w us. I think we're gonna get along pretty well!

gold standard is completely useless in running a modern macroeconomy like we have today. but this man's arguments are also hugely incorrect. i never understand people who always push for monetary systems which are so inflexible as compared to todays dynamic economic system. what is needed is neither gold standard nor his inflexible monetary system. we just need a system where debt is properly underwritten so that the economy does not due to irrational exhuberence go into the ponzi financing stage as envisaged by hyman minsky, imho the best economist of the latter half of last century.

what people do not realise is that debt like money is also fungible. and in todays economic/monetary system, growth in debt (private and not government) is what grows rapidly and finances mal-investment (what minsky called ponzi financing). So debt underwriting needs to be subect to strict regulation. secondly once you still go into debt overload, the debt needs to be able to be written off with the debt holders (read banks) forced to take huge losses because they are the ones who lowered underwriting standards (like happened in housing bubble, even a dog could get a million dollar loan) and the debtor getting the benefit of the writeoff.

 

[guest]

ya try out your gold silver system. and see how well it goes, especially it apparently is ordained divinely. we have lived last 2000 years on atleast a pseudo-gold standard. there is a reason when todays modern macro-economy evolved, they quit that gold standard. if of course in the name of opposing dynamism, you want ot go back to the economy of the pre-modern era, then you are entitled to the luxury.

I sometimes wonder whether that "Dynamic Economic System" is stable in itself? This dynamic economic system is perhaps the creation of the "Unlimited Economic Wants" that modern economics teaches us. Islam, on the other hand puts certain restrictions on the level of Dynamism and because of this it has forbidden dealing in interest because it is the same desire of Unlimited Economic Wants that gives birth to Interest. The world "Dynamic" looks great, but no system which has dynamism beyond certain boundaries can survive. It has to remain within those boundaries. A boundary less system will ultimately collapse under its own burden.

Islam teaches us to remain within ones financial constraints - not to stretch beyond ones means unlike modern economics. The priority for a state is to regulate that. Allah has created all His Living Beings - not without their basic need in the world. Islamic economics prioritizes basic needs of the Ummah / State over all other financial motives. A state prioritizing this, will never have any of its citizen, dying of hunger or lack of shelter. Yes, because of this priority, certain elites of the society will suffer because their desire of "Wants" will be restricted. But the overall wellbeing of the society is much important than serving the needs of the few.

I think if we remodel our economic system to remain within the bounded Islamic economic system, gold / silver could be a perfect solution. I think it is the divinely ordained solution.

 

[AsifAmeer]

Can you translate this article for me in Urdu?
http://blogs.thenews.com.pk/blogs/2012/08/an-open-letter-to-ulema/

anybody..?
@tirisb and [MENTION=25067]BuTurabi[/MENTION]

http://www.siasat.pk/forum/showthre...2;ام-معشی

 

[AsifAmeer]

You have to think beyond religion here. I was convinced that Gold Standard IS the answer after studying it and finally reading a hit of it in Surah Kahf when a "righteous man" saved his wealth for his soon-to-be orphan kids in gold and silver. Then I studied the Industrial revolution, the great depression and why the modern money theory was developed. Phir andaza huwa tha the human race is so much more complicated. Religion is a framework of morality. If you expect more out of religion, it will have diminishing returns till you starts to play havoc socially and economically.

Mein bohot soch ker ye likh raha houn. The basic needs you speak of, does not include electricity or ultrasound or a gasoline engine. nor a cellphone or internet. Its a self-defeating argument.

Economics is not a problem of religion. Economics is a problem of HUMAN Interaction and perception. And the problem is by nature we humans are not capable to comprehend absolute truth. Read up The Black Swan by Nassim Taleb and Alchemy of Finance by George Soros.

There is alot more to learn and I know I will die with a thirst for knowledge. I just hope if God's pleased with me, that Heaven is a big Library! lol.
[MENTION=23319]Temojin[/MENTION]

I sometimes wonder whether that "Dynamic Economic System" is stable in itself? This dynamic economic system is perhaps the creation of the "Unlimited Economic Wants" that modern economics teaches us. Islam, on the other hand puts certain restrictions on the level of Dynamism and because of this it has forbidden dealing in interest because it is the same desire of Unlimited Economic Wants that gives birth to Interest. The world "Dynamic" looks great, but no system which has dynamism beyond certain boundaries can survive. It has to remain within those boundaries. A boundary less system will ultimately collapse under its own burden.

Islam teaches us to remain within ones financial constraints - not to stretch beyond ones means unlike modern economics. The priority for a state is to regulate that. Allah has created all His Living Beings - not without their basic need in the world. Islamic economics prioritizes basic needs of the Ummah / State over all other financial motives. A state prioritizing this, will never have any of its citizen, dying of hunger or lack of shelter. Yes, because of this priority, certain elites of the society will suffer because their desire of "Wants" will be restricted. But the overall wellbeing of the society is much important than serving the needs of the few.

I think if we remodel our economic system to remain within the bounded Islamic economic system, gold / silver could be a perfect solution. I think it is the divinely ordained solution.

 

[guest]

in a bad debt case, i think people have come to agree largely that of the two parties, the debtor and the creditor, it is the creditor who is at bigger fault. to make it clearer to you, we all know when we deal with banks, how they nickel and dime us by all sorts of hidden things which you can only see if you have the courage to go and read the terms of agreement. even then it might be very hard as those are written by highly qualified lawyers.

now if such a bank were to issue a housing loan of 1 million dollars to a schmuk working at a McDonalds, when the loan goes bad, who is to be held responsible. who is to loose the money, the schmuk who was actively encouraged to lie by the bank or the bank who very well knew that it was loaning to someone unfit of handling that level of debt. so of course i dont believe in bailing out banks, no moral hazard there.

however i believe in bailing out people in bad situations by writing off debts especially those that are incurred by the creditor's malicious or irresponsible behavior. there are also very sound economic arguments to do that (when it involves large number of people), as large sections of population if encumbered by debt, will stop spending as they have to pay off debts and slow down growth in the economy.

Dont you think Debt creates moral hazard if not forced into a default when it goes non-performing? When investors are disconnected from profits and cashflows, it will surely create moral hazard. We saw the same thing with MBS and securitization in US. Plus we saw the same thing with Investment Banks and its management goals after they abandoned the partnership model and went public.

I see a constructive criticism happening b/w us. I think we're gonna get along pretty well!

 

[zhohaq]

Al Jazeera ran a programme on this I watched, also includes Islamic prespective and other possible alternatives... Very interesting topic looking forward to a lively deabte here

Here is a rather weak piece on Salon about the Gold standard in the American context:
http://www.salon.com/2012/08/31/the_gold_standard_delusion/

 

[AsifAmeer]

Sahi kaha..

I was trading before I took my classes in Economics and Finance. Going thru Uni and college was tormenting for me because almost all of my professors were not traders but Book readers. Teaching finance to a trader is like teaching birds how to fly. These are the words of Nassim Taleb.

About 2 months ago I attended this gathering where there were more folks from the IMF, World Bank and ADB. MANY of them were of Pakistani/Indian/Sri Lankan origins. Spoke with a few. Aur tumhari baat was clearing visible from talking to them. Common sense was not their strong point. Dont get me wrong. Very intelligent folks. I mean harvard, MIT, Georgetown, Princeton. Sad state of human affairs.
[MENTION=13871]Unicorn[/MENTION] I think what [MENTION=10641]wadaich[/MENTION] is saying has a shred of truth in it.

(hmm) People trained by educational and financial institutions of the current system ..... ..... may not be able get out of its shackles. Their whole thinking and solutions cannot get out of the vicious circle of this system. ... .... banking .. ... fractional reserve banking.:)

 

[Unicorn]

(hmm) People trained by educational and financial institutions of the current system ..... ..... may not be able get out of its shackles. Their whole thinking and solutions cannot get out of the vicious circle of this system. ... .... banking .. ... fractional reserve banking.:)

I suggest you and the patriots get Asif in a room, get a blow torch and cut his shackles(bigsmile)than take him in year 1795 and educate him there.

 

[AsifAmeer]

Thing I like about Equity partnership is it disperses risk. Reason why we see booms and Bust are because during booms you have profits counted twice. And a bust when that debt (projected profit) is realized as bad debt. The more this practice is concentrated, the bigger the boom/bust.

What you shared here about Banks underwriting crazy loans was because of 2 reasons.
1. Greenspan Put (remember LTCM?)
2. Securitization

When you disconnect Home mortgage holder from its creditor via securitization, just like i-banker from capital via public capital, the more chances you are going to see examples of moral hazard.


And again, the more I see and hear this "Islamic Economic System", the more I feel convinced that a rhino is being sold as a unicorn...
[MENTION=13871]Unicorn[/MENTION] here's another quote for ya..

in a bad debt case, i think people have come to agree largely that of the two parties, the debtor and the creditor, it is the creditor who is at bigger fault. to make it clearer to you, we all know when we deal with banks, how they nickel and dime us by all sorts of hidden things which you can only see if you have the courage to go and read the terms of agreement. even then it might be very hard as those are written by highly qualified lawyers.

now if such a bank were to issue a housing loan of 1 million dollars to a schmuk working at a McDonalds, when the loan goes bad, who is to be held responsible. who is to loose the money, the schmuk who was actively encouraged to lie by the bank or the bank who very well knew that it was loaning to someone unfit of handling that level of debt. so of course i dont believe in bailing out banks, no moral hazard there.

however i believe in bailing out people in bad situations by writing off debts especially those that are incurred by the creditor's malicious or irresponsible behavior. there are also very sound economic arguments to do that (when it involves large number of people), as large sections of population if encumbered by debt, will stop spending as they have to pay off debts and slow down growth in the economy.

 

[Unicorn]

Thing I like about Equity partnership is it disperses risk. Reason why we see booms and Bust are because during booms you have profits counted twice. And a bust when that debt (projected profit) is realized as bad debt. The more this practice is concentrated, the bigger the boom/bust.

What you shared here about Banks underwriting crazy loans was because of 2 reasons.
1. Greenspan Put (remember LTCM?)
2. Securitization

When you disconnect Home mortgage holder from its creditor via securitization, just like i-banker from capital via public capital, the more chances you are going to see examples of moral hazard.


And again, the more I see and hear this "Islamic Economic System", the more I feel convinced that a rhino is being sold as a unicorn...
@Unicorn here's another quote for ya..

[hilar][hilar]. Ya, you got to feed him a whole lot with very little use[hilar]

 

[only_truths]

Sahi kaha..

@Unicorn I think what @wadaich is saying has a shred of truth in it.

Innovativeness has to be beyond certain accepted norm of base standard. This has nothing to do with the shackles of education or current system. Many financial innovativeness has happened in the past working within this system.

If you want to break the shackles, then you have to be Agha Waqar who broke the shackles of Newton's second law of thermodynamics?