Tuesday, January 25, 2011

My Response to Einstein

My response to this article titled: "FLASHBACK: Albert Einstein Identifies The Inherent Flaw Of The Gold Standard"

Main Quote from Article: “The gold standard has, in my opinion, the serious disadvantage that a shortage in the supply of gold automatically leads to a contraction of credit and also of the amount of currency in circulation, to which contraction prices and wages cannot adjust themselves sufficiently quickly.” Albert Einstein

My Response:

If such an actual check on a nation's production as the gold standard existed we'd not be in the predicament we are in now. No nation or person can run a decades long deficit and not pay the price someday. If there was a gold standard of some type in place our deficit would have never been able to run as high and as long as has today. Consequently, because it is a lasting trend, production has gone overseas and left the USA.

Forget the Gold Standard or any Commodity standard or bias toward it for a moment. The real issue is production. Nations must produce in order to trade with other nations. All we have produced over the last 30 years is a bunch of paper with dead presidents on it. China and other nations now are the producer nations. When the fiat dollar falters, and it will, the US will be in dire straights. Whether gold, silver, copper, corn, oil, beans or lumber, all of these things, these commodities, cannot be counterfeited. Only through work and production can they be made usable for their purposes. Once a nation gives the right to claim the production of another nation or person without having produced themselves then you get abuse. In our case, abuse of the dollar, which has depreciated 96% since 1900. The average person's life savings in 1900 would not be enough to buy a car now. His lifetime gross income not enough to buy a house. How can the wealth of a nation's people be preserved and grown from generation to generation under such conditions? With the fall of the dollar we've seen a corresponding fall in quality of life in the last 50 years. Every household must have 2 earners now to make ends meet. Actual wages are down, costs are up. It does not matter who it is, unless it is God himself, when you give one man, one group or one nation the ability to legally get something for nothing the system will be abused at the expense of the neighboring individual's, societies, nations and eventually the counterfeiter himself.

Recessions caused by trade imbalances under a gold standard, which you discussed above, are not the problem, the imbalance is the problem. The recession is the cure. The nation or person is producing an unwanted, outdated or overpriced product. The recession is the signal that it needs to retool, refocus or be liquidated to more productive means. Instead what we do now is to flush the industry with funds and credit to keep building the unwanted products indefinitely to preserve the jobs, the name or the pride of the endeavor. Giving money to a company who still makes CRT TVs in 2011 to keep jobs or because the company has been around since 1878 etc. will not increase demand for CRTs. People want the Chinese flat screens and the Goodwill down the street from me has big boxy CRT TVs for sale for $10 as far as the eye can see. All propping up such a company in times of trade-imbalance-induced-recession does is waste more glass, more copper, more silver, more wood, more labor and more manufacturing space on junk no one wants or needs.

Life in a non-counterfeit economy is not easy. We cannot just print our way out of trouble at the expense of the rest of the world's and our own neighbor's savings. We have to stay on our toes and realize that whatever it is that got you to where you are today is not enough to get you there tomorrow. There is a cure for gold-standard-trade-imbalance-induced-recession. It's call savings. So long as the deficit is not large, like say... 4:1, reference: http://www.census.gov/foreign-trade/balance/c5700.html#2010 then it should be able to be absorbed by savings until the nation can retool its production to correct the deficit of trade. Unfortunately, a nation with a sometimes negative savings rate and a 4:1 imbalance is in for a rough ride. How on earth did it get to be 4:1 anyways... how could we get 4 tons of stuff in return for 1 ton of stuff in 2010. Well lucky us. Just as you pointed out above, we have an elastic money supply that can issue counterfeit value into the system, thus allowing the imbalance to never force a correction and thus expand as we make more and more stuff nobody wants or just make nothing at all. All of this misused production is not cured by the elastic money, it is merely given a blood transfusion. It is still not able to produce it's own blood and will need the blood of others indefinitely. So now, thanks to the system you endorse, some day the world will stop taking the paper and give us back all the paper we gave them over the years and all we'll have left is 1/4 the productive capability of our neighbors, no savings and a mountain of defaulted debt. All because of an imbalance that a gold standard or any non-fiat standard could have stopped.

The truth is that we only learn through negative feedback. If you are groping in the dark for the light switch you identify and move to correct each time you grasp something that is not the light switch until you find it. If you are doing the correct thing, such as a pilot maintaining a heading, no action is required until the instruments read that conditions have changed or the pilot has made an error and strayed from his course at which point he must act to correct.

Einstein was a genius, but he wasn't always right. That's a fact. Geniuses are always thinking of new ideas, thinking about things. Trying to find which ideas work and which don't. Exploring deeper the plausible ideas and ignoring the bad ones. I'm not saying that this was a bad idea he stated in your quote. I think he is actually absolutely correct. In today's world though I think he'd appreciate it, if he were still alive, if I asked "Mr. Einstein, seeing now what has transpired perhaps you'd be better served by your correct observation of trade imbalances and the gold standard by looking at it differently. Perhaps this characteristic is in fact an advantage of the gold standard. Perhaps is a society with misallocated resources needs a contraction of credit and money to let it know it is veering off course so it can steer itself in the correct direction."

Oh and by the way, The Germans... they make awesome stuff that everyone wants. That is why they are a prosperous nation in the sinking ship of Europe. Even though their neighbors rob them blind every day with bailouts to Greece, Spain and Ireland their production base is strong enough to take it. At least for now.

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