Grant Schumacher

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Grant Schumacher
Posted over 2 years ago
What would happen to an economy if physical precious metals were legal tender currency?
To Brian: Yes, it is possible to have recessions and bank runs similar to our current situation with a physically backed or a commodity currency, especially following an era of easy credit. There were many recessions and bank runs before the US went off of the gold standard, as well as before the existence of the Federal Reserve System. When people do not believe that a bank can meet demand for withdrawals, there will be a bank run, which may lead to a bank panic (systemic). In this recession, the packaging/ sale of mortgage backed securities and under the table derivatives trading, combined with Fed policy & regulations incentivizing banks to make poor loans. The market for mortgage backed securities collapsed (people realized borrowers were not creditworthy) and the market for them dried up, leading to a liquidity spiral (banks dump securities at the same time, leading to lower prices and more dumping -> need for a lender of last resort). It would still be possible for banks to package and sell loans if there was only a commodity currency, and a commodity currency would not prevent derivatives trading. Any time there is a fractional reserve system (+ mix: poor national bank policy, perverse incentives & non-disclosure) this can happen. Also, there can be problems with the purity of the commodity (i.e. gold) as it can be diluted which can increase transaction costs relative to a fiat currency. To Alan: Yes, I agree, if there were a transition back to a physical currency standard, it would be very difficult and likely cause a collapse. In my response I was focused more on the long term consequences on funding liquidity, abstracting from the transition. You bring up a good point; I don't know if there would be a satisfactory and orderly way to go back without bank runs & panics to redeem the currency for the commodity. It would probably require a complete financial collapse beforehand or a temporary, complete government control of the financial system. Bad.
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Grant Schumacher
Posted over 2 years ago
What would happen to an economy if physical precious metals were legal tender currency?
If only physical currency was accepted for business, then you start getting into logistical problems, transporting the currency would be costly & inefficient (so much for the ability to pay with credit or debit). Also, inflation & the price level would be determined by the mining of raw materials relative to the creation of new goods. Also, the fractional reserve system would likely run into some problems, slowing growth.
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Grant Schumacher
Posted over 2 years ago
Can we think without any presumptions?
You should read The Structure of Scientific Revolutions by Thomas S. Kuhn or a summary thereof. In short, assumptions are needed so that specific things can be tested; when enough new and contradictory evidence is gathered assumptions can be adjusted if necessary to allow an increase in the scope of the model's explanatory power. Such a change in assumptions is called a paradigm shift.
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Grant Schumacher
Posted over 2 years ago
Is capitalism sustainable?
Yes, capitalism is the only sustainable and dynamic economic system; however, current consumption of raw materials, pollution, and population growth may not be sustainable. In the past, we have found solutions to our problems, providing more food for more people, living ever longer and wealthier lives. If we find are able to get more cheap energy... there are real possibilities. Regarding your question about wages, people are paid real wages (nominal wage/ price level) based on the marginal productivity of their labor. To raise real wages, one must raise productivity, and to raise productivity we need more education and technology (usually related to more knowledge & education). It will never be possible to eliminate jobs that are "low paid" (in the sense that they are paid less compared to others) but it is very possible to eliminate absolute poverty.