The famous tulip bubble was not created by central banks

[blazespinnaker]

A gold standard will not solve the bubble problem.

We had a gold standard in 1624 and 1929. And during many other historical bubbles.

Free markets can over extrapolate just as easily on a gold standard as they can on a fiat currency.

The current fiscal nightmare wasn't caused by loose CB money. Perhaps that was a trigger, but anything can be a trigger, eg: tulip bulb fashion can be a trigger, investment stock mania can be a trigger, etc.

The current fiscal nightmare was caused by a lack of regulation by the CB. A lack of pushing back against the bubble.

The current fiscal nightmare was simply caused by the tendency of free markets to form bubbles. Add the internet and globally spawning computer systems, and suddenly the bubble becomes that much more bigger and deadlier.

Free markets can bubble and burst just as easily on gold standards. The only difference is that government do not have any tools to clean up after the bursting of the bubble.

I guess that would be one advantage of the gold standard. Governments would be much more likely to clamp down heavily and regulate the markets with a much more heavy hand if we were on a gold standard because if things got out hand, they'd know they couldn't do anything about it.

[grapejelly]

Re: The famous tulip bubble was not created by central banks

No, you have it wrong.

Banks were always allowed to create money through fractional reserve. But the lenders to the bank (so-called depositors, hahahaha) sometimes get suspicious or need their money back due to the vicissitudes of business, and usually all at once due to either a rumor of the bank's insolvency (the bank is always insolvent) or crop failure.

Then the state gives the bank safe harbor and suspends the right of depositors to get their money.

It happens again and again all the way to this day.

The solution of course is to not give the banks the right to reneg on their contracts. Years ago, for awhile, there was a law that held shareholders liable personally for banks' going under, and this helped a lot.

The answer is really to get rid of government monopoly central banking altogether as an illegal fraudulent scam. There is no need for banks anymore. The purpose of central banks has been and still is to fund wars and spending by government, in league with large wealthy men and women.

There is no need for banks anymore because the intermediation and transactional functions can be handled perfectly through the Internet. Competing commodity currencies are quite easily spent and exchanged with extremely low transaction costs. The "unit of account" function of the currency can be retained but there is no store-of-value function and no need for fraudulent schemes such as banks.

If people do want to lend to banks, let them. But don't rescue them when the bank collapses.

[blazespinnaker]

Re: The famous tulip bubble was not created by central banks

I have it wrong?

Central banks created the tulip bubble? Citation for that one?

Free markets bubble. The dot com bubble was created by irrational exuberance about the internet. It was not created by central banks.

The problem is not central banks. it's just the nature of man. These things can happen just as easily on a gold standard as they can on a fiat currency.

Governments are there to keep men from behaving badly. Governments should be there to keep bubbles from forming, or at least, forming disastrously.

You still need credit and formation of large amounts of capital. Credit is what keeps the world going. Without credit, the world will seize up. Shipments couldn't occur from one place to another due to the time between receiving of goods and payment. Credit is the lifeblood of commerce. Credit what lets biotech companies do research.

This is why we all have credit ratings. Credit ratings are basically what keeps our economy going and it's only when banks ignore the credit ratings did things get out of hand.

Without credit we'd just have dead money anywhere. Doing nothing. Wealth could not be invested. People need to be able to borrow money.

[ricket]

Re: The famous tulip bubble was not created by central banks

I have it wrong?

Central banks created the tulip bubble? Citation for that one?

People need to be able to borrow money.

In my opinion, the CBs didnt cause it per se, but the bubbles could never have existed without the collusion of the central banks and them giving out so much money on the cheap. If people actually had to "work" for their money (in every sense of the word), then people would be much more careful with how they spent that money and would be much more suspicious buying into "tulip mania". However, if cheap credit is flowing and it would be easy to borrow more to cover any losses speculating in tulips, then most people wont approach the situation with any sort of actual rationality.

[blazespinnaker]

Re: The famous tulip bubble was not created by central banks

Agree, the avilability of credit certainly helps bubbles.

However, the availbility of credit is necessary for capitalism to function.

Btw, another problem with the gold standard. Would anyone trust the US after what Nixon did?

[grizam303]

Re: The famous tulip bubble was not created by central banks

Governments are there to keep men from behaving badly. Governments should be there to keep bubbles from forming, or at least, forming disastrously.

And men are there to keep government from behaving badly. It looks like the blame rests with many.

What governments should be doing is a matter of personal political philosophy. What our government should be doing is explicitly outlined by the US constitution. There is no provision for protecting the economy in the constitution. There is, however, a provision stating that money must be backed by gold or silver. If you want to talk "should"'s, you should start here.

[Guest]

Re: The famous tulip bubble was not created by central banks

And men are there to keep government from behaving badly. It looks like the blame rests with many.

What governments should be doing is a matter of personal political philosophy. What our government should be doing is explicitly outlined by the US constitution. There is no provision for protecting the economy in the constitution. There is, however, a provision stating that money must be backed by gold or silver. If you want to talk "should"'s, you should start here.

Amen! from the choir

[friendly_jacek]

Re: The famous tulip bubble was not created by central banks

A gold standard will not solve the bubble problem.

We had a gold standard in 1624 and 1929. And during many other historical bubbles.

Free markets can over extrapolate just as easily on a gold standard as they can on a fiat currency.

The current fiscal nightmare wasn't caused by loose CB money. Perhaps that was a trigger, but anything can be a trigger, eg: tulip bulb fashion can be a trigger, investment stock mania can be a trigger, etc.

The current fiscal nightmare was caused by a lack of regulation by the CB. A lack of pushing back against the bubble.

The current fiscal nightmare was simply caused by the tendency of free markets to form bubbles. Add the internet and globally spawning computer systems, and suddenly the bubble becomes that much more bigger and deadlier.

Free markets can bubble and burst just as easily on gold standards. The only difference is that government do not have any tools to clean up after the bursting of the bubble.

I guess that would be one advantage of the gold standard. Governments would be much more likely to clamp down heavily and regulate the markets with a much more heavy hand if we were on a gold standard because if things got out hand, they'd know they couldn't do anything about it.

Of course you are correct as bubble and bust cycles are a part of human nature and psychology. People have the sheep behavior or crowd psychosis. Things did become worse with the credit economy with its credit feeding on credit, giving another dimension of exponential, unsustainable growth.

[FRED]

Re: The famous tulip bubble was not created by central banks

Of course you are correct as bubble and bust cycles are a part of human nature and psychology. People have the sheep behavior or crowd psychosis. Things did become worse with the credit economy with its credit feeding on credit, giving another dimension of exponential, unsustainable growth.

No. It's far more complicated than that. Google: next bubble.

[DToM67]

Re: The famous tulip bubble was not created by central banks

...The problem is not central banks. it's just the nature of man....

The problem has always been money changers... manipulation, whether PM or other currency.

...Governments are there to keep men from behaving badly. Governments should be there to keep bubbles from forming, or at least, forming disastrously.

Governments have rarely kept men from behaving badly... Given excuses & license to wealthy & privileged men to kill, plunder & starve the poor, uneducated & less-privileged via war and crises. Governments enable disastrous bubbles to occur.

This is why we all have credit ratings. Credit ratings are basically what keeps our economy going and it's only when banks ignore the credit ratings did things get out of hand.

Credit ratings are arbitrary measures, manipulated by financial institutions when it serves their purposes.

One need only look to the past to see that the root of the problem has been long understood:

"If the American People ever allow the banks to control the issuance of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power of money should be taken from the bankers and restored to Congress and the people to whom it belongs. I sincerely believe the banking institutions having the issuing power of money are more dangerous to liberty than standing armies."

~Thomas Jefferson~

"Permit me to issue and control the money of the nation and I care not who makes its laws"

~Mayer Amschel Rothschild~

[marvenger]

Re: The famous tulip bubble was not created by central banks

well said. I'm sick of bitching about this stuff, there's enough smart people out there, smarter than me, who understand this stuff. Where's the organised effort to do something about it? Sapiens just posted an article http://www.itulip.com/forums/showthread.php?t=6564 giving a pretty detailed arguement for government controlled fiat currency. Lets support this guy Stephen Zarlenga, he reckons that you only need 5% of people to get behind this movement. I reckon Obama will have our backs too. I'm an aussie by the way but really wants america to sort its shit out; last best hope for humanity and all.

[blazespinnaker]

Re: The famous tulip bubble was not created by central banks

Of course you are correct as bubble and bust cycles are a part of human nature and psychology. People have the sheep behavior or crowd psychosis. Things did become worse with the credit economy with its credit feeding on credit, giving another dimension of exponential, unsustainable growth.

A very sensible counterpoint. So you are saying leverage could not exist with a gold standard? I don't think that's the case. I think it could have existed, but probably will not now for quite awhile because of all the lessons we've learned.

[blazespinnaker]

Re: The famous tulip bubble was not created by central banks

Eric's thesis is very well thought out and certainly worthy of a lot of kudos. He's certainly an equal to the Schiff, if not better because he doesn't annoy like Peter does.

However, I still feel that some of the pronouncements that come out are often louder in volume than they need to be because they compete with the shouting from the other side. There is this need to become almost as dogmatic as the laffer's of the world, just in reverse.

But Laffer is partly right. Cutting taxes does help trickle down economics which does help everyone. Greenspan was right, too much government regulation is a bad thing.

And Keynes was certainly correct, reflating during the bust of the boom-bust cycle is an appropriate way to react to overly negative population psychology.

Because the fact is, the future has much promise. Think Robotics. Think AI. Think alternative-energy. Think globalisation, advances in food production. Technology is improving at an accelerating rate.

So credit is not the problem. We need credit to bankroll this innovation. The problem is (and always has been) making sure the right people get the credit that they need in order to invest and innovate.

I will agree that as a % of GDP, we generally shouldn't have too much outstanding credit and should try to stay near historical norms. Certainly the Shadow Banking System, with its ability to ignore the reserves that the fed could force on the banks, went too far. We also need to be aware with credit is falsely pushing up GDP.

However, the problem here is not loose monetary policies. The problem is a lack of push back by the Fed. All a gold standard would do would cause the fed to push back faster and harder because they'd know they wouldn't be able to clean up afterwards.

A gold standard would also cause people not to innovate because wealth preservation would be too easy. Some inflation is a good thing. It forces people to invest, and invest we must if we are going to improve our standard of living.