Friday, December 10, 2010

Paul Krugman: Holding Economic Logic Hostage to Keynesian Nonsense, Part I

I must admit I enjoy reading Paul Krugman's material on the NY Times page if for no other reason than he does a good job of explaining bad "economic theory" in the form of what Robert Higgs calls "vulgar Keynesianism." While today's column primarily is political in nature (and no one politicizes economics more than Krugman), he also lays out the keys to understanding how Keynesian "logic" actually works.

Now if one were to have a conversation with Krugman, one would find that he actually believes in the Law of Scarcity, the Law of Demand, and the Law of Opportunity Cost. Furthermore, I doubt seriously that he believes these things can be repealed, even by a mythical President Krugman.

Yet, when put into a macroeconomic framework, Krugman's economic thinking is based upon a view that the "rule" somehow are different at different stages during the business cycle. For example, when things are relatively good, then one set of rules apply, and when the economy is in the tank -- as it is now -- one goes by another set of rules. And so it goes.

I will take the liberty to say that Krugman believes that a capitalist economy suffers from what might be "internal contradictions" (I use that term carefully, as Marx used it and Krugman is not a Marxist) that tend to bias economic performance downward. The logical progression goes in the following manner:
  • People produce goods and are paid;
  • They take that money and "buy back" the goods that they make.
As long as people are able to "buy back" everything they have created, then all is well. However, the "internal contradiction" tends to be seen here:
  • People save part of the income they receive;
  • Savings tends to be greater than investment (the banks and other savings institutions tend to invest less than they take in as deposits);
  • Not enough money is available to "buy back" the created products;
  • Therefore, this "underconsumption/overproduction" cycle leads to layoffs as firms quit making goods so that they can sell off their inventories.
That pretty much is the Keynesian explanation of what is happening, and if one reads Krugman, one finds that he is operating on two fronts regarding any cut in tax rates for people he calls "the rich."
  • Wealthy people do not consume their entire paychecks at one time, so they have a greater "marginal propensity to save" than do people with lower incomes, which means that their spending/savings ratio creates problems for the economy;
  • Wealthy people tend to be more responsible for economic downturns because they don't spend everything at once, which is why they need to have large portions of their income taxed away so that government can do the responsible thing and spend.
Keynesians refer to the "multiplier," which is 1 over the MPS (Marginal Propensity to Save, or 1-MPC, the Marginal Propensity to Consume), and the greater the "multiplier," the better the economy performs. Obviously, the less that is saved, the greater the "multiplier," although Keynes adds that zero savings would bring about hyperinflation.

However, in the Keynesian view, the more government can drive down the savings rate to as close to zero as possible, the better off we will be, and the only way to do that is for government to make saving money as unattractive as possible. This noble goal of government can be accomplished in the following ways:
  • Inflate the money supply by enough to discourage present savings, as the value of money depreciates so quickly that to hold any money to spend in the future would be pointless;
  • Have high progressive tax rates to confiscate "idle money" from the wealthy so that government can quickly spend and bring the economy back to full employment;
  • Have government aggressively borrow money in order to lap up any other idle funds.
As for capital, well, in the Keynesian view, capital simply happens. Furthermore, capital investment at a time like this is useless because of "excess capacity."

There are a number of other implications in all of this, and when one adds Krugman's own belief that a society that is based upon a cradle-to-grave welfare system along with other restrictions is preferable to what he sees as a society governed by the "animal spirits" of capitalism, the logical progressions are obvious. Furthermore, in Krugman's view, markets that are not boxed in by rules set by government agencies always run off the cliff, as all investors are short-term oriented (as are Keynesians) and are not deterred by changes in relative prices, since Keynesians don't believe that prices have any significance except when aggregated in to various price indices.

Furthermore, in Krugman's view, no one would be willing to invest in new capital, given that the economy already suffers from "overcapacity," so any cut in tax rates for wealthy people would be pointless and most likely would further drive down the economy. Only government can make things right, and that government must be run by people who think like he does.

So, when one reads Krugman's columns, these are things that are under-girding his statements. Now, I think that Keynesian thinking was wrong in the 1930s, it is wrong today. I'll address my concerns in my next post.

61 comments:

AP Lerner said...

“Savings tends to be greater than investment (the banks and other savings institutions tend to invest less than they take in as deposits);”

Huh? Have you been paying attention to what’s going on in the banking system lately?

“That pretty much is the Keynesian explanation of what is happening”

False. You forgot the part about consumers and banks being over levered and rates up against the zero bound. You describe a typical recession. Keynes only cared about balance sheet recessions, which we are in now. Why can’t Austrian economists see the difference?

“Furthermore, capital investment at a time like this is useless because of "excess capacity."

Uh, this is common sense.

“Furthermore, in Krugman's view, no one would be willing to invest in new capital, given that the economy already suffers from "overcapacity,"

Huh?

jason h said...

"Why can’t Austrian economists see the difference?"

Because there is no real difference. Recessions are always about correcting the mismatch in production, due to miscalculations brought about by manipulated interest rates.

"Uh, this is common sense"

Only if you consider all capital to be the same. A factory tooled to build cars is useless if no one wants cars. 'Excess capacity' is a myth. Capital does not just sit idle because there are 'excess' factories, it sits idle because it takes time to transform it to meet different market demands. Furthermore, entrepreneurs can't retool their factories correctly because economic calculations are distorted when consumer's time preference for cash is artificially shifted by the manipulation of interest rates.

'Huh'
This is why Krugman demands more counterfeiting and confiscating. He wrongly believes the rich are hoarding their cash because of 'overcapacity'. He thinks, no one is investing long term because there is already an abundance of idle factories.

AP Lerner said...

"Recessions are always about correcting the mismatch in production, due to miscalculations brought about by manipulated interest rates."

Right. Consumer/bank balance sheets are irrelevant. Where have you been the last 10 years?


You define excess capacity by saying "A factory tooled to build cars is useless if no one wants cars." and then in the next sentence you say "'Excess capacity' is a myth". So which is it?

"Furthermore, entrepreneurs can't retool their factories correctly because economic calculations are distorted when consumer's time preference for cash is artificially shifted by the manipulation of interest rates."

Have you joined the copy paste crowd? FYI - just because you read it on mises.org, does not make it relevant to all topics.

Mike M said...

Lerner, you missed the essence of Jason h’s point. At least as I took it and he can opine for himself.
Recessions are in fact about clearing out the malinvestment of the prior cycle that was caused by interference in the free market cost of money. Of course consumer/bank balance sheets relevant. But what you fail to acknowledge is the present condition of those balance sheets, and their position at any given point in time, is a response to the marketplace signals. When you have a monetary system that artificially manipulates the cost of money you get behavior that is different from free market conditions.
What baffles me about Keynesians and Neo-Keynesians is their absolute faith in the deity like wisdom of the government elites versus the free market of the masses making individual decisions every day in their best interest. Austrian economics is compatible with liberty. Keynesianism is incompatible because it superimposes one man’s judgment for another. Austrian economics is not perfect but embraces liberty of the individual. Keynesianism is about force of judgment of one over another.
History is filled with example after example of the failure of central planning. The fact that Keynesians believe that central planning of the cost of money, or its very definition, is different or will have a different outcome is nonsensical. Then again, Keynesianism is not really about economics, it’s about politics and providing the political class with the tools and rationalization they need to expand the dependency class and exert control over the economy.

AP Lerner said...

"then when Dr. Anderson rewords it slightly your reply is “huh?”. "

First he says "the Keynesian view, capital simply happens. Furthermore, capital investment at a time like this is useless because of "excess capacity."". So Prof. Anderson believes Krugman/Keynesians do not see the point in investing in capital at a time of excess capacity. Ok? (Of course, Krugman and Keynesians are correct. Why in the world would you build more capacity, when you are not utilizing current capacity? But Prof. Anderson does not believe in capacity utilization, but that is a different topic.)

Then Prof. Anderson says "in Krugman's view, no one would be willing to invest in new capital, given that the economy already suffers from "overcapacity,"". So now he is saying, according to Krugman, no one is willing to invest due to overcapacity? And to that, I say 'huh?'.

My guess is he is trying to imply Krugman/Keynesian do not believe in investing in captial, ever, which of course is false.

I'm sure there is an explanation to all this that must conveyed in Latin :)

AP Lerner said...

"What baffles me about Keynesians and Neo-Keynesians is their absolute faith in the deity like wisdom of the government elites versus the free market of the masses making individual decisions every day in their best interest."

I'm not a Keynesian, and if you have read anything I have written, I have bashed the neo-liberal Neo Keynesians just as much or more than the Austrians. In reality, they are not all that different. However, when you say things like "deity like wisdom of the government elites versus the free market" you do not understand Keynesians, or Neo Liberal Neo Keynesians.

"Austrian economics is not perfect but embraces liberty of the individual."

Right. Embraces liberty so much most Austrian economists want to give up monetary sovereignty and return to the gold standard. Brilliant.

"History is filled with example after example of the failure of central planning."

Which is not Keynesianism. You are 100% wrong to imply it is.

"Keynesianism is not really about economics, it’s about politics and providing the political class with the tools and rationalization they need to expand the dependency class and exert control over the economy"

This is 100% false. You have fallen into the trap, and should take time to understand Keynesianism. And I mean John Maynard Keynes, not what you read on Wikipedia, and not what some ideologically driven Professor or Politician has told you. Keynesianism has been distorted over the decades, including by Krugman, to fit a political ideology. What you describe, and what gets describe as Keynesianism today by the media and many ideologically narrow minded academics is not what Mr. Keynes wrote about.

Sorry Mike M. I don't mean to come across harsh, but much of what you write is factually incorrect. Just because something gets repeated enough by people you want to believe, does not make it true.

Daniel Hewitt said...

AP Lerner,

I don’t think he meant to imply that Krugman does not believe in investing in capital ever. But at least I understand what your critique was now. Thanks.

“Why in the world would you build more capacity, when you are not utilizing current capacity?”

Investment in capital does not automatically mean “more capacity”. It can be necessary for a new product or new process. For instance, the company I work for is producing way less than our capacity. But there are still many capital investments ongoing. In general, customers want cheaper products in the midst of a recession, so our production lines have to be modified to handle a different mix of products. We want to reduce our internal costs as much as possible in order to better compete on price, so there are several cost savings projects that require new capital. Capital investment is still useful when there is excess capacity.

Mike M said...

“I'm not a Keynesian, and if you have read anything I have written, I have bashed the neo-liberal Neo Keynesians just as much or more than the Austrians.”
Lerner I wasn’t referring to you it was a separate point. I don’t really know what your economic or political philosophy is and to be honest don’t care.
“ Right. Embraces liberty so much most Austrian economists want to give up monetary sovereignty and return to the gold standard. Brilliant.”
Austrians advocate honest money. It does not necessarily follow that the gold standard is the only way to achieve that end. You confuse a pure fiat system and its effects with monetary sovereignty. The only “sovereigns” in that system are the bankers and the elites. May I suggest expanding your knowledge base on money (not currency). Its purpose and what it should be versus what passes for it today. There can be no true individual liberty and proper ownership of property unless there is honest money.
“Which is not Keynesianism. You are 100% wrong to imply it is.”
Keynesianism as it is embraced by policy makers today is about central planning and enabling the rationalizations they need to engage their policy.
“not what you read on Wikipedia’
I don’t read Wikipedia for my information thank you. Why would you assume so. I do my own homework
‘Keynesianism has been distorted over the decades, including by Krugman, to fit a political ideology...”
A point we concur on.
“… but much of what you write is factually incorrect. Just because something gets repeated enough by people you want to believe, does not make it true.’
Fascinating you would imply I don’t do my own thinking on these matters since you don’t know me.
Economics should not be about politics but politics uses and abuses economics to achieve their ends. Ultimately this falls into deciding whether you are a Statist or an Individualist. Everything flows from that fork in the road. Contrary to your statement I am not factually incorrect. I embrace those elements of any philosophy or discipline that embraces liberty of the individual and rejects any form of Statist control.
Make your own decisions for yourself on where you fall.

Anonymous said...

The real magic trick is that the Keynesian model is static. This is primary reason it violates reality so thoroughly. With interest, for example, the real world purpose is to pay for the time of the money, not the price of the money at a static instant. While this may seam arcane, it is the root of the Keynesian failure.

jason h said...

You define excess capacity by saying "A factory tooled to build cars is useless if no one wants cars." and then in the next sentence you say "'Excess capacity' is a myth". So which is it?

It was not an example of excess capacity but of the heterogeneity of capital. When Krugman aggregates he loses fidelity to the actual system he is trying to understand.

Krugman sees a closed factory, assumes there are too many factories. Surely, this will unleash the animal spirits causing individuals to stop investing.

He ignores the reality that the factory may produce cars no one wants, or consumer goods no one needs (it is not excess capacity, but simply mis-allocated) and (in fact) individuals may want to invest in said factory if they had any idea of what to make. Without a clear market signal as to whether there will be resources and customers available in the future, there is significant uncertainty.

'Excess capacity' in a macro sense IS rubbish.

It is impossible to convert every single product into a widget an declare, 'Nation A has a capacity of X widgets, if it produces anything less than X widgets it has excess capacity, thus the King must print money to buy up the extra widgets and keep the economy running'

Have you joined the copy paste crowd?

How is discussing a basic principle of the Austrian business cycle not relevant to a discussion about recessions? I guess this is where Bob chimes in a reminds us that many don't even take the time to understand the basics of ABCT.

Bob Roddis said...

Jason H, I was just thinking the same thing.

Dr. Hut Tax is a proud Chartalist. I find it very strange that these various Chartalist characters have been commenting on Austrian School blogs in support of their wacky religion without having the faintest familiarity, much less understanding, of basic Austrian concepts, such as subjective value and the problem of economic calculation. Never mind the law of scarcity. Talk about a gang that does not want to engage in a debate.

When I have pointed out to AP “Hut Tax” Lerner that his ideas come from Georg Friedrich Knapp who was eviscerated by Von Mises in 1917 for failing to even address the concept of "Catallactics", I was told by Dr. Hut Tax that “that essay is irrelevant since it was written in a period of time when the current monetary system did not exist. The rules changed in 70’s. The US left the gold standard.”

See here and

here and


here and


here.

In Chartalist-land, there are no humans, no catallactics, no capital structure, no economic calculation and no economic scarcity. Oh, and no morality.

Bob Roddis said...

Why doesn't Dr. Hut Tax explain exactly what he means by a "balance sheet recession"? As opposed to the other kind[s].

Is the other kind an "income-shock driven" recession? "Where rising inflation compels the Fed to tighten money and raise interest rates and the predictable slowdown follows as (a) business investment contracts because of higher funding costs (b) causing all the industries and suppliers associated with that investment to contract (c) laying off their workers and cutting their orders to their own suppliers (d) leading to further employment contraction (e) decreased consumer spending (f) decreased demand for business products and services, and so on until inflation is tamed and the Fed can ease off the brake and back onto the gas."

Is a "balance sheet recession" where households, small businesses, big busineses, banks, investment banks, and yes, law firms--has seen their net worth hosed. The problem with recovering wealth is that it takes so much longer than it does to recover income.

You know don't you, Dr. Hut Tax, that not only do we not believe in your ideology, but we don't think too much of your jargon either. We don't use your jargon unless we are pressed to decipher one of your illogical rants.

Are the above the two instances where different rules allegedly obtain?

Lord Keynes said...

That pretty much is the Keynesian explanation of what is happening, and if one reads Krugman, one finds that he is operating on two fronts regarding any cut in tax rates for people he calls "the rich."

Wrong.
You totally ignore other fundamental factors: a dysfunctional financial system, excessive private debt, mortgage default crisis, loss of manufacturing.

This noble goal of government can be accomplished in the following ways:
• Inflate the money supply by enough to discourage present savings, as the value of money depreciates so quickly that to hold any money to spend in the future would be pointless;


This is about the stupidest thing I have read here.
Deficit spending is about raising employment, increasing demand, increasing capacity utilization.
You don’t even have to “inflate” the money supply for government to deficit spend, if you borrow from private markets.

The idea that government wants to cause the value of money to depreciate “so quickly that to hold any money to spend in the future would be pointless” is bizarre.

Are you saying that Obama, Bernanke etc consciously and deliberately want to, and are trying to, reduce the US dollar’s value to zero?

If so, you might as well change the name of your blog to “William L. Anderson in Wonderland”.

Mike M said...

“You don’t even have to “inflate” the money supply for government to deficit spend, if you borrow from private markets.”
Until the private markets have had enough. Then you turn to monetizing the debt. Do you really believe the Fed would engage in QE1, QE2 and what will surely be QE3 or 4? The amount of debt to be rollover combined with new debt issue in the next 24 months is staggering.

“The idea that government wants to cause the value of money to depreciate “so quickly that to hold any money to spend in the future would be pointless” is bizarre.”
Have you not read economic history? This is what all governments do when the run out of options. Since 1913 the USD has lost over 95% of its purchasing power most of which occurred after 1971. The principal is always the same; it is only the time line at question. What is bizarre is the utter refusal by people to accept factual history of how governments and central banks behave.

“Are you saying that Obama, Bernanke etc consciously and deliberately want to, and are trying to, reduce the US dollar’s value to zero?”
I think what he is saying is the real value of the debt, which can never be paid at present levels, must be reduced to a manageable number in relationship to the size of the economy in absence of default. Is that zero? Not measured from a contemporary time frame. But then again it’s all relative isn’t it when in 100 years you are 95% of the way there.

Lord Keynes said...

Until the private markets have had enough.

So you concede that deficit spending does not necessarily inflate the moneys supply?

Then you turn to monetizing the debt.

Nope. Proper Keynesian stimulus will have returned the economy to good growth and low unemployment.

The budget goes back into surplus naturally, and debt is paid down.
Just as happened in the US after WWII:

US Federal Debt As Percent Of GDP, 1930-

Have you not read economic history? This is what all governments do when the run out of options.

Wrong.
Many implement austerity and budget cuts - e.g., Ireland.

Since 1913 the USD has lost over 95% of its purchasing power most of which occurred after 1971.

And real wages have soared, meaning that real living standards also soared.
This is an utterly feeble argument.

I think what he is saying is the real value of the debt, which can never be paid at present levels, must be reduced to a manageable number in relationship to the size of the economy in absence of default.

And that will happen by restoring good economic growth and full employment by Keynesian economics, which will drive the budget into surplus.







Pay attention to history

Mike M said...

Lord Keynes.
“So you concede that deficit spending does not necessarily inflate the moneys supply?”

No. The problem with discussions of money supply is people’s different definition of what is money. The USD is not money. It is not even a money substitute. As a fiat currency it is a theoretical abstraction based on confidence of those using it either by force or by choice. Since the USD is a created from debt, the issuance of bonds to cover deficit spending can by definition increase the “money” supply. The problem is that it functions differently in the economy and the psychology of the citizenry that outright “printing” or what we now affectionately refer to as QE

“Many implement austerity and budget cuts - e.g., Ireland.”

Ireland hasn’t run out of options yet. It is engaging in austerity because it CAN’T debase because it has no country currency. If it did have that option it would debase its currency. When the pain of austerity is great enough socially and politically it will leave the Euro and substitute a debased currency. This is how governments always behave time and time again. I reiterate my recommendation that you study some history on the matter.

“And real wages have soared, meaning that real living standards also soared.
This is an utterly feeble argument.”

With all due respect, what is feeble is your non sequitur. You cannot have real living standards “soar” in the face of significant and material currency debasement. Using hard asset money as the measuring instrument, real wages have not risen in material terms in 40 years, key date being since 1971. American households have compensated by becoming smaller in terms of members, engaged in having both spouses work outside the home, sending manufacturing of consumer goods to third world countries where we can export our inflation (as defined by the BLS) and taken on debt.

“And that will happen by restoring good economic growth and full employment by Keynesian economics, which will drive the budget into surplus.”

I shall assume that was not an attempt at humor. The myopic fanatical worship of only the demand side of the equation of economic life is one of the critical errors in Keynesianism. It, like the supply side crowd, treats human economic activity like a lab experiment. Simply mix the proper chemicals, do a complex math formula and we can control the macro universe. As for budget surplus, it will never happen without sound money. The promises are too great, the politicians too weak and the public is not ready to accept the reality of what would really be necessary to achieve. Look how well its going over in Europe.

Lord Keynes said...

No. The problem with discussions of money supply is people’s different definition of what is money. etc etc etc

Your statements are a ridiculous attempt to change the subject - obviously because you know that deficits don't necessarily have to inflate the money supply.

You cannot have real living standards “soar” in the face of significant and material currency debasement

That is utter rubbish.
You say the US dollar has lost 95% of its purchasing power since 1913.
Yet, as is well known, real living standards have in fact soared since 1913.
You are effectively reduced to denying the patently obvious.
You might as well tell us you don't believe the sky is blue.

Using hard asset money as the measuring instrument, real wages have not risen in material terms in 40 years, key date being since 1971.

The key date is NOT 1971, it's 1973.

And you don't need "hard asset money as the measuring instrument" to know that real wages stagnated for many (but NOT all) sectors of the US labour market after 1973, after monetarism, New Classical economics and supply side economics were adopted:

http://www.mindcontagion.org/html/real_wages.html

All you need to do is inflation adjusted calculations - which show that real wages and living standards SOARED during the era of Classic Keynesianism (1945-1973).

So much for your rubbish argument.

As for budget surplus, it will never happen without sound money.
??
Sorry to destroy your fantasy, but Clinton had budget surpluses. Australia had budget surpluses in the 1990s. A vast number of countries with fiat money have had budget surpluses over the past 60 years.

Bob Roddis said...

“And real wages have soared, meaning that real living standards also soared."

So, the dollar was depreciated 95% for nothing. Money dilution is not necessary for sustainable growth and, in fact, impairs it. Without the funny money and income tax and the debt spending, we could have probably avoided most of the wars of the 20th century and we'd be much richer with no government debt. The people are catching on as anti-Keynesianism is sweeping the public.

http://tinyurl.com/38qyngu

On cold winter's night, it makes me all warm and fuzzy inside knowing that the Keynesians and Chartalists have NOTHING to offer and they are on the run.

Lord Keynes said...

Money dilution is not necessary for sustainable growth and, in fact, impairs it.

Inflation happened even under a gold standard (e.g., 1896-1914).
It is a consequence of most booming economies.
You might as well start talking about the inflationary "evils" of the gold standard, and the inflationary "evils" of private sector investment and economic activity.

The people are catching on as anti-Keynesianism is sweeping the public etc.

This bizarre nonsense is refuted by the fact that Obama is president of the US.

If "people" were largely in favour of libertarianism or Austrian economics, Ron Paul would have been elected president.

Austrianism will remain a fringe movement - despite your fantasies.

Mike M said...

Lord Keynes
“Your statements are a ridiculous attempt to change the subject …”
May I suggest what is ridiculous is the avoidance of defining the foundation of a position. If you improperly define money, then everything that flows from that wrong premise is flawed.
“Yet, as is well known, real living standards have in fact soared since 1913…”
I am not denying that living standards have increased since 1913. If you paid attention to my point I stated that the material stagnation was since 1971. Incidentally living standards increased dramatically between 1800 and 1913 without debasement (excluding the civil war period) and in fact the economy experienced healthy mild deflation. This begs the question as to how much more advanced living standards would be today if the currency had maintained its purchasing power.

“The key date is NOT 1971, it's 1973”
Incorrect. It is 1971. Specifically it was August 15 when Nixon announced the end of the Bretton Woods agreement and severed convertibility of the dollar and the international gold backing of the USD engaging in the form of default. FDR had conducted a domestic version of default on 4/5/33 and the decree re-pricing the value of an ounce of gold from $20.67 to $35. From 8/15/71 on the USD was a pure fiat currency. This was the trigger action. By the end of 1976 all major nations floated their currencies on a sea of nothing but confidence.
“…show that real wages and living standards SOARED during the era of Classic Keynesianism (1945-1973)”
Again as I stated the bulk of the loss of purchasing power was lost post 1971. As for the period 1945-1973, you apparently believe that the rise in living standards is the byproduct of Classic Keynesianism. The only thing classic is that it is a perfect a Post Hoc Ergo Propter Hoc logical fallacy. Classic Keynesianism was practiced during that period, living standards and wages rose, ergo the former caused the later. What your science lab vacuum analysis fails to factor is the condition of the world during that time frame. The only industrialized nation left standing post WWII was the USA and the balance of the nations was enslaved under communist central command and control economies. Again this is the problem with the majority of contemporary economic teachings. Economics is not a math formula or science experiment.

“Sorry to destroy your fantasy, but Clinton had budget surpluses.”
You got the words right, fantasy, Clinton, budget surplus, but your order is wrong. In each fiscal year of Clintons two terms the national debt increased. That is a fact. Total national debt is the sum of Public debt plus Intra-governmental Holdings. This is a fact. From 1997 to 2001 the Public Debt portion of the debt went down. This is a fact. During that same time frame the Intra-governmental Holdings portion went up greater than the Public debt went down thereby increasing Total National Debt each year. This is a fact. The public debt was paid down via increased borrowing through Intra-governmental holdings, mostly Social Security. This is a fact. All of which can be confirmed from the US Treasury data. There was no surplus. It was smoke and mirrors accounting. Perhaps that’s where Enron learned its accounting methodology.
I know facts can be stubborn and uncomfortable things when they conflict with a personal ideology. But there they are.

Mike M said...

My apologies to readers of this forum. After reviewing the various responses by Lord Keynes it dawned on me that he is essentially a statist, which means he is impervious to logic, reason and rational thought when it is advocated from the perspective of individual liberty first and the state second. If he is not already he would make an excellent Harvard economics professor. I will continue to read all of your comments but with respects to Lord, I shall refrain as best I can from further long winded dialogue and transition to watching paint dry which is eminently more productive.
My best to all during the holiday season.

Lord Keynes said...

I am not denying that living standards have increased since 1913.

Then your argument above now collapses.

Incidentally living standards increased dramatically between 1800 and 1913 without debasement (excluding the civil war period) and in fact the economy experienced healthy mild deflation

Utterly irrelevant - your point above was clearly an attempt to deny that massively increased living standard occurred under a fiat money system.

Incorrect. It is 1971. Specifically it was August 15 when Nixon announced the end of the Bretton Woods etc

Real wages continued to rise until 1973 - your following comments about the breakup of Bretton Woods are irrelevant.

As for the period 1945-1973, ... The only industrialized nation left standing post WWII was the USA and the balance of the nations was enslaved under communist central command and control economies.

Pure rubbish.
Post war reconstruction ended by 1955. Australia and Canada never suffered destruction. Europe was a manufacturing powerhouse again by 1955. East Europe was a backward underdeveloped region when it fell to communism and so was China.

This is a fact. The public debt was paid down via increased borrowing through Intra-governmental holdings, mostly Social Security

That explanation involves a ridiculous accounting gimmick:

http://socialdemocracy21stcentury.blogspot.com/2010/08/us-government-debt-and-social-security.html

The intergovernmental debt are nonmarketable securities and neither debts nor assets. The future spending for social security will simply come out of future tax revenue or deficit spending. Since the government can raise or lower tax revenues by fiscal policy, these future spending promises can be dealt with by comparatively minor fiscal adjustments, such as raising taxes or cutting government spending in other areas.
The claim that social security spending in 2011-2020 is "unfunded" is as idiotic as saying that "defense spending" or the president's salary in 2011-2020 is "unfunded."

Lord Keynes said...

With relevant changes:

"After reviewing the various responses by Mike M it dawned on me that he is essentially a libertarian, which means he is impervious to logic, reason and rational thought etc etc"

Blah Blah blah..

Anonymous said...

Lord Keynes and others, in nearly all of the world except sub-Saharan African countries like Uganda and Liberia, human progress has always been upward and upward in the longer run, and those exceptional African cases exist because of extremes of violence and social breakdown.

So it's difficult to say which policy worked based on how much progress people have made since it was first implemented. Whether it was the Soviet Union or Chile or United States, their progress will only be upwards as far as problems of allocation of scarce resources are concerned. And the very existence of one region or nation with strong development ensures that even nations with worse policies can benefit from them with imports and foreign investment.

I think Lord Keynes could do justice to his opponent's argument by seeing that perhaps he means that negative effects of inflation, if any, are temporary, before things get back on track, and it takes another round of inflation to have the negative effects set back in again.

@AP Lerner
The word "neoliberal" reflects very poor politics, poor debate, and poor manners, for it is used widely describe even Obama, Bush, Nixon, and Reagan by some. George Orwell warned against using words to do your thinking for you, and cautioned people to use specific language; else they risk not thinking instead of thinking. As it is, "neoliberal" itself is a meaningless insult, as per general usage, with no real coherent idea behind it.

Bob Roddis said...

Those of us who understand Austrian School theory understand why the central bank and Keynesianism have made us much poorer than otherwise would be the case. Note the following topics our snotty commenters always ignore when insulting us (besides ignoring everything about Austrian School theory):

1. Since the free market and sound money work fine, what problem is being supposedly being solved by money dilution and unpayable debt? (Also, where do they get the moral and constitutional authority to screw around with everyone else's life via money dilution and unpayable debt?)

2. Where's all the stuff going to come from to satisfy all the unpayable debt?

Bala said...

@Bob Roddis,

"where do they get the moral and constitutional authority....."

omigosh! You gave it to Him on a platter!! Want the answer? RULE UTILITARIANISM!!!!!!

Mike M said...

“The claim that social security spending in 2011-2020 is "unfunded" is as idiotic as saying that "defense spending" or the president's salary in 2011-2020 is "unfunded."”
Money is fungible so you can pick which part of the budget is fund with revenue and which part is funded debt and debasement.

The balances of your responses are shallow and truncated in your thinking, partly due to the inherent nature of this type of forum. Perhaps a classroom lecture series would be more beneficial.

If I am a Libertarian, then I subscribe to the philosophy that the individual is sovereign and government is subordinate. Oh the horror!

Mike M said...

Bala,
You are correct, that will be the answer. And how much evil has been done in the world under that thinking.
Rule Utilitarianism is at its foundation the rule of man not the rule of law. How well has that worked out for mankinid.

Grant said...

Capitalism is the exploitation of man by man. Socialism is the complete reverse.
Those who want smaller government should visit India and see for themselves the results of massive tax avoidance leading to lack of resources to police the rule of law, the lack of effective political will to make wise laws, and the hoarding of food resources while a huge proportion of the population is malnourished. It helps you be a little less doctrinaire in your criticism of government spending.

Mike M said...

Grant, your faith in the concept of government benevolence is unsupported by history. Government at its very core is about force. Accordingly it needs to be minimized and controlled. This is the core principal behind the Constitution. Government has nothing without first taking it from its citizens either by present or future taxation or by stealing it by debasing the purchasing power of the citizen’s currency. Expanding the size and scope of government does not compensate for corruption and incompetence. (India)

I am not an anarchist. I have no issues with government spending so long as they are confined to the limits intended by the Constitution which was designed to push most of the responsibility to the local level where it is easier to control.

Your description of Capitalism is jaded. Capitalism is not perfect but at least it is based on voluntary transactions whereas Socialism does not. What has happened to the human spirit that embraced liberty and the sovereignty of the individual? Has society become too soft and comfortable with the nanny State taking care of an ever expanding list of their needs?

burkll13 said...

@ Grant-

"Capitalism is the exploitation of man by man. Socialism is the complete reverse."

Caplitalism is a system based on voluntary, mutually beneficial transactions. people dont voluntarily choose to be exploited. Socialism, on the other hand, is a system of involuntary servitude that is 'morally' justified. in socialism, the government takes from some and gives to others. the person who is robbed is exploited.

Russ Nelson said...

AP Lerner: you are obviously this blog's resident idiot. A "muirgeo" of the KiW set.

Russ Nelson said...

And Lord Keynes is no better. "Inflation is a consequence of most booming economies"?? How absurd! It is instead: deflation is a consequence of most booming economies ... unless there is a central bank which is printing up money faster than the economy can grow.

bastiat's buddy said...

@ Grant-

Perhaps India's problems are due to their socialist economy, and the utter failure (once again) of central planning to work anywhere in history, rather than "not enough good government"...

Lord Keynes said...

Inflation is a consequence of most booming economies"?? How absurd! It is instead: deflation is a consequence of most booming economies

Wrong.
Left to itself, the free market produces fractional reserve banking (FRB) and fiduciary media - money supply growth is thus an endogenous outcome of capitalism.

In the real world and in the 19th century gold standard, people repeatedly and freely choose to engage in fractional reserve banking, e.g., no governments were *forcing* Americans to engage in FRB in the free banking era from 1837-1863:

http://socialdemocracy21stcentury.blogspot.com/2010/06/fractional-reserve-banking-evil.html

The anti-FRB Austrians are clueless. They would require "evil" government intervention to outlaw FRB - which would infringe people's freedom to do what they want in private transactions.

And in fact not even all Austrians oppose FRB:

Sechrest, Larry. 1993. Free Banking: Theory, History, and a Laissez-Faire Model, Westport, Connecticut: Quorum Books, 1993.

Selgin, George. 1998. The Theory of Free Banking: Money Supply under Competitive Note Issue. Totowa, New Jersey: Rowman & Littlefield.

Selgin, George A., and White, Lawrence H., 1996, “In Defense of Fiduciary Media – or, We are Not Devo(lutionists), We are Misesians!,” Review of Austrian Economics, Vol. 9, No. 2, pp. 83–107.

White, Lawrence H. 1995. Free Banking in Britain: Theory, Experience, and Debate, 1800–1845, 2nd ed. London: Institute of Economic Affairs.

On the history of FRB and why it did not arise as fraud, see:

Selgin, Those Dishonest Goldsmiths
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1589709

Lord Keynes said...

And the gold standard was no protection against inflation: the US had inflation under the gold standard in booms, in 1811-1814, 1825, 1834-1837, 1844-1847, 1841, 1852-1855, 1857, 1859, 1880, 1896-1914.

The UK had inflationary periods in 1823-1825, 1831, 1835-1840, 1845-1847, 1853-1855, 1860-1861, 1865-1867, 1871-1873, 1882, 1888-1892, 1897-1903, 1905-1912.

UK historical rates:
http://safalra.com/other/historical-uk-inflation-price-conversion/

Bob Roddis said...

LK is such a true cement-head.

The sole purpose of governmental agencies (whether purely voluntary or not) is to protect property rights and protect against fraud. FRB is fraudulent unless expressly stated in the parties' contract (at which point I find it absurd, but parties are free to contract how they please). What's hated about government is when it engages in other activites. Somehow, we all knew that already except the brilliant LK.

Without legal tender laws, it's not clear to me why anyone would accept a private FRB note over a note with guaranteed redemption in specie. Under such a regime, there could be no inflation absent massive discovery of new specie. No inflation, no economic miscalculation.

The primary purpose of the Fed was to bail out the rich bankers who engaged in risky FRB activities when such activities should have been declared fraudulent. Keynesianism is nothing but a convoluted scam to hide and deflect the fact that the big bankers are looting us into oblivion.

Lord Keynes said...

Without legal tender laws, it's not clear to me why anyone would accept a private FRB note over a note with guaranteed redemption in specie

Because fiduciary media also carry the promise to redeem in specie, though because of the nature of FRB, people take the *risk* that they might lose some money or all their money for the greater gain of a return in interest.

The fact that you "unable" to understand why is totally contradicted by the real world: as I said, in the 19th century gold standard, people *repeatedly* and *freely* choose to engage in fractional reserve banking, e.g., no governments were *forcing* Americans to engage in FRB in the free banking era from 1837-1863.

David said...

LK,

Wrong.
Left to itself, the free market produces fractional reserve banking (FRB) and fiduciary media - money supply growth is thus an endogenous outcome of capitalism.


Please show me a fractional reserve bank that was created without a government corporate charter.

There's not a single one. There has never been "free banking" in the United States. Yes, I am aware that some Austrians call 1837-1863 an era of free banking, since banks were free to fail. However, that is not the equivalent of a free market in banking.

Banking has always been husbanded by The State in America (and I think everywhere else as well.) The first business given Corporate legal status in America? If you guess a bank, go to the front of the class.

So you cannot empirically refute the idea that frb's would suffer or disappear under a free market system using American history. There is no period of American history where a free market system in banking existed.

Feel free to whine about your confusion. A free market is one which lacks government intervention, it is not merely the absence of a central bank. Corporate legal protection granted by The State is an intervention that has dramatic affect on market behavior.

Bob Roddis said...

Because fiduciary media also carry the promise to redeem in specie, though because of the nature of FRB, people take the *risk* that they might lose some money or all their money for the greater gain of a return in interest.

When there is no monopoly government money and only truly competitive currencies, people can take the risks they want to take. People who want to earn interest would know that there is no guarantee because all investments are risky and they could make time deposits. People who want close to 100% safety for their money would probably have to avoid interst altogether. Having a single government monopoly money is the culprit, one size fits all (and banks get to loot all).

Note how totally slothful LK is in his historical analysis? He never distinguishes between true laissez faire and American historical crony capitalism. (Of course, he has no familiarity with Austrian theory OR the non-aggression principle). And his sloppy and deceptive anecdotes of history are supposed to determine the laws of economics. Pathetic.

Mike M said...

I’ve reviewed prior Lord Keynes posts and come to the conclusion that he is consistent with the government and educational conventional viewpoint. He is in possession of data and facts but no understanding or wisdom, in a way much like a computer. He assembles the data to fit a particular point of view and in doing so constructs compounding logical fallacies. He is no doubt an educated person. But I have found that excellent education build upon a faulty foundation is wasted.
I used to subscribe to his particular economic philosophy because that is what I was taught and it surely made sense superficially. Later I began reading and studying other views because I found what I was taught conflicted in the real world of running a business and investing. Eventually I found that the Austrian view provides the best foundation for a view that is grounding in free enterprise and liberty. While not perfect, for what created by man truly is, it provides the best roadmap for understanding.
The difference between me, and no doubt many of you, and LK is that I invest accordingly to my experience in the real world and the Austrian foundation. I have been better for it. In other words, I make a true commitment to my point of view and put my money where my mouth is and don’t just bloviate for sport. I suspect we are coming to a reconciliation point in the world due to the mismanagement and meddling with the natural course of its economic affairs.

Lord Keynes said...

Please show me a fractional reserve bank that was created without a government corporate charter. There's not a single one.

“No charter, or special authority from the legislature, is needed to empower any one who has credit enough with the mercantile community to perform both these offices [receiving deposits and making short loans], since they are lawful acts of ordinary trade etc…” Francis Bowen, American Political Economy including Strictures on the Management of the Currency and the Finances since 1861, 1870, p.324



”Tennessee was one of five Southern states to adopt a true free- banking law (Virginia had a derivative). Under free banking, no charter from the legislature was required: the founders had only to place a stipulated amount of bonds on reserve with the state treasurer, to be forfeited if the bank did not meet its obligations.“ Tennessee historical quarterly: Volume 45 , p. p. 204

Lord Keynes said...

“During the 20 years leading up to the American Civil War, the number and importance of private banks in the country’s commercial banking system increased significantly. These were unincorporated banks that operated without charters from state governments, with unlimited liability for their debts, and at a small scale relative to their chartered counterparts.”

Jane Knodell, “The role of private bankers in the US payments system, 1835-1865,” Financial History Review (2010), 17: p. 239.

“The first charter granted to the Bank of Scotland in 1695 contained no exclusive clause. It provided that for the period of twenty one years from the 17th July, 1695 it should not be lawful for any other person to set up a distinct company or bank within the kingdom of Scotland. No renewal of this exclusive privilege took place after the expiration of the twenty one years, and in 1727 a charter was conferred upon a new company called the Royal Bank of Scotland and at a subsequent period a charter conferring banking privileges was also given to the British Linen Company. As none of these three charters prohibits the formation of other banking companies, or in any way affects their operations, joint stock banks without charters have successively been established in Scotland, as they have been required by the increasing wants of the country. The chartered banks and the unchartered banks are on the best terms with each other, and they equally share the public confidence”
James William Gilbart, The Logic of Banking, 1859, p. 229.

Yet again your statements are false.
And no answer is given to my question: how did governments FORCE people to engage in FRB?

If people really wanted gold warehouses or 100% reserve banks, such institutions would have arisen in great numbers due to demand for them. They didn't. Instead people preferred FRB.

Pirate Rothbard said...

"Right. Embraces liberty so much most Austrian economists want to give up monetary sovereignty and return to the gold standard. Brilliant."

Or better yet, have no standard currency at all and let the market determine what's best.

Bob Roddis said...

1. Why would anyone pay a debt with a private 100% guaranteed note when one could pay the debt with a diluted FRB US legal tender note?

2. If people prefer FRB notes, then go for it. Who cares? When the sh*t hits the fan, they can pay for it all themselves.

3. The historical record does not prove or establish economic laws or principles. There is no question that meticulous preservation of private property, private contracts and personal liberty takes a meticulous effort and understanding by civilized people. The fact the people in the past were slothful and/or dishonest and/or abusive (and during a time when Asian and black people were treated like dogs or slaves) says nothing about how sound money and private property would work for people who understand these concepts and will insist upon their strict enactment.

Again, LK cannot explain from where his moral authority comes from that allows him to screw around with other peoples' lives via funny money and unpayable debt attempting to fix problems that don't exist but for his funny money and debt. And, of course, he knows nothing about how funny money distorts economic calculation.

Lord Keynes said...

If people prefer FRB notes, then go for it. Who cares?

You contradict yourself ridiculously. A consequence of FRB is fiduciary media which increase the money supply. So now you saying if private individuals decide to use FRB notes and increase the money supply, this is OK?

Again, LK cannot explain from where his moral authority comes from that allows him to screw around with other peoples' lives via funny money and unpayable debt attempting to fix problems that don't exist but for his funny money and debt.

If FRB notes involve screwing “around with other peoples' lives via funny money”, then why do you say above that “If people prefer FRB notes, then go for it. Who cares”??

Your whole argument is ridden with self contradiction.

Lord Keynes said...

And also you don’t even properly describe the Austrian position.

The Austrian position would be

(1) under a minimal state, FRB would be illegal and punished as a crime by the state, or

(2) under Rothbardian anarcho-capitalism, there is a mutually agreed-upon libertarian legal code, enforced by private protection agencies and private courts. These would presumably enforce the law against FRB.

In case (1), any Austrian is admitting a positive role for the state and the need for “evil” state coercion to enforce the law.

In both cases (1) and (2), the argument used against the morality of FRB is deeply flawed, as shown in:

Selgin, G. A., and White L. H. 1996. “In Defense of Fiduciary Media – or, We are Not Devo(lutionists), We are Misesians!,” Review of Austrian Economics 9.2: 83–107.

Selgin, G. 2000. “Should We Let Banks Create Money?” Independent Review 5.1 (Summer): 93–100.

The FRB deposit is in fact a loan (or legally “mutuum”), a “contract under which a thing is lent which is to be consumed and therefore is to be returned in kind”. The depositor who lends the money gets a credit (or IOU) from the bank and a promise to pay interest. The money has been “sold” to the bank as a mutuum and is to be returned in genere. In demand deposits, you lose your absolute property rights to the money when you lent it to the bank voluntarily, and instead have entered into a contract with the bank to allow them to use it, even though they are obliged to return to you, on demand, money to the same amount in whole or in part from their other reserves and deposits. When people freely and voluntarily engage in this practice, it cannot be regarded as fraud – the whole anti-FRB position is itself a violation of private freedom.

Bob Roddis said...

1. People can enter into whatever contracts they want. If they want to enter into an FRB contract, it's none of my concern. I can refuse to accept notes from such banks if I choose. I can live in an area where such a thing isn't allowed. If the thing blows up, the parties cannot look to people not privy to the agreement for a bailout.

What's so difficult to understand?

I just find the concept of "you can have your money on demand, but it might not be there" a little strange. And just a little deceptive.

2. Your Keynesian regime of funny money, legal tender laws, taxation and government debt is an assault on innocent third parties. And, like FRB, it's intended from the get-go to mislead and fool the unsophisticated.

Lord Keynes said...

People can enter into whatever contracts they want.

Which means they can inflate the money supply, by definition, yet you (and any other consistent Austrians) vehemently oppose inflation (increasing money supply)!!

So you admit that you DON'T mind if the money supply is inflated by private fractional reserve banks, their voluntary depositors, and people accepting their money, if all is free and consensual?? Well?

If not, your position is illogical and self-contradictory.

(also, do you support anarcho-capitalism?)

burkll13 said...

lk, i think the OBVIOUS point that you keep missing, is that in a system of competing currencies, fluctuations in the money supplies from FRB or printing, is acceptable in the sense that usage of that currency is voluntary. those people can abandon that currency.

its NOT ok to force EVERYBODY to use one currency that gets manipulated at the discretion of a few elites (what we have now).

burkll13 said...

and might i add, that your failure to recognize the difference in the argument only goes to show the laziness in your thought process.

Lord Keynes said...

i think the OBVIOUS point that you keep missing, is that in a system of competing currencies, fluctuations in the money supplies from FRB or printing etc etc

Rothbard and other Austrians object to FRB in principle as fraud.

If you find voluntary FRB and inflation of money supply acceptable, then you are a completely different type of Austrian from them - and you are offering different arguments.

Your issue is with legal tender laws and fiat currencies, not with FRB per se.

burkll13 said...

"Your issue is with legal tender laws and fiat currencies, not with FRB per se."

bingo. thats what, i believe, we've all been talking about.
under the current system, we are all forced to use a currency that uses FRB. thats wrong. i would not choose this, if i had a choice.

if other people choose to use a currency where FRB is normal, so be it. i will say that if the managers of that currency change their reserve requirements without letting the users of the currency be aware of it, I would consider that fraud. but then again, it would be none of my concern.

Lord Keynes said...

we are all forced to use a currency that uses FRB.

Currencies do not inherently "use" FRB.
FRB banking can co-exist with, or use, any type of currency (commodity or fiat).

Mike M said...

B13 said
we are all forced to use a currency that uses FRB.

LK said
Currencies do not inherently "use" FRB.

FRB banking can co-exist with, or use, any type of currency (commodity or fiat).

LK you’re being cute with your language. That’s not what b13 said. You know very well what he meant is under the legal federal tender laws in this country government controlled fiat currency must be accepted. “This note is legal tender for all debts public and private”

Another Anonymous said...

Legal tender laws are economically meaningless and could be repealed tomorrow with no effect. Currency is universally accepted because the state demands it for tax payments. You Austrian guys are perfectly free to come up with gold-backed Austrobucks and use them for your transactions.

Getting upset at legal tender laws is just a way to pretend that the evil state is making the wonderful entrepreneur-people do something, when it isn't. Who forces you to use currency? If you hate it so much, just send the awful stuff to me!

As LK points out, getting upset at FRB is just an authoritarian-fringe-of-Austrians desire to use the state to prevent individuals from freely contracting with each other.

Scotland doesn't have legal tender - this fun fact is obscure, precisely because the effect of legal tender laws is nil.

Mike M said...

“Getting upset at legal tender laws is just a way to pretend that the evil state is making the wonderful entrepreneur-people do something, when it isn't. Who forces you to use currency? If you hate it so much, just send the awful stuff to me!”

Who forces me? The government. What part of legal tender laws is a mystery to you?
If the State didn’t force a currency by fiat, there would be competing currencies and through that competition good currencies would drive out bad instead of the other way around which is Gresham’s law. Would it be perfect? No. But which would you rather have an imperfect system governed by liberty and free choice or an imperfect government mandated one?

Another Anonymous said...

Mike - The government is forcing federal reserve notes on you? Take this money or else? How did you get it to do so?

Precisely what do the legal tender laws force you to do? Make a contract for payment in gold, if you want. Start using your own austrobucks, no law against it. Do something instead of complaining about nonexistent government force.

Taxation is the government forcing you to do something, and what gives fiat currency value. But again, LEGAL TENDER LAWS ARE ECONOMICALLY MEANINGLESS. How do they force anybody to do anything? Move to Scotland if you don't like them. Funny how people there use the non-legal tender Pound, rather than invent their own money .

There already is a free competition in currencies. Government fiat currencies have won out decisively. What part of this is a mystery?

Mike M said...

"Precisely what do the legal tender laws force you to do?"

You need to do some homework on what legal tender laws and how they work in this country specifically. In essence they mean that government controlled fiat currency must be accepted for most monetary transactions.

If you and I make a contract in terms of gold and have a dispute, the court system will force settlement in Federal Reserve Notes.

Yes government currencys have won, but it was a rigged game.

Another Anonymous said...

Mike: Doesn't change anything. Of course fiat currency must be accepted for financial transactions, because they are almost always denominated in dollars.

A court could order settlement in gold if it wanted to. As long as the settlement is honest, what the court uses is meaningless. Go out and trade it for gold. The contract could specify enormous dollar penalties if not paid in gold. The rigging of the game is in the tax system, not economically meaningless laws. You need to read up on the many economists who note that the effect of these laws are nil. Again - see Scotland.

Mike M said...

AA
Of course it changes things. You fail to consider that denomination of a transaction in dollars is simply the mechanics for settlement. What we are implicitly bargaining for is the representative purchasing power of the transaction. If during the time between the agreement and settlement the dollar loses material purchasing power one party loses the other gains.

Yes a court could order settlement and enforce a gold clause especially after 216 Jamaica Ave, LLC v S&R Playhouse Realty Co USCA sixth circuit 2008. Yet it is not settled in all jurisdictions and not tested under a significant currency depreciation environment. If you understand judicial thinking you would understand that penalty enforcement would not be upheld if the court refused to acknowledge a gold clause since it would be viewed as a de facto gold clause the court is not recognizing in the first place. And I can’t go trade a depreciated currency for gold after the fact and be made whole.

Legal tender laws are only economically meaningless in a stable currency environment. See my first point. I’ve read several economists perspective on legal tender laws. Virtually none have run a business in the real world and their observations and conclusions are perfect for academic lab but that’s about it.

Scotland has its own notes that trade essentially the same as the pound although it technically doesn’t have its own legal tender. Should the Brits abuse the pound, no doubt the Scots would abandon it for an alternative. In addition Scotland’s GDP is about the size of Alabama and does not occupy a world reserve currency. Not exactly a good example to use to make your point.

If the USD is such a great long term sound currency with good stewards, then why does it need a legal tender law to begin with?