Reviews

 

I wrote this book for the intelligent adult, and the student prior to indoctrination!

These reviewers are well-educated achievers who think for themselves.

Here is what they have to say:


Hugh Templeton, Rhodes Scholar, former Minister for Trade and Industry:

You’ve written a good book.

Sir Geoff Cox said never use the word very. It’s either good or it’s not. 

But you’ve done it. It’s a good, good book.

It would be interesting if you get asked to give a lecture or two. If I were a varsity prof, I would get you in to provide some variation on their teaching.


Emeritus Professor Don Trow, Victoria University of Wellington:

I enjoyed reading the book. Easy to read, and persuasive.

I found much appeal in gaining a better understanding of the following matters:

THE ECONOMY IN WHICH WE LIVE

There is a clear explanation that we live in a politically directed capitalist economy. Countries with greater freedom (rather than emphasising central control) create more wealth.

It is disturbing to realise that any politician who proposes to do what should be done to create more wealth, will not be elected.

DEBUNKING STRONGLY HELD BELIEFS

Refreshing to find economics examined from a scientific point of view.

Revealing to read a critical review of the writings of Keynes and Samuelson.

Instructive to be warned about accepting statistics as facts. This is particularly the case with the generally accepted CPI index.

The CPI index is obviously not a fair or realistic measure of the rate of inflation, and I agree with the statement that (chapter 8) “we need an after tax return of 7% to just stay still” and (chapter 10) “what is often regarded as a capital gain is only capital retention”.

Pleasing also to have clarification of what is involved with the calculation of GDP.

Not very flattering for economists, who are generally proud of their profession, to be told that “they have become a tool of propaganda” (chapter 10).

A WARNING ON THE DAMAGE CAUSED BY AN INCREASING MONEY SUPPLY

It is obvious that moves to deliberately increase the supply of money, can be regarded as cheating the citizens.

The act of printing extra money might have short term benefits, but it clearly does not create additional wealth.

It is sobering to note (chapter 8) that last century, there were 37 countries that hyperinflated from a greatly increased money supply, and went bust.

It is alarming to note (chapter 7) “that we are getting closer to the big melt down”.

I worry that this might be an exaggerated statement. I guess that I am reluctant to believe that the distinguished economists controlling economic activity have failed to forsee the result of their actions.

However, if the conclusion on an impending melt down is indeed indisputable, I would like to see effective leadership from statesmen and real economists to prevent this from happening.

How can we bring this about?

 

Lindsay Gordon, MA, MSc, PhD:

This book is good, damn good, and no statistics.

Scientific revolutions can have gestation periods of many years before scientists come to a general agreement on implementing a new paradigm.

For example, one of the great physicists, Maxwell, was committed to the atomic theory of matter in the 1860s, but it took another 50 years before the last eminent scientist, Ostwald (Nobel Laureate), conceded.

The problem lay in the fact that atoms could not be seen even with the highest powered microscopes of the day.

Phil Scott in his treatise on economics attempts to posit his subject in the scientific mould, and in line with the Austrian School.

He places emphasis on establishing what is true and what is false in the construction of an economic theory, and from basic ideas shows how one derives the ‘real’ economics of the Austrian School, and why the alternative Keynesian theory poorly serves the nations in which it is employed.

Based on the works of von Mises and Hayek, this book is a challenge to modern economists, who in the main follow the approaches recommended by Keynes.

One of the major differences is to be seen in the printing of money in financial crises, with inflationary consequences.

Scott argues that the more constrictive method of the Austrian school has the more favourable long-term outcome, where the printing of money is not permitted without capital backing or guarantee in the form of gold (or its equivalent).

Whereas scientific revolutions are about theories of nature. They are not burdened with the problem of human interactions, as would be the case of a revolution in economics.

These interactions occur at two levels.

Within the system there are terms such as value, which need to be recognised as having multiple states, for it depends on which citizens are making the judgements.

However, the major stumbling block to a paradigm shift away from the Keynesian model can be traced to the human intervention external to the system.

As Scott indicates, to replace Keynes’s methodology with that of the Austrian School will be difficult, for it is held in place, not by academics (such as scientists as illustrated above), but by heads of states and central bankers who wish to remain in office, and whose powers are heightened by the control of the money supply, and particularly in the printing of money to support enterprises where elements of dishonesty can lurk.

My critique is focused only on one aspect of ‘Real Economics’, from a large range of ideas and levels of complexity written within its 223 pages.

Each chapter is thoughtfully constructed to draw the reader into a discussion about the foundations of its subject matter, and leaves him to form an opinion not only on what should be the central tenets of economics, but also on the worthiness of their derivations that this book affords.

 

Dr Libby Smales, retired palliative care physician:

Thank you so much for lending me that brilliant book. I have finally got around to reading it and can’t put it down, it is so clear.

As a result I am now extremely conflicted, on a global scale extremely concerned and on a personal level, so relieved that all the things that don’t make any sense to me (e.g. printing silly paper money, with nothing to support it) actually don’t make sense!

Many congratulations to Phil. When is it out so I can give it to everyone?

Happy for you to put comments on web site, that is one good book. It needs to be on Nine-to-Noon.

 

Vincent Kerr, investor:

For many years, Phil has extolled the advantages of gold and silver as his preferred investment. It is therefore fitting he has now penned his views.

Whatever your personal investment preferences, “Real Economics” challenges the more orthodox conventions, and argues strongly for a more internationally disciplined financial base from which investors could feel more confident.

“Real Economics” is a well researched and thought-provoking read.

 

Anonymous retired music teacher and book club convenor: 

I found your book easier reading than I’d expected, seeing I know very little about economics.

I liked your relaxed style and your clear explanations about economic points as I read.

Having the small notes of reference at the bottom of the pages, was a good idea, too, rather than the reader having to look at the back of the book every time.

Another thing I liked, too, were your little grey boxes on various pages with appropriate ‘words of wisdom’ relevant to the contents of the chapter you were writing about.

It was news to me that our super pay is only 33% of the average wage, not 66% as I’d thought. No wonder things get a bit tight each month!

I hope that we are not going to become a totally digital world – I hate the thought of having to use my plastic card for everything instead of what feels much safer – actual money — but it sounds as if that’s an older person’s view and not currently acceptable.

Loved the yellow brick road on the cover! What made you decide to use that? On the way to the Emerald City and wealth? Or more obfuscation?

I now think I have a small grasp of the two facets of economics – the Keynes approach which seems very flawed as I read about it, and the Mises approach which makes much more sense.

I’d just like to get my hands on some gold now, of course, to feel safe as I get older!

I also enjoyed reading about Nowhere and Erewhon. You should take up sci-fi next!

 

Andrea McIlroy and Don McAlpine, retired professors:

1. In “Real Economics” Phil Scott presents an interesting personal perspective. The book itself is well presented, attractive and easy to read. The historical aspects are dealt with extremely well and it is about the right length for this kind of discourse.

2. A particularly attractive and useful mechanism are the 54 insert boxes within the text which provide background or explanatory information about issues being discussed.

3. Real Economics is a provocative piece of writing which takes issue with a number of “sacred cows” in the field. At times personal opinions appear to be unsupported e.g. P93: “Those who control the world banking system have power to control the world and they are very reluctant to give this up. This will be the next big battle for world domination.”

4. The use of “Erewhon” as an analogy in a book about “Real” Economics was not persuasive unless the reference is that “Real Economics” is like “Erewhon” i.e. utopian.

5. Finally as neither of us know much about economics our comments may reflect this. However, hope you find them useful.

 

Graham Withers, Australian accountant: 

I really enjoyed reading it as it answered so many queries I developed when I was studying economics as a tertiary student.

Coincidentally I also attended a workshop a week ago without realising that Wez Hone, principal of The Greenhouse (a small business development consultancy), was going to preach the same message as you.

Some of the statistics he quoted were even more damming when you look at where Keynesian economics has taken our world economy.

Therefore it was pleasant to get almost instant confirmation of your perspective on the way wealth is created and money circulates.

Getting back to the readability of the book, I have already commented on how much I enjoyed all the quotes running through the text in the grey background text boxes.

I must admit to having a cynical streak which made me want to laugh at some of them while of course economics is usually no laughing matter.

The first five chapters logically stepped out the foundation for your later rationalisations and were easy reading.

Chapter 6 — Simple as ABC — got me excited that the Austrian Business Cycle was going to provide the cure-all, but then was disappointed that you make no suggestion that the Austrian Government took up the theories of their own economists and put them into action.

Did I miss something or wasn’t Mises taken seriously? It is a sad loss to us all if the opportunity to reform wasn’t taken up.

Your diagram on page 89 headed ‘Politics for the 21st century’ is extremely clear in giving the overview of the dynamics involved.

Your elaboration of what the diagram meant was well put together, but I wonder why you repeat that elaboration in later chapters.

I can only presume that, being such a central description to your exposition, you didn’t want the reader to skim over it. Perhaps because I am not a complete novice, this made the repetition a little tedious.

Chapter 8 — Real Investments — was very clear about what has true value and what might only have perceived value. I’m glad I now know how Buffett built up his wealth.

Chapter 9 — Erewhon — used an interesting literary technique of bringing some life into a dry subject. The fictitious country seemed to be too good to be true, but that is my cynicism coming to the fore.

A small reference to the need to purchase insurance coverage at the start could have been elaborated on, as I have worked most of my life in the welfare industry and am aware of some of the real needs residents have, wherever they live, to be assisted when life’s crises in all their variety shatter their lives.

Without the existence of a welfare department within Erewhon, residents would have to take out massive insurance policies to fund them when they needed help to recover from a disaster, unless you can presume that the family structure is strong enough for people to look after their own.

I have worked the longest in age care, where in many cases that family structure does not provide assistance, but in other cultures like Japan, clearly it does.

It would be nice to think that families could be strengthened to be able to work as, in the perfect world, they should.

Also I don’t know anything about thorium, but if this is the answer to power generation we need the technology ASAP.

Did you know our latest Federal Government is reducing its support for wind farms? And so we progress!

Chapter 10 — Question and Answers — is clearly written, and I particularly like the way you discredit Paul Samuelson’s textbook that I had to suffer under.

I was waiting for you to highlight this author’s invention of stagflation, that is brought into the equation when Keynesian theory of demand and supply falls into a hole.

Such ploys always seemed to me as a way of excusing basic flaws in the economic theory being espoused.

The Appendixes provided are all good background reading, particularly Appendix 5.

Of course, Appendix 6 gives a good history lesson and highlights the need for the world to always sponsor another war, although the change in their outcomes where there are no winners isn’t so helpful for wealth creation.

My only unanswered query is whether you can believe in some kind of world bank conspiracy, not only to control the flow of money, but also world politics, so that the whole world comes under a single dictatorship.

This might be outside the scope of your book’s subject, but it is the final worst case scenario from our manipulation of money, and the concentration of real wealth in the hands of an elite.

Will www.feg.org.nz delve into this?

By the way I like your website. You will have to use it to take orders for your book!

Anyhow congratulations on sharing your passion and giving us all a thought provoking read.


Ray Cooper, BA (English Language and Literature), successful entrepreneur and businessman:

In “Real Economics” Phil has succeeded in demonstrating the flaws in mainstream economic thinking and practice.

He does this using historical comparisons, and by applying scientific and other logical analyses to the philosophies the thinking is based on.

The central banks and governments of the world, using our paper money system, are the cause of the boom/bust cycle, and of the growing gap between the few very rich and everyone else.

This book should be compulsory reading for all economics students. But it should also be read by anyone determined to grow and retain wealth.

It is an absorbing read.

 

Mike Keenan:

I have now read the book and thoroughly enjoyed it.

I felt it was extremely well researched and provided a valuable insight into the ‘money system’ and its implications, as well as raising serious, balanced and challenging questions about the future.

 

Alister White, farmer:

My concern at being asked to make comment on a friend’s strongly held opinions on macro money matters, disappeared soon after I began reading this book.

Being warned it and our comment were destined for NZ’s members of Parliament added something, especially with the 2014 election just days away.

Making our rulers economically wiser is a highly commendable target, whether achievable or not.

Without doubt all MPs should read this book, as last weekend’s election results hint strongly that most people instinctively — and perhaps unwittingly — know a bit about real economics, in that the parties furthest away from it were not well supported.

People earning money know that they cannot contemplate spending their next 10 years of income without uncomfortable consequences, so get queasy hearing repeated promises from those currying favour to out-spend every problem with unearned money.

Phil pinpoints many of the falsities the media continually trumpet as truths.

Keynesian economics’ errant irresistible political appeal is explained, and rightfully targeted as fuelling the long run debt problems rife in many countries.

Common sense, with a little experience added, suggests societies rest and prosper on productive work, i.e. doing things that people will buy voluntarily, even with their own money.

The sectors that do this successfully are increasingly lambasted by those claiming compassion/concern/feelings for every living thing other than people, because, for example, they use energy, unleash, or even just recycle (farming) carbon.

Acknowledging all life needs carbon and the production of virtually all life’s physical necessities, which they themselves use in abundance, requires energy, does not stop them advocating deadweight new monitoring schemes, with vicious penalties for the producers who also have bad habits, like not chorusing their concerns or getting (undeservedly) richer.

Neither is appreciated, nor is real economics.

Of value and interest is the idea that the scientific approach could/should be used to distinguish what is true from what is no more than a belief when approaching economics.

Comparing prediction with outcome to ascertain validity is not the political way, especially pre-election.

Eloquent conviction, incessant over-talking, selected statistics and rote repetition must sway more voters, for that is what we get, but Phil’s plea for more scientific appraisal is a worthy one.

Forlorn too, unfortunately — take the recent fix-everything presentation of CGTax, which bears little resemblance to its achievements elsewhere.

Those needing ever more of other people’s money to do their great work, effortlessly overlooked that it reduces the sensible incentive for individuals to save.

That some economists supported it illustrates the subjectivity in economics.

Phil rightly questions the silent redefining of CPI and GDP figures when trending not as desired.

Learning how nonchalantly this happens is a bit like realising our legal system is not entirely about justice.

In time one understands that authority everywhere habitually adjusts its rules to suit its circumstances, hence its need for good communicators.

An intentionally dry title, but a thoughtful read with many sharp insights and delightful quotes. I enjoyed reading it.

Politicians should be made to.


Leo Dolan, insurance assessor:

Kiwis generally rely on their political leaders to ensure the New Zealand Economy is maintained in a healthy state.

All would agree, sound economic performance by central government is key to our individual wealth.

How do we judge economic performance?

The view of most Kiwis is shaped by disjointed sound-bites or the columns of political reporters who strive to grab the headline of the day, prompted mostly by the Media-Release, an artful means to guide our daily focus.

Witness the reported ‘Rock Star’ economy; how reduction in the Fonterra payout will impact GDP; then sale by the Reserve Bank of $512M to achieve a 1 cent reduction against the Greenback.

Brief reports devoid of continuity and over-arching analysis.

REAL ECONOMICS provides an informative and researched explanation of the New Zealand economy.

It explains the background on how we got to where we are today and in an international context discusses the risks we face.

As our political and world banking ‘masters’ make their decisions that control Credit Expansion or Quantitative Easing, and adjust reported spending to bring GDP in on forecast, whose interest is really being served?

REAL ECONOMICS discusses risks associated with the short-term outlook approach being applied to economic management currently.

It will have you question the extent to which the philosophy and practice of politicians and bankers best serves the interests of mum and dad investors, or whether it is self-fulfilling.

 

Jan Davies:

This is a very good book for someone like me. A real novice when it comes to the history of money and the world of international economics and investments.

I found it easy to read and very informative. I particularly enjoyed the chapters about the history and development of coins and notes, and the early history of banking.

This book is full of interesting stories of the interference and skulduggery of the powers that be, past and present.

It does not fill me with confidence in the governments and financial leaders of today.

 

Tony Naughton, historian and world champion squash player:

The author has taken a pragmatic approach to show how the study of economics in our current times has changed from ancient times, and outlining clearly the bartering system through to the medium of exchange changing from gold to the introduction of the Central Banking system to control the issue of currency into today’s market economy.

The contrast between the Keynesian approach and the Austrian Ludwig von Mises to modern economic theory is dramatically emphasised and explained.

The emergence of money as the original medium of exchange in trading in its many forms, leading to the establishment of the banking system and the importance of the principle of supply and demand to economics, has been carefully analysed with careful investigation.

But the most startling revelations come with the interview with Dr. Richard Ebeling, who succinctly shows how politics and economics can affect each other — putting forward examples from modern history like the breakdown of Communism is the early 1990s.

For further study, there is a good system with pertinent questions and answers set out clearly in laymen’s terms to be understood.

Overall: a thought provoking study of where current economic practice is taking us in our modern, sophisticated world — a good read!

 

Dr Adolph Stroombergen, Chief Economist, Infometrics Consulting Limited:

[NOTE: Since I have found that reality lies with the classical economists of the old Austrian School, I expect the modern Keynesian economists to protect their ‘patch’ assiduously. This they do!

Bear in mind that the modern economist is paid either by a bank or the government, and is rewarded for his value to his employer. My response to Adolf follows his review.]

As usual with books on economics, especially those by authors who dabble on the fringes of the subject, this book contains some good points and arguments, while also making claims about economics that reflect misunderstanding of the subject.

The tone of the book can be summed up by the following quote:

“Another thing we know [emphasis added] is that the central bank of America, the Federal Reserve, manipulates all markets as necessary to keep the statistics, indices and GDP numbers looking good.”

Not surprisingly therefore the main theme of the book is the desirability of a return to the gold standard and the associated blindness of economists to this idea.

The central proposition is that inflation is caused by too rapid growth of the money supply. Few economists would disagree.

However, the author draws two inferences from this observation: that the recent quantitative easing (QE) in the USA (in particular) will lead to rampant inflation and that (following the proposition) if only the world had stuck to the gold standard inflation would not be a problem.

He is not the only person to worry about the potential inflationary consequences of QE. So far inflation hasn’t eventuated, and those countries that utilised QE softened the worst effects of the GFC on output and employment.

At some stage a continuation of QE would be inflationary. Most economists agree that inflationary pressure needs monitoring.

Interestingly there is no attempt in the book to explain the lack of inflation in Japan after many years of credit creation by the government.

Much of the discussion in favour of the gold standard is in effect a search for an invariant standard of value, which does not exist.

The closest concept is perhaps a basket of goods and services consumed by households – food, shelter, mobility and so on.

Inflation might be measured as the change in the price (expressed in whatever currency) of that basket – hence the Consumers Price Index (more on this below).

One could of course measure inflation by a change in the price of an ounce of gold, but apart from industrial users of gold, jewellers and those who use it as a store of wealth, who cares?

The cost of goods and services is far more relevant to most people.

A return to the gold standard in the context of a fixed quantity of gold would prevent the growth of the monetary base to accommodate economic growth unless its velocity of circulation increased, which is not an easy process to sustain.

The price of gold in terms of other goods and services would increase.

More likely people would start bartering and exchanging IOUs – in effect paper money would resurface so the gold standard would achieve nothing but inefficiency and slower growth.

A sudden increase in the supply of gold would of course be inflationary, but this possibility is quickly dismissed by the author with just a comment that gold is expensive to produce.

However, it would be a fluke if the rate of increase in the gold supply (whether from extraction or from a trade surplus) matched the rate of growth in output.

Moreover when gold is scare interest rates would have to rise, which would be hardly be desirable if the economy was in recession.

The GFC would have been much worse under such a regime, and the Great Depression was indeed made worse by it.

The author complains a lot about the growth in the money supply being well above inflation (as measured by the CPI), but seems not to realise that most of the difference is accounted for by real economic growth, rather than the CPI understating inflation.

There is no recognition that the CPI is meant to measure inflation for household consumption goods (not investment goods) and that there are many other price indices that measure inflation in different parts of the economy.

The CPI is also criticised because it does not apply uniformly to all groups in society and because the regimen changes in response to what consumers buy.

The author does not like the idea of demand and supply curves, criticising the straw man of continuous curves, asserting that they are without empirical basis and quoting a few counter examples in an attempt to discredit the whole notion of an inverse relationship between price and demand.

No economist would claim that the demand for all commodities is downward sloping.

Presumably the author would not reduce his consumption of bread if its price rose ten-fold relative to substitute products.

Perhaps he would also deny that no one has turned down their heating in response to higher energy prices.

As noted the book makes some valid points.

For example:

  • crony capitalism distorts the economy
  • politicians tend to promise more than they can deliver
  • FATCA is overly invasive, and
  • GDP is a poor measure of economic growth.

Governments that bailed out the shareholders of insolvent banks during the GFC are castigated, and Cyprus is mentioned numerous times as illustrating the risk of wealth loss to depositors when banks fail.

Many faults in the current financial system are discussed:

  • poor risk assessment by bankers (and central bankers)
  • perverse lending incentives
  • insufficient control by depositors with only paper money when things go bad

and so on.

Unfortunately few reform options are suggested, apart from a return to the gold standard. Never mind that private holdings of gold could also be confiscated by government.

“What tends to be forgotten is that a paper money system unbacked by gold or silver depends upon the belief by all participants that the paper money remains its store of value.”

No argument with that.

The same applies to gold and silver, albeit that these have the advantage of being accepted internationally whereas few currencies are in that position.

The author genuinely believes that fiat money regimes are more likely to generate inflation than under a money regime that is tied to gold, and that this is the main argument for adopting it.

However, a gold standard is neither a necessary condition, nor a sufficient condition, to avoid inflation.

Moreover one has to balance this possibility against the very high risk of insufficient credit expansion to support real economic growth, and the risk of higher interest rates precisely when they are least wanted.

The author expects that hyperinflation is imminent, so he is presumably converting his assets onto gold (or buying real estate, given his claim that real estate always keeps up with inflation – try telling that to US banks).

Interestingly he is also forecasting a steep fall in the price of gold, presumably somewhat before hyperinflation sets in.

 

Author’s response:

Adolph start his review with:

As usual with books on economics, especially those by authors who dabble on the fringes of the subject, this book contains some good points and arguments, while also making claims about economics that reflect misunderstanding of the subject.

I have been assiduously studying the subject for the past 12 years and read widely. I would estimate that I would have easily spent 1500 hours per year on this effort (maybe up to 2000 hours). I think my 18,000 hours of scientific study constitute something more than dabbling at the fringes.

If I have a misunderstanding of the subject then I expect that Adolph will point it out.

He continues:

The tone of the book can be summed up by the following quote:

“Another thing we know [emphasis added] is that the central bank of America, the Federal Reserve, manipulates all markets as necessary to keep the statistics, indices and GDP numbers looking good.”

All my work is backed up with research and appropriate references. He doesn’t say that this assertion is wrong. He just comments on the tone.

Not surprisingly therefore the main theme of the book is the desirability of a return to the gold standard and the associated blindness of economists to this idea. 

The central proposition is that inflation is caused by too rapid growth of the money supply.  Few economists would disagree. 

However, the author draws two inferences from this observation: that the recent quantitative easing (QE) in the USA (in particular) will lead to rampant inflation and that (following the proposition) if only the world had stuck to the gold standard inflation would not be a problem.

Adolph asserts that my “central proposition is that inflation is caused by too rapid growth of the money supply and that few economists would disagree.”

However I did not make this assertion.

I took pains to use the original definition of inflation as an increase in the money supply. I then show that when the money supply of a country is increased this causes an increase in the general level of prices over time.

That is, inflation (of money) causes price rises (price inflation). We need to make this clear so that we understand our definitions, and what is cause and what is effect.

He is correct that I do indeed expect a lot of price inflation in the USA, since they have been inflating the money supply by many trillions of dollars.

Price inflation hasn’t happened yet, because most of this new money is trapped within the banking system, and the economy is carrying so much debt that spending is slowing and the velocity of money has slowed dramatically.

The natural economy (the actions of the people) is trying to deflate and reduce to a ‘normal’ level, but the Federal Reserve won’t allow that to happen. The economy is ‘suspended’.

It is quite clear that if the USA was still using gold as its money, as it was doing 100 years ago, the Federal Reserve could not inflate the money supply, and the economy could not get into the current state.

Adolph continues:

He is not the only person to worry about the potential inflationary consequences of QE. 

So far inflation hasn’t eventuated, and those countries that utilised QE softened the worst effects of the GFC on output and employment. 

At some stage a continuation of QE would be inflationary.  Most economists agree that inflationary pressure needs monitoring. 

Interestingly there is no attempt in the book to explain the lack of inflation in Japan after many years of credit creation by the government.

This section is about what other people are saying, not what the book says.

This book is not about Japan, but if we examine Japan we see what happens when a government takes such a high level of control over the economy. As the stock market falls, the government buys more and more stocks, since the people cannot or do not wish to buy stocks.

The Bank of Japan is now the largest shareholder of Japanese stocks. We know also that they are buying virtually all the bonds they are issuing.

All this is being done with money raised as debt. Eventually the Japanese economy will collapse in a sea of debt. Just when this will happen is unknowable. But it is inevitable.

Much of the discussion in favour of the gold standard is in effect a search for an invariant standard of value, which does not exist. 

The closest concept is perhaps a basket of goods and services consumed by households – food, shelter, mobility and so on. 

Inflation might be measured as the change in the price (expressed in whatever currency) of that basket – hence the Consumers Price Index (more on this below). 

One could, of course, measure inflation by a change in the price of an ounce of gold, but apart from industrial users of gold, jewellers and those who use it as a store of wealth, who cares? 

The cost of goods and services is far more relevant to most people. 

Adolph’s first sentence is just plain wrong. I am not searching for an invariant standard of value.  The book does not mention this concept.

As I explain clearly on page fourteen, value is in the eye of the beholder. Gold is just the natural money that people moved to when trading goods. As such, it merely has value relative to the goods being traded.

Nowadays we use fiat paper as money, but the principle still applies. Our big problem with paper currency is that banks and governments continually print more and more of it, so its value lessens as time goes on.

If the definition of inflation is adhered to, then we can obtain a better understanding of what is happening.

Adolph’s discussion of consumer prices and baskets of goods is his attempt to find an invariant standard of value, not mine.

He then confuses the issue by changing the definition of inflation to mean a change in the price of his basket of goods.

This is exactly the muddled thinking that I avoid in my book.

Adolph goes on to say:

“One could of course measure inflation by a change in the price of an ounce of gold, but apart from industrial users of gold, jewellers and those who use it as a store of wealth, who cares? 

The cost of goods and services is far more relevant to most people.”

Since I did not say this, and do not think this, his comment is merely his argument with himself.

His next paragraph is:

A return to the gold standard in the context of a fixed quantity of gold would prevent the growth of the monetary base to accommodate economic growth, unless its velocity of circulation increased, which is not an easy process to sustain. 

The price of gold in terms of other goods and services would increase. 

More likely people would start bartering and exchanging IOUs – in effect paper money would resurface so the gold standard would achieve nothing but inefficiency and slower growth.

Again we have a false assumption based on Adolph’s false assertion about gold and value in the previous paragraph.

The book does not describe a fixed amount of gold as a money base.

The amount of gold to be used as money in the nation would vary continually, as we bought and sold goods and services overseas, and mined for gold.

The prices of goods would vary depending on people’s demand for them, and the efficiencies of the manufacturers and distributors.

Life would continue as usual, as people continually adjusted their needs with the value of gold and goods as they saw them.

As the economy produced more goods over time, the prices would tend to go down, and the amount of gold that people received as wages need not change, as its value relative to the goods would be automatically increasing to match.

We would not need to revert to paper money.

With our modern technology, we could just use gold and insist that banks hold 100% reserve, so that at any stage we could get our money back.

We could pay people by doing an online bank transfer of the agreed amount of gold, measured in milligrams. The banks could do a weekly or nightly reconciliation in gold, to keep all gold balances in order.

Our phones or credit/debit cards would initiate this process.

The system would in fact be much like now, except the banks could not cheat on us and defraud everybody by printing up extra money from nowhere.

They would be true banks in the original form.

Also the government could not tax us by the sly method of increasing the money supply (and thus reducing the value of our savings of dollars) through the central bank, as they do at present.

Economic growth would be enhanced, since we would not be continually subject to ever more vicious booms and busts, which have destroyed so much of our wealth in the past.

A sudden increase in the supply of gold would of course be inflationary, but this possibility is quickly dismissed by the author with just a comment that gold is expensive to produce. 

However, it would be a fluke if the rate of increase in the gold supply (whether from extraction or from a trade surplus) matched the rate of growth in output.

I did not dismiss the idea of an increase in gold being inflationary. This is the very definition of inflation!

It could also be a problem, as Spain found when they stole all that Inca gold.

We are making a scientific examination of the REAL World and history bears us out. But this huge increase in gold is not possible in a modern world.

The increase in the supply of gold has nothing to do with how much is produced by an economy. It would just alter the prices as people’s assessments changed.

Increased production has other causes. If the government stops interfering with the economy, it will grow and develop in a balanced way, as people continually strive to increase the level of their satisfaction with their environment.

This was shown by Adam Smith’s observations of the increasing wealth of nations back in the days of the original gold standard under Sir Isaac Newton.

Once again all this is fully explained in my book.

Moreover, when gold is scarce, interest rates would have to rise, which would hardly be desirable if the economy was in recession. 

The GFC would have been much worse under such a regime, and the Great Depression was indeed made worse by it.

Economies get into recession when a boom turns to a bust. We would not be using paper money, so we would not experience such a recession.

There may be a downturn in business due to many other reasons, but in a free market economy each element will change and adjust to meet any loads imposed on them. (Sudden loss of a foreign market, for instance.)

This might be devastating to the suppliers, and there may be other follow-on effects to their suppliers, but this would not cause recession.

Gold, being the commonly used money, wouldn’t ever just suddenly become scarce.

It may become harder to obtain, and borrowers may have to pay a higher rate of interest to borrow gold. But this would be a private matter, and not one to concern governments and economists in a real gold-based economy.

Actually economists would become redundant.

The Great Depression was made worse when the American government imposed price controls and confiscated everybody’s gold.

The American economy did not recover until after the war, when they reduced taxes to around 20%, and reduced the size of government and its effect on the economy.

America had a bust in 1921, and the government of the day did nothing. The economy recovered within 18 months.

Then the government loosened the money supply and we had the boom of the roaring twenties, followed by the 1929 crash.

Adolph cannot help thinking of gold as some sort of “add on” to a paper money system.

The author complains a lot about the growth in the money supply being well above inflation (as measured by the CPI), but seems not to realise that most of the difference is accounted for by real economic growth, rather than the CPI understating inflation.   

There is no recognition that the CPI is meant to measure inflation for household consumption goods (not investment goods), and that there are many other price indices that measure inflation in different parts of the economy. 

The CPI is also criticised because it does not apply uniformly to all groups in society, and because the regimen changes in response to what consumers buy.

Adolph states that “most of the difference is accounted for by real economic growth” when looking at money supply and CPI inflations.

Adolph should read my Question 3 on page 143 and the answer I supply on page 144. Increases in asset prices are not the same as real economic growth!

shadowstats.com clearly shows how CPI gives misleading information about inflation.

I did not criticise the CPI because it did not apply uniformly to all groups — I just keep on pointing out that economists continually confuse the CPI with inflation, which is the increase in the amount of money the government and the banks supply to the economy.

Inflation of the money supply causes inflation of the prices of goods. Not vice versa.

The way to adjust price inflation in an economy is by adjusting the amount of money added. Continually blaming the CPI for inflation is total confusion of thinking.

The author does not like the idea of demand and supply curves, criticising the straw man of continuous curves, asserting that they are without empirical basis, and quoting a few counter examples in an attempt to discredit the whole notion of an inverse relationship between price and demand. 

No economist would claim that the demand for all commodities is downward sloping. 

Presumably the author would not reduce his consumption of bread if its price rose ten-fold relative to substitute products. 

Perhaps he would also deny that no one has turned down their heating in response to higher energy prices.

Adolph says:

No economist would claim that the demand for all commodities is downward sloping.

Samuelson in his famous textbook ‘Economics’ says on page 45 of the sixteenth edition:

“The [demand] curve slopes downward, going from northwest to southeast. This important property is called the law of downward-sloping demand. It is based on common sense, and has been empirically tested and verified for practically all commodities — cornflakes, gasoline, college education, and illegal drugs being a few examples.”

“The law of downward-sloping demand” — Samuelson’s law — sounds like a fundamental truth of economics when we see his own words.

Unfortunately we have found many cases to counter the “law”. According to scientific principles this means the law is false. It is not true.

There is just no point in having a “law” which is sometimes true — but not always. We can never make any logical deductions from this thinking and expect to get “true” answers.

Adolph claims:

The author does not like the idea of demand and supply curves.

It is not a question of liking them. I just point out that they do not accord with reality. They are not scientifically obtained.

They are not graphs in the ordinary scientific and mathematical sense, so ordinary scientific and mathematical operations and conclusions just do not apply to them.

As a pointless figment of Samuelson’s imagination, they do harm by claiming to be more than they are. Generations of economists are being sadly misled in their academic studies.

How can the dons of academia justify teaching that which is incorrect?

As for his presumptions about what I might think about bread or electricity, that comment is merely an attempt to disguise his inability to argue the point about Samuelson’s curves.

As noted the book makes some valid points.

For example: crony capitalism distorts the economy, politicians tend to promise more than they can deliver, FATCA is overly invasive and GDP is a poor measure of economic growth. 

Governments that bailed out the shareholders of insolvent banks during the GFC are castigated, and Cyprus is mentioned numerous times as illustrating the risk of wealth loss to depositors when banks fail.

Seems fair. (The word Cyprus occurs 7 times).

Many faults in the current financial system are discussed – poor risk assessment by bankers (and central bankers), perverse lending incentives, insufficient control by depositors with only paper money when things go bad, and so on. 

Unfortunately few reform options are suggested, apart from a return to the gold standard. Never mind that private holdings of gold could also be confiscated by government.

It is interesting to me when he says:

Unfortunately few reform options are suggested, apart from a return to the gold standard.

The whole point is that if we return to using gold and silver as money, all the problems that paper money bankers visit upon us will disappear.

We only need to take away from bankers the right to create money from nothing. This reform is clear, simple and quite do-able.

We do not need any more options when the solution is so clear.

When Adolph says

Never mind that private holdings of gold could also be confiscated by government.

I am not sure if he means that this is a reason not to use gold.

Governments can always usurp laws and steal from their citizens. They have done it from time immemorial.

The American government did it in 1933, and although they paid the citizens the then going rate of $20 per ounce they immediately revalued gold to be $35 per ounce and reaped their unfair reward.

They could only do this because they had moved away from the  gold standard.

The solution to reforming government is to have a very small one, as I illustrate in my Erewhon chapter.

What tends to be forgotten is that a paper money system unbacked by gold or silver depends upon the belief by all participants that the paper money remains its store of value.

No argument with that.  The same applies to gold and silver, albeit that these have the advantage of being accepted internationally whereas few currencies are in that position.

Agreement, at last.

The author genuinely believes that fiat money regimes are more likely to generate inflation than under a money regime that is tied to gold, and that this is the main argument for adopting it. 

However, a gold standard is neither a necessary condition nor a sufficient condition to avoid inflation.  

Moreover, one has to balance this possibility against the very high risk of insufficient credit expansion to support real economic growth, and the risk of higher interest rates precisely when they are least wanted.

I am not trying to avoid inflation. Using gold would still involve some inflation and some deflation. These are not bad things.

The whole point of this gold regime is that we would not have unbacked credit expansion by the banks.

Credit expansion is the problem which does not produce real growth, but ensures that we have a continuum of booms and busts until the BIG one arrives.

This might be soon.

When that happens, perhaps Adolph will reread my book and think again more carefully about the facts.

He would then discover that using gold as money, and requiring banks to hold 100% reserves, is a necessary and sufficient condition for avoiding credit creation and the high inflation it causes.

The author expects that hyperinflation is imminent, so he is presumably converting his assets onto gold (or buying real estate, given his claim that real estate always keeps up with inflation  –  try telling that to US banks). 

Interestingly he is also forecasting a steep fall in the price of gold, presumably somewhat before hyperinflation sets in.

I did not say all that.

I have never forecast a steep fall in the price of gold. Nor did I say that real estate always keeps up with inflation.

(Nor am I sure what Adolph means by inflation — if he means CPI, then that specifically excludes increases in existing house prices.)

I have maintained for some time that politicians will try to solve their banking problems by expanding the money supply. (They always do in a paper money world.)

This will lead eventually to hyperinflation if they cannot stop this endless credit expansion.

Mises proves this quite conclusively. We see it happening time and time again throughout history. (See Appendix 6.)

Does Adolph think that America is immune from this?

The book is very clear about this. No-one can tell just when a paper money system will hyperinflate.

Japan is printing trillions of yen, and has been doing so since 1990. Still the money remains tied up in the banks, trying to keep them ‘solvent’ with all this ‘liquidity’.

Governments have so much power they can just bring their economies to a dead stop if they wish.

At some point in time the population will decide to spend all their paper money before it becomes completely worthless.

Then the hyperinflation begins.

I haven’t ever forecast a steep fall in the price of gold. I point out that the bullion banks under the control of the Federal Reserve are working hard to lever the price of gold down. And they are succeeding.

This effort to control all US (and other) markets will fail at some point, and the people with the gold (Easterners) will certainly not wish to exchange it for mere American paper dollars.

They buy it now because they see it as good value for the paper dollars that they have by the trillions.

I think the Chinese are getting the bargain of the century.

After all this, the proof of the validity of my book will be self-evident when the mighty US dollar falls from its current perch as World Reserve Currency, and all the chickens come home to roost.

That day is coming closer. But just because I can say that with scientific certainty does not mean that the day of reckoning is imminent.

There are many straws in the wind which indicate that what I say is correct. Some would say that the time is very soon indeed. But that cannot be assessed scientifically.

We must all make our own assessment of the world monetary system, and prepare for our own futures.