Reply To: Why is gold falling?


Why is it falling? I am not entirely sure. I heard one explanation being that the Chinese economy is slowing and they are the second largest buyer of gold. Not sure

But, I will take on the part about speculation and stunting growth.

The point of the Keynesian theory is to level out the supposed boom and bust cycle inherent in the free market. The validity of the idea that business cycles are a feature of the free market and not of government controlled economies is pretty flimsy as you have probably learned in these courses.


Speculation is an interesting discussion. Keynes’s prescription for control economies was for governments to save during the booms and spend during the busts thereby leveling out the cycles he believed to be inherent in the free market. Austrians on the other hand believe that sharp booms and deep, prolonged busts are, in fact, the result of government meddling. Now, in theory, Keynes prescription might work…sort of. What would be the point? when there is a surplus of goods and general prosperity for whatever reason, government soaks up purchasing power and then releases it during the bad times. The goal for Keynes is to have price stability across goods and services, the ability to prop up the labor market during a bust and things like that.

What does that have to do with speculators. Speculators are doing the EXACT thing that Keynes wants government to do. During booms in one market, speculators buy up cheap surplus goods, wait for demand to increase in relation to supply and then they release those goods onto the market when the price goes up. If they are buying more goods when prices are low, this increases those prices. if they put those goods onto the market when prices are higher, then it lowers prices. Speculators are speculating on what? the future price of a good on the market. In other words, if they think prices will soon spike, they will buy now raising prices some now with the anticipation of selling them at a higher price and lowering the price then. They are leveling prices not perpetually increasing them. (search “Speculation in Man Economy and State

So, why should government not do what I just said the market does? Well there is the calculation problem from Mises. Basically, no one person or small group of people is capable of calculating how the millions of units of millions of different goods and services are best distributed in the economy to fit the demands of every person. But even if there were some computer program that could provide this instant answer, Hayek explained that there would still be a knowledge problem. The amount of information that would need to be gathered from every person would be too ridiculous to think about gathering and even if you could manage to gather all the information need, you can still not compare the subjective value between individual and, by the time all this information was gathered, the values scales of individuals would have changed.

Thus, it is better to leave the leveling of prices over time to thousands and thousands of individuals who specialize in one or a few markets who are putting their own cash or businesses at risk rather than to a small committee in government disconnected from the markets and the incentives provided by profit and loss.

Limiting Growth

This argument is pretty much a complete misunderstanding of economics. The argument goes something like this. If there is a limit to the amount of money, then as more goods are available to more people money is spread thinner and thinner through the economy. With less and less money spread around, prices would have to fall. If people see falling prices, they will wait to make purchases. If prices continue to fall, people will continue to wait. No one will buy anything, money will stop flowing through the economy and the entire economy will collapse. I assume you are using this website on your personal computer. But, even with general inflation, computer prices have fallen about every year. So why did you buy a computer (say… this year)? Because you still valued the services of your computer over the course of this year more than the money you would have buy waiting until next year to buy one. This would be the case for most goods and services. People are not going to perpetually wait to buy food, clothes, the next iPhone, a car, a house, etc, if they value the use of that item now more than the money saved by waiting. Yes, if there is a fixed amount of money then prices will fall, but that is not necessarily a bad thing and it is not going to collapse the economy.

Yes, prices will fall and this will also lead to more savings. But savings, in the form of savings accounts (the type in a non fractional reserve system) and investments. this money will just go right back into the economy in the form of capital investment. It doesnt sit idle in someones mattress. Keynesians want consumption now. Austrians are looking at a long term picture where there is investment in capital, an extension of the capital structure, and greater long term growth in production.

But besides all of that, at least around here, people are not calling for a gold standard as most Keynesians believe it to be. When Keynesians decry a gold standard, they are talking about a government decree stating gold is the only valid currency. What most free market austrians advocate is competing currencies and it would eliminate this argument all together. If the amount of one form of money (say gold) become too low to be practical for use in the market, then the market will, basically on its own, begin using other currencies like silver, copper, bitcoin, whatever comes along. It is not that the dollar should be replaced with gold, but that we should let the market take over issuing of currency.

Of course, they can say that the dollar isnt prone to wide fluctuations because they are using the dollar as their ruler. if you measure a ruler using itself it will always look straight.

I probably did alot of straying from the target on this post. Feel free to ask some questions that get me a little more focused ;).