Why Utah adopting gold and silver as legal tender is really stupid but also a really, really good idea

I’ve seen a fair amount of comments on Facebook poking fun of the Utah legislature for passing a law making gold and silver legal tender in the Beehive state. One Democrat said Utah should make salt legal tender because Utah produces a lot of salt.

Here’s a description of the bill:

The measure would recognize as legal tender gold and silver coins issued by the federal government — not just their face value, but also their value in gold and silver or to a collector, and exempt sales from personal gains tax. It also would order the state to study whether Utah should establish an alternative form of legal tender, such as one backed by silver and gold.

“It will put some pressure on the federal government. That’s the goal here because right now we have a dollar that’s just running away with inflation and our hope is that this is a little bit of a shock that’ll say we want to deal with inflation,” said Senate Majority Leader Scott Jenkins, R-Plain City, Senate sponsor of the bill.

I’m having problems understanding the concerns here. Perhaps you can help me out.

First of all, gold and silver have been used as legal tender for millennia precisely because they are portable, durable and relatively rare. It turns out that when you actually study the periodic table there are not very many elements with those qualities. Gold, platinum and silver are among the few elements that would work as currency. Obviously, salt wouldn’t.

But the reference to salt was mostly a snarky complaint about the legislature’s priorities. This is what I don’t get. If your complaint is that the legislature should be doing other things with its time, fine, but legislatures do much stupider things with their time every single day all over the world, and people don’t get snarky about it. Take a look at a state legislature calendar sometime: believe me, there are some really stupid things done by state legislatures with taxpayer money.

Having discussed this with a few pretty smart people, it seems that the concerns about the measure boils down to this:

1)Going on the gold standard is stupid.
2)The legislature is wasting its time on stupid things.
3)Most of the supporters (including the Utah legislators) are tea party/Cleon Skousen/Glenn Beck fanatics who are stupid.

I can mostly agree with these three statements. But I still think this bill is a good idea, atleast as a Robinhood alternative. Here is why: it draws attention to the debt and the declining value of the U.S. dollar. Folks, if you are not worried about the national debt, you should be. Really, really worried. Anything that gets people talking about this issue is a good thing.

Let me show you a few links and charts that explain why you should be worried.

First, here is the U.S. debt. It is $14.2 trillion. That figure is so staggering as to be difficult to imagine. Think of it this way: That debt is more than $128,000 per taxpayer. The yearly deficit proposals being discussed are $1.6 trillion. This means that Congress is discussing adding another $1.6 trillion per year to that debt of $14.2 trillion. Just paying the interest on our current debt takes up more than $200 billion a year. So, when you hear the Democrats talking about cutting $10 billion a year and the Republicans talking about cutting $61 billion a year, keep in mind that those cuts would not even touch the total interest on the debt.

Again, the numbers are so staggering that I don’t think people understand them. Let’s put it this way. Let’s say you just graduated from college with $200k of student loans. You also have $30k in credit card debt. Now let’s say you make $50k a year. Your student loan payments and credit card payments are $3000-plus per month. You are married with three young kids. Your spouse doesn’t work. How are you going to afford rent, food, a car payment, insurance, etc? You aren’t. Now, let’s say your best friend comes to you and says: let’s buy a condo in Park City, it’s only $250k. Your monthly payment will only be another $1500.

Folks, the numbers don’t add up. You can’t live on $50k a year when you have $230k in debt. And you certainly can’t go buy a new condo. There is literally no way out but personal bankruptcy (or borrowing a lot of money from friends and family). The U.S. goverment has taken the borrowing route. How is that likely to work out, based on your personal experience? You can’t borrow forever: at some point, the bill comes due.

All of us, every single one of us in the United States, are living on borrowed time. The bill will come due one way or another. There are only two possible results, long-term:

1)At some point, nobody knows when, the U.S. will not be able to sell any more debt to investors. The Fed will have to buy the debt. This will result in a massive selloff in bonds and treasuries, which means a run on the dollar and massive inflation, much higher than the U.S. has ever seen. According to an analyst who blogs for eToro Nachteile, the consequences for the world economy will make the 2007-2008 crisis look like a party in comparison. The stock market will tank. Your 401k will disappear. Banks will close. People will lose confidence in paper money. Commodities (wheat, corn, gold, silver) will soar even higher in value. If this happens, the U.S. will be forced to immediately, massively cut government spending. Every government program will be affected. If you get a pension or Social Security or some other check from the government, you will be affected.
2)We get serious about government spending before nightmare scenario 1) happens. This means very, very large cuts in real spending. But the interesting thing is that you can balance the budget with real cuts if you make them every year, and the cuts don’t need to be massive. Take a look at this proposal.

The problem is that nobody is talking about a real proposal to get to a balanced budget today. Nobody is touching Social Security, Medicare and Medicaid. And nobody is talking about cutting Defense. So the message to the bond market is: we cannot take the United States government seriously.

So, going back to why you should be worried: take a look at the value of the dollar. The accompanying chart shows that the dollar has lost half its value in the last 10 years compared to a basket of other currencies. This means that the world is betting that the dollar is weak compared to our competitors and that the it will continue to be weak.

The worldwide economy is already betting against the dollar. But it gets even worse: the worldwide economy is also already betting that inflation will get out of control. Leave out oil for a minute (although it is also relevant). Take a look at the following.

1)The price of silver.
2)The price of gold.
3)The price of copper.
4))The price of corn.
5)The price of sugar.

I could go on and on. Do you notice a common theme? Everything is going up (except the value of the dollar), and most things are near historically high prices. Why is this? There are a few main reasons:

A)There is more money in circulation because the Fed has increased the money supply. More money chasing about the same amount of goods means inflation.
B)The market believes there will be more inflation in the future. Therefore, investors are fleeing to stable items that will increase in value, like gold and silver and platinum.
C)The market believes that the U.S. government will not resolve the debt situation, which means that more and more people believe the scary scenario of a complete market collapse. If this happens, commodities will be worth even more, thus people are investing in these things as a hedge.

So, even if the rube legislators in Utah are stupid Glenn Beck/Cleon Skousen followers, they are probably smarter than you think. Their purpose is to try to draw attention to the debt and get people concerned about it, as they should be. Nobody thinks the U.S. will be going on the gold standard anytime soon. But if you are not worried about the debt, you are substantially less intelligent than the stupid Utah legislators.

As a last comment, I would like to link Connor Boyack’s piece on this issue, which makes some pretty good points supporting the measure.

This entry was posted in General by Geoff B.. Bookmark the permalink.

About Geoff B.

Geoff B graduated from Stanford University (class of 1985) and worked in journalism for several years until about 1992, when he took up his second career in telecommunications sales. He has held many callings in the Church, but his favorite calling is father and husband. Geoff is active in martial arts and loves hiking and skiing. Geoff has five children and lives in Colorado.

48 thoughts on “Why Utah adopting gold and silver as legal tender is really stupid but also a really, really good idea

  1. My big issue with the measure is this:

    If you invest in stocks, you pay taxes on the interest you earn. Same if you invest in real estate. Same if you invest in any number of other things. Why should investments in gold or silver be any different? Why should an investment in copper require payment of taxes when the value goes up, but not investments in gold and silver?

    In other words, this is a tax loophole.

  2. Tim: gold is not really an investment. It’s currency. You don’t pay taxes on the increased wealth from having moved your money into yuan, pesos, or wheat, do you?

  3. Maybe people are having a hard time taking this bill seriously because it comes at the end of ridiculous bills like choosing an official state gun, forcing teachers to say we are a Republic because calling us a Democracy “leads to Socialism”, making it more difficult to citizens to get access to government records, the legislature deciding they are education experts, and not even flying the U.S. flag along with the Utah State flag for the day? This one bill may not seem like a waste of time to you by itself, but to many of us it seems like they are more interested in making statements than doing anything else this year.

    I mean really, finding an alternative form of legal tender to the dollar? You really think Target is going to accept my Utah Bucks or my gold coins when I want to buy a gallon of milk? How is this anything other than posturing by Tea Party legislators?

    I’m not saying there isn’t a problem that needs to be fixed, but in my opinion this isn’t going to solve anything.

  4. I agree with Tim. A much more effective measure would be to charge Utah capital gains taxes on inflation adjusted (i.e. real) gains on an opt-in basis. That would protect investments in any kind of real asset, not just gold and silver.

    As it is, without inflation adjustment, in inflationary periods (such as the 1970s) people often are required to pay taxes on imaginary (nominal) gains – i.e. economic transactions where they have actually lost money in real terms.

    In other words, the capital gains tax at present includes an inflation tax, and it is a severe one, especially for any investment held for several years. Taxing inflation promotes speculation, borrowing, and debt finance in general. A Utah move to adjust for it would set an excellent precedent and attract investors and investment to the state.

  5. “The problem is that nobody is talking about a real proposal to get to a balanced budget today.”

    What was the name of that joint commission on the debt that produced a report several weeks ago? I thought they did a good job.

  6. I think Connor’s point is that you don’t tax gains on a currency. When your dollar goes up vs. the Euro, you aren’t taxed on that. If Utah recognizes the dollar and silver as currency, then gains wouldn’t be taxed. An interesting conundrum.

  7. BrianJ, I wrote about that commission at the time. Everybody called it the Obama Debt Commission, but it probably had a more official name. In any case, I agree with you that their report was a good start. But you’ll notice that both Rs and Ds immediately forgot about those recommendations. Obama’s proposed 2012 budget includes almost no proposals from the commission. And at the end of the day the commission’s proposals for cuts were way too tepid. But if they were adopted, we would be better off than we are now.

  8. Steven Montgomery wrote an excellent related article at Sound as a Dollar.

    Regardless of the pundits and their followers, the Fed has consistently increased and decreased the money supply leading to booms and busts – one of the stated purposes they were enacted to prevent. Since 1913, the same year the Federal Reserve Act was enacted, the dollar has lost 96% of its value.

    One of the reasons the founders included language calling “gold and silver coin a tender payment in debts” in Article 1, Section 10, Clause 1 of the Constitution is because they had financed the war with Britain with paper money which became almost worthless after the war.

    Is the Utah legislature being foolish by enacting such a law?

    Only time will tell, but if the dollar is replaced by another reserve currency, the consequences could very well be disastrous.

  9. When your dollar goes up vs. the Euro, you aren’t taxed on that.

    If you sell your holdings of Euros at a higher exchange rate (in terms of dollars) than you purchased them, you will definitely owe capital gains tax on the difference.

    I fully support exempting gold and silver bullion from sales taxes. Foreign currency transactions are not subject to them, and gold and silver are as viable a currency as any other. True investments shouldn’t be subject to sales taxes in any case, and generally aren’t.

    The dollar doesn’t deserve to be the reserve currency anymore, but it won’t be the end of the world. We will have to pay somewhat higher interest rates due to that fact alone, but that is hardly anyone else’s fault.

  10. Geoff,
    I don’t think you are being fair. I’m snarky about just about everything that the jerks and idiots in the Utah State Legislature do (I actually pay attention, even though it saddens me; don’t fear for my sanity though, the proposed cuts the NPR would wipe out my local NPR stations ability to cover the state legislature, so removing that access would make me happier, right?). Note, also, that if they pass stuff I agree with, they are neither jerks nor idiots (unless they are for other reasons). Also note, if they are named Carl Wimmer or Chris Buttars, then they are grandstanders who never, ever accomplish anything useful. They are stupendous bad idea generators; they always no exactly what we shouldn’t do.

    State legislatures trying to send message bills to the Federal Government is, by definition, a big waste of time. Has the Arizona bill from last year actually generated any light along with its heat? What about the 2010 Utah bills on gun ownership; is that issue still foremost on the nation’s mind? How are all those resolutions (in Utah at least) to assert that the State won’t do whatever the Federal government wants it to do on health care working? The legal cases, of course, matter, but these dumb message bills just waste time. It costs these state folks nothing to make these resolutions and it feels like the majority of what they do (I know it isn’t; but it is the majority of what is reported).

    If you don’t think that the debt is getting attention right now, you are crazy. It is everything people talk about on the news and such. I agree that most of the talk regarding it has to do with people using it as a smokescreen to go on anti-union tirades or to cut funding for women’s clinics, but it is, indeed, the talk of the town.

    The people behind this measure either haven’t thought it through or they expect to be chosen as government contractors to handle all the gold sales. Either the government is going to provide a means for participating businesses to test and measure gold or some group is going to provide it.

    Ask yourself “Is the time to test the gold standard (which is what this is about) in the middle of a recovery from a massive economic bust?” Let’s say that this actually becomes widespread (because every Wal-Mart and Best Buy have assaying materials readily available). Presumably, stores will prefer gold and silver (as has been noted, it better retains its value). So stores that use hard currency will have more stable pricing that stores that don’t. Folks will get to see inflation firsthand. So, more people will shift to gold (Are we absolutely certain that goldline isn’t behind this bill?). But this is only true of stores within Utah (because other states apparently learned the lessons of the Great Depression), so the paper money economy will go online (except for food, but Utah obviously doesn’t care about food prices, just look at the recently proposed bill on raising the sales tax on food so that luxury items can be purchased more cheaply). So, at a time when Utah hasn’t fully recovered from the Great Recession (or whatever), we think it is a good idea to split the market into a hard and soft economy, creating an artificial increase in demand for gold (and an artificial shortage of supply (Are we absolutely, absolutely certain that goldline isn’t behind this bill?) So the poor will go from being relatively poor to being incredibly poor (gold will only in increase dramatically in value at the beginning of this; if you don’t already have great stores, then you will be screwed). Oh yeah, I see the point of this.

    Hey, you know what won’t increase street crime? People walking around with little bags of silver and gold. Actually, I take that back. Those people are also likely to be bearers of an incredibly easily obtained conceal and carry permit. Hey, you know what won’t increase shoot outs in the street? Of course, this is all about rushing back to the economy of the 1800s, so maybe street fights are desirable? It would probably increase tourism and health care spending (because Utah is the US leader in creating broken health care exchanges that still don’t work years after implementation, unless you disagree with the Legislature’s perception of morality in which case you just find insurance at all; Thanks freedom-loving representative Carl Wimmer!)

  11. Sales tax is more of an impediment than capital gains taxes to using metal as money. I suppose a legal tender law would allow someone to cash out some of his paycheck in silver eagles and use them to buy groceries and get a haircut without giving any more thought to taxes than he would if had pulled out a bunch of twenties from an ATM. Would it require the grocery store and the barber to accept silver and gold on the same basis they accept cash?

  12. John C, I got you fired up! Yeah baby!

    All well and good, but could you please point me to the left-wing proposal that will get our deficit under $1 trillion by 2013 and balance it within a 6-7 years after that? Secondly, could you give me your personal proposals along those lines?

    I presented such a proposal from the libertarian side in the body of the story.

    John M, I’m not sure any store today has to accept U.S. dollars. They have the right to refuse service, don’t they? In any case, all transactions should be voluntary, in my opinion. You shouldn’t require grocery stores or barbers to accept any kind of monetary unit.

  13. Connor,

    The reality is that gold and silver are an investment. In 1970, gold was worth about $35/ounce. Today it’s worth over $1400. Imagine I spent $35,000 on gold in 1970. I keep it around for forty years. Utah passes this bill. My $35,000 is now (as of March 8, 2011) $1,435,000. And guess what? When I sell that gold, I don’t have to pay a dime! 1.4 million dollars of tax free money. Wow.

  14. Geoff,
    I don’t disagree with you that the cuts have to come in Medicare, Social Security, Medicaid and Defense Spending. That’s not a particularly Republican or conservative position (Obama’s been preaching something similar for a while). I’m also all for letting the Bush Tax cuts die and for general tax reform (lower corporate, higher individual progressive (although if corporations want to be treated like individuals regarding freedom of speech, I can’t say that I object to treating them like individuals for tax purposes). Also, treat capital gains like income.

  15. Tim, not to be argumentative, but if gold is a currency it is no longer an investment, it’s money.

    The Euro has gone up about 40 percent against the dollar in the last decade. If you bought Euros 10 years ago and kept them in a drawer, and then spent them, you would not be taxed on the gain dollar vs. Euro. Your Euros would simply be worth more (in dollar terms).

    So, if you bought gold in one-tenth of an ounce increments (the U.S. mint sells these, and you can go to a coin shop to buy them), they would be worth more or less $145. In Utah, they are about to be legal tender. You could take one to Deseret Books today and buy a bunch of books (in theory). Now, let’s say the value of that currency goes up 20 percent in a year and is now worth $174. You take it to Deseret Books and buy even more books a year from now. You are not taxed (nor should you be) on the different between $145 and $174 as a gain.

    The point you are missing is that if something is a currency and it goes up relative to another currency, it shouldn’t be taxed because of the gain. And Utah is declaring gold and silver currencies.

  16. Honestly, people who argue that we can get out of the debt with cuts only, no tax increases, are full of crap (which is why I wasn’t impressed with the article).

  17. lol @ anybody thinking were getting out of this debt. The market will crash, its just a matter of when. I am buying silver coins on Ebay and everyone else should too. My silver dime is worth $2.50, how much is your 2010 dime worth? about $.02

  18. John C, if you don’t mind, I’d like to drill down a bit on this subject. That is the purpose of the post, and it’s my post, so please bear with me.

    There is difference between talk and action. Where is the action on the left side of the aisle (I’ll admit there has been plenty of talk)? The president had his chance to take his own deficit commission report and then apply it to the 2012 budget, which was presented two months later. But he did not. So there is no real proposal from the president or the Dems or any left-leaning group I know of to balance the budget or even come close.

    So, let’s look at the big numbers.


    The proposed 2011 budget (which is the one Dems and Reps are discussing now) shows income of about $2.2 trillion and expenditures of about $3.8 trillion. That’s a $1.6 trillion deficit.

    The major programs (in big numbers) are:

    Non-defense discretionary: $800 billion
    Defense discretionary: $700 billion
    Social Security: $700 billion
    Medicare: $600 billion
    Medicaid: $200 billion
    Other mandatory: $600 billion
    Interest on the debt: $200 billion

    To show the markets you are serious about the debt, you must get the deficit under $1 trillion immediately and show a pathway to getting to near a balanced budget by 2020.

    My plan is: cut defense $200 billion, get out of Iraq and Afghanistan, cut all other programs by 20 percent starting immediately. Get rid of the departments of Education, Energy and HUD. Don’t raise taxes.

    What is your plan? Keep in mind that if you allow the Bush tax cuts to expire you only get $70 billion a year in supposed extra revenue, so that alone is not going to do it (and you will never get that entire $70 billion anyway, but let’s say you do for the purpose of this exercise).

  19. Geoff,
    I’d generally support raising the age at which Medicare kicks in and not offering it or Social Security to people who don’t need it (say, people who can expect 50,000 a year or more assuming 20 years of retirement). I also generally support switching Medicaid to HMO type insurance. I did this balance the budget thing at the NYTimes a while ago and I know that this would help. Removing the Bush tax cuts and raising the general tax rate will also help. I can’t give you specifics, because I don’t have the figures at my fingertips.

    Now, my question is, if you want to talk deficits, why are you doing in on a post titled Gold and what-not? Just say, “I’m looking to understand the left’s position on the deficit” (Note: I’m not actually a leftist and am willing to do things that a leftist wouldn’t (make Medicaid HMOish, for instance)). You’ve not addressed anything that I said in that long comment (not that you have to, but if you don’t want to talk about gold, why bring it up).

  20. Tim,

    All that really means is that the dollar is declining in value. The gold is retaining the wealth fairly well, but saying that the gold is “worth more” is disingenuous. It mostly only means that you can exchange it for more dollars, each of which is worth far less in value. I’d hardly consider that an investment…

  21. Connor,

    Hate to break it to you, but $35,000 in 1970 was not worth anything close to $1.4 million today. Yes, the dollar is worth less. But nothing like that. I’m guessing $35,000 in 1970 money is worth somewhere between $150,000 and $200,000 today. Not even close to $1.4 million. In any case, other investments are taxed without considering inflation.

    My point is, people don’t typically treat gold and silver as currency. Passing a law to call them currency doesn’t change that. A rose by any other name…

    People will continue to treat them, primarily, as an investment. Therefore, they should be taxed like any other investment.

  22. John M, Cato and Rand Paul have look at that, and have determined those projects can go to the DoD.

    Google “downsizing government” and go to the Cato website. Very interesting.

    John C, I’ve discussed the deficit before, but the main point of this post is: even if the Utah legislature is doing something stupid, it is still smart because they are getting people to talk about the deficit.

    On your points, I probably agree with 1, 2 and 6. I don’t agree on 3 because talk isn’t action. On 4 and 5, we’ll have to wait and see.

  23. Tim: long-term trends suggest otherwise, I believe. As this article suggests, gold behaves as a currency over the long run. Also, pointing to 1970’s numbers isn’t a fair comparison as the fixed price of gold was an artificial valuation of gold by the government.

    Anyways, as I don’t believe capital gains taxes should exist at all, the point is relatively moot for me.

  24. The point you are missing is that if something is a currency and it goes up relative to another currency, it shouldn’t be taxed because of the gain

    Geoff, I think you need to make an argument for that. That certainly does not apply to foreign currencies under current law.

    The only way that makes sense for multiple official currencies is if there is a fixed exchange rate between them, as there used to be between gold and silver during the era of bimetallism, or between gold and the dollar under the strict gold standard.

  25. Mark D, there is a difference between trading in currencies, where you have a capital gain, and using different currencies for transactions.

    I explained it as clearly as I can in #16. Let me try it one more time.

    If you are a Forex trader and you buy a Euro for $1.25 and sell for $1.30, you have a capital gain, and you can be taxed.

    However, if you are a business and happen to have a business in Europe where you are earning money in Euros, and keep that money in Euros in a European bank, then you are not taxed when the value of the currency increases relative to dollars. The reason is that you are not trading in currencies, you are doing business transactions in currencies. So, one year your American wheat costs $1/bushel. You pay for it in Euros at $1.25 per Euro. The next year it costs $1/bushel, but your Euro is worth $1.30. You can buy more wheat. Nobody is going to tax you for the difference, your currency has simply changed in value relative to another currency.

    In Utah, if you had gold, the second principle would apply (according to this new law). One year you could buy a certain amount of stuff with gold (in dollar terms), the next year you could buy a different amount of stuff in gold (in dollar terms). There is no capital gain — just a change in value of one currency (gold) vs. the other (dollars).

    This is exactly why Utah is so smart to consider gold and silver legal tender: people have lost the concept that stuff has real, absolute value.

  26. Hey, you know what won’t increase street crime? People walking around with little bags of silver and gold

    No one needs to carry physical gold and silver. All you need is a gold or silver denominated bank account and an associated debit card.

    Then when you go to a store and purchase something, the bank automatically calculates the right conversion rate and adjusts your balance accordingly. If the store offers prices in terms of gold or silver (and the debit card network supports multiple currencies), no conversion required.

    Money market checking accounts work this way already. It is called mutual fund banking.

  27. Geoff, I completely agree that sales taxes should not apply to currency transactions or virtually any investment transaction for that matter.

    Taxing only inflation adjusted capital gains would solve much of the problem you describe, and would be far more economically beneficial than what Utah has done so far.

    However, if you have a (domestic) Euro denominated bank account, and the value of the Euro relative to dollars rises far faster than inflation, I don’t think it is a foregone conclusion that one should be exempt from capital gains taxes on the realized increase in value in the interim.

    However, I agree that may very well be a legitimate system if capital losses on Euro denominated bank accounts aren’t deductible either.

    In like manner, exempting gold holdings from capital gains taxes would be legitimate in the long run if capital losses on gold holdings were not deductible either. But that is not what the Utah law does, which stacks the deck unfairly in one direction.

  28. Mark D, if your European subsidiary has a bank account in Europe and keeps its money in Euros, and the value of the Euro increases against dollars, who would do the taxing?

    Think of it this way: you have a bank account in the U.S., right? If the value of the dollar vs the Euro increases, you are not taxed for that. The same thing applies worldwide.

    So, if gold is a currency, it would be just like a Euro. Its rise in value is irrelevant as a taxable event.

  29. By means testing social security and removing the ~$106,000 cap on SS tax you solve a major problem fairly easily, and then you can remove SS from the budget picture completely.

    I think most liberals, like myself, are also worried about the deficit and are frustrated that government can’t do anything about it. I agree with John C. that going back to the Clinton or Reagan era tax scheme is an absolute must. I think this because Americans are generally very supportive of cutting programs and reducing government spending until we actually find out which programs will get trimmed and then we are very unsupportive. Most programs are incredibly popular individually. So raising taxes to keep these programs has to be on the table. If Americans saw exactly how much their taxes would have to be raised to keep all the programs they love it might help the discussion along.

    So that really leaves defense spending, which is enormous. Simply shutting most overseas bases, like in Germany and Japan, would save billions, not to mention all the other bloated programs in defense. And yes, I also think Medicare/Medicaid need to be dealt with, but I’m not smart enough to know how (although I’m a big universal health care guy).

  30. Geoff, nuclear weapons in the U.S. have been overseen by civilians since 1946. It is a wise policy worth the expense of a separate agency. If Cato and Rand Paul don’t understand the use and value of dividing most responsibilities for nuclear stewardship away from the military, then I can’t take them very seriously. Apart from the special nature of nuclear weapons, we ought to be hesitant in general about shifting government functions into the military domain. I suspect that the Department of Energy is part of the list of departments to abolish mostly as a swipe at Jimmy Carter who oversaw its restructuring from the older Atomic Energy Commission. DOE ought to be replaced it with Transportation or Agriculture in the budget hawks’ talking points.

  31. Jacob S and John C, there is a very important graph you need to read and internalize. It shows all federal outlays and revenues for the last 80 years or so. It turns out that no matter how much you raise taxes, you can’t get more than 19 percent of GDP (on average). The reason for this is that people exercise tax avoidance. So, during the 1950s when the top income tax rate was 90 percent (yes, it really was 90 percent), we still only got 19 percent of GDP in revenues. During modern times, Clinton briefly got the revenue return rate above 20 percent, but remember revenues decline during a recession, so maintaining it that high is literally impossible on a long-term level.

    So, expenditures now are 25 percent of GDP. Revenue is about 16 percent or so (we are still in an economic downturn). The budget already assumes that we will get revenue back toward 20 percent soon (see the attached graph) but notice that this does not close the budget gap.

    Bottom line: we cannot raise taxes enough to get even close to solving this problem. If we raise taxes too much, we actually get less revenue because people stop working and investing. This is why the Obama deficit commission said we should actually *lower* the tax rate and eliminate deductions. This would actually raise more revenue than raising tax rates.

    Here is the link. Please study it.


  32. Maybe this is too sophisticated for me, but it has me thinking of that junior high question, “What weighs more, a pound of lead or a pound of feathers?” Substitute those with a dollar of paper and a dollar of gold; that way lies absurdity. If it’s another way of saying we’re going back to the gold standard, there are all the pros and cons of doing that which many others have discussed for a long time.

    I think it’s interesting that in the Book of Mormon, Nephite currency was in the form of gold and silver, backed by grain. It makes sense to me because in a really dire situation precious metals would just be shiny useless trinkets, while grain would still have real value (see what Robinson Crusoe had to say on that).

    Of course, our money is all a grand illusion that only has value because everyone believes it has value.

  33. Witt, there are way too many problems with moving to a gold standard right now. It ain’t going to happen anytime soon, barring a huge worldwide economic collapse.

    If you go to the top of this post, I mention that there are actually very few elements that could be used as currency. Gold, silver, platinum are really the only ones, and gold and silver are the only ones that are common enough. Very few people actually own platinum.

    You are correct that paper money is a grand illusion. The only value is has is the imagined value that people currently share. But that value is decreasing over time. The same thing happened in the 1970s, and there was a huge boom in commodities, just like now. The difference then was that the deficit was still at manageable levels, which is not the case today. From a national urgency standpoint, we have not been in this much trouble as a country since WWII, yet people are blithely continuing on as if nothing is wrong.

    The value of gold and silver is also illusory in a sense. The difference is that everybody the world over recognizes they have real value, which is why their prices are soaring right now.

  34. Geoff, if Cato is advising that all nuclear stewardship be put under DoD, their proposal for DOE isn’t worth consideration.

  35. if your European subsidiary has a bank account in Europe and keeps its money in Euros, and the value of the Euro increases against dollars, who would do the taxing?

    Geoff B, the rules for multi-national corporations are complicated. In the U.S. no domestic taxes are due on foreign operations unless profits are repatriated to the United States. I believe the rule is similar for individuals. That is why I referred to a domestic bank account denominated in Euros.

    It is important to recognize that under U.S. law the change in value of most investments is not a taxable event. You have to realize the gain (or loss) by selling assets for taxes to apply, and there are exceptions for that.

    If you never sell your gold holdings, no taxes apply. If you make a killing after adjusting for inflation, you should pay taxes. If you lose your shirt you should get a tax deductible capital loss.

    The idea that gold should be some sort of capital gains free zone isn’t fair unless it is also a capital loss free zone. If the government did that, that would be fair and reasonable.

  36. Bottom line: we cannot raise taxes enough to get even close to solving this problem.

    The main reason why tax revenue goes down so dramatically in a recession is the tax system is too progressive. Too many people don’t pay for the federal government at all and the tax revenue from the upper brackets takes a major hit. That is why nearly every state has both a sales tax and an income tax – revenues are much more stable that way.

    And it is also why it is probably an economic and political inevitability that some sort of federal VAT will be established in addition to some sort of federal income tax. It is the only way the government can pay for itself during a recession.

    I don’t know if the federal government can raise its revenue share past 20% that way, but if they are creative enough, I wouldn’t put it past them.

  37. Geoff,
    I’ve seen the graph. Let’s pretend I said raise tax revenue (because that’s ultimately what I meant) and not get too fussy about the means.

  38. It is by no means a given that the wealthy will dramatically stop working so hard with increased tax rates. There is evidence that they tend to work less hard, but not to the extent that raising the top marginal rate will have a huge effect. Here are a couple quick links I found that illustrate the point, more or less. The upshot is that economists and behavior psychologists are in no agreement as to the effect of higher tax rates on work ethic.

    So if relatively stagnant tax revenue as a percent of GDP can only be minimally ascribed to a decrease desire to work, what else can explain it? All the usually stuff like loopholes, creative accounting, more money put into health benefits, and the like. I think a much more simplified tax code that closes loopholes would be as effective as actually raising rates, although a touch of both might be useful.

  39. I was warned before I became a member of the Church that I would run into some “slightly tetched” individuals that would say some strange things, that I should not judge the Church on them. I ran into a few of these people from time to time. The High uncil speakers who said you shouldn’t neuter your pet because they had free agency too and the one who said you got serious illnesses or diseases because you did something evil or immoral come to mind. I’m afraid much of this post is heading that way

    A few things to consider:
    1. The U.S. Consitution does not allow states to coin money. So coins are out
    2. Printing money is against Federal Law, so printed money is a no no
    3. Some type of promisory paper would have to be created? If the state backed it,
    then how much silver and gold would it have to buy to back it? Where would it
    keep it? What programs would need to be cut to try to buy the gold or silver
    4. If the banks printed it, where would they get their supply of the minerals? How
    would they pay for it? What happens if there is a run on the bank.
    5. What about foreign companies wanting to do business in Utah? Tourists coming to
    Utah? People paid by the U.S. government? The reality is that people would
    have to operate on two sets of currency. What a mess.
    6. For purposes of this reply lets call the gold equivalent a “Beck” ( noted shill
    for gold) and the coin equivalent for silver a “Skousen.” Some one hands a
    McDonalds clerk one dollar, two Becks, 32 cents and 17 Skousens for 4 Happy Meals.
    What happens?
    7. If you operate on “polks and scales” system, who determines the exchange rate?
    Do ou expect that McDoalds clerk to correctly measure the right amount of gold or
    silver? What if a customer pays in dollars and wants change in gold? How
    long would you haveto wait for your Big Mac while this process goes on?
    8. Would every store have to have three sets of prices (dollars, becks, and skousens?
    Remember, the price of gold and silver fluctuate independent of one another. What
    size cash cash registers would you need.

    I could go on and on, but the point is that the reality of making such a system work is unbelievingly complicated. The only way I can see it easily working is if Utah seceded and formed the country of Browning and did create its currency of Becks and Skousens. It would be easy because those of us in California and the other 48 states wouldn’t have to worry about it,

  40. Would every store have to have three sets of prices

    No. There is no obligation of stores to accept any form of legal tender. Stores can refuse to accept $100 bills for example. Businesses that perform services ahead of time might, but they have no obligation to make change either.

    If the banks printed it, where would they get their supply of the minerals? How would they pay for it? What happens if there is a run on the bank.

    Banks should be required to keep 100% reserves on all deposit accounts. The banks themselves do not need to physically carry gold in their vaults, but they must have an absolute claim on gold stored somewhere for a gold standard to be viable.

    Then as deposits in dollars are made, the bank purchases claims on gold from an insured gold depository at the appropriate exchange rate, and credits the depositor’s hard currency account.

    When a depositor wishes to make a purchase in dollars, the reverse process happens – the bank sells some part of its claims on gold at market rates, and uses the proceeds to pay the pay the merchant via the regular debit card network.

    No coins, no bills, no banknotes required. Banks can do this all electronically, using exactly the same procedures as are used for cross currency debit and credit card transactions.

    Realistically though, it would be somewhat risky to use such an account for your checking account as long as most recurring obligations are denominated in dollars. So it would more likely be a niche product until such an eventuality as a worldwide currency collapse.

    There would be no runs on deposit accounts, but if you wanted to earn interest you would need to put your savings in some sort of investment account, which always bear some risk.

  41. Mark, One huge problem. Banks are only required to have about 8-14% reserves (before 1980 it was about 20%.) Where is that other 80-92%? In loans. For your system of 100% reserves to work

    1. The bank would keep your deposit and charge you fees for maintaining it.
    2. The bank would loan on the gold or silver but buy insurance that would pay if a
    problem arose. There are several difficulties with that. Who will eventually pay for
    the insurance (hint: its not the bank). How good of insurance will it be (remember
    the failure of the credit default swaps of the sub prime/MBS fiasco?”
    3. Unless you tied the value of silver to gold (ca.40 to 1) you would in
    essence have three sets of books to keep. If you tied the values, only one would
    reflect world wide market value (probably gold).

    In reality, if you are using checking accounts, you are right in that we need to stick with dollars. If you want to invest in gold and silver buy it and keep it (a la the Beckster). If one is really serious about returning to a full or partial metallic standard, it needs to be done on the national scale.

    This piece of legislation is just a publicity gimmick for the Republicans to expand their base to include the less bright members of the Tea Party and other Knuckle Draggers. It is just as stupid as the state “implement of murder, mayhem, suicide, accidental death and drive by shootings.”

  42. Wow, Stan, you have perfectly summed up what the OP said!

    Tell me, how do you feel about the deficit? Is it is serious problem or not? What is your plan to actually do something about the deficit? If you don’t think these questions are relevant, please go re-read the OP.

  43. Stan, It doesn’t matter what they are required to have now. What matters is what they should be required to have. The government has no business guaranteeing the value of deposits that are not held at 100% reserve. Fractional reserve banking is one of the riskiest business models on the planet. That is why banks fail on a regular basis.

    Linking fractional reserve banks together with the FDIC doesn’t solve the problem all it means is that when serious problems do come instead of affecting individual banks the whole system is in danger of going under. Besides that problem, government backing for banks essentially means that the taxpayers subsidize the banking industry on an ongoing basis. One of the greatest scams ever pulled.

    If banks were required to maintain 100% reserves on deposits (even if it was 100% reserves of a fiat currency) there would never be any runs on banks, nor any financial crisis.

    It is true that holding 100% reserves has a real cost. The easiest way to recover that cost is through fees paid by merchants on debit card transactions, which is primarily why you can get free checking accounts today.

    Banks would never issue loans against those reserves. That is the whole point. Banks would issue loans from investments made in investment accounts (money market funds, primarily) and bonds that they issue. They do this now.

    Investment accounts naturally carry some risk – all interest bearing investments do, and so investors would want to diversify. In a worst case money market fund crisis, investors in such funds might lose two or three percent, but the entire system wouldn’t be in danger of collapsing.

  44. I should say, no bank created financial crises. AS long as we are on a fiat currency, the government is more than capable of ruining the value of the currency. Hence the attraction of a gold standard, or at least a price rule (target zero inflation).

    Of course, the problem we are facing now is a fiscal crisis, not a banking crisis. Establishing a gold standard and eliminating fractional reserve banking can’t solve that problem. The only thing that can solve it is for the government to quit spending money it doesn’t have.

  45. Who will accept gold ? How will they weigh it. How will they check purity. Also is this just another ploy to rip off and take advantage of ignorant people who don’t know the value of gold right now

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