Gold bugs in unicorn-land

Reading someone else's blog, I came across this gem:

I'm not at all sure what kind of money system would work best, but I prefer gold and silver coins. Deflation is the best thing that can happen to an economy. The cause of this catastrophe and the many others that have preceeded it are gov’t intervention and money printing.

And another gold bug strikes, demonstrating once again that gold bugs have no understanding of money behavior at the zero bounds or, indeed, any understanding of money and its function in the economy. Sadly, they are more influential than people who have an actual understanding of the issues that occur at the zero bounds. It is as if the denizens of the mental asylum have been released and set to making policy.

In the real world, as vs. the bizarro world universe that they live in, we know that a small and predictable amount of inflation is needed in order to drive money out from under mattresses and into the economy where it can contribute to meaningful economic activity. In the real world, as vs. the bizarro world universe that they live, we know that money under mattresses is just lumpy mattress stuffing insofar as its contribution to economic activity is concerned, and gold is just a shiny metal that has no magical properties insofar as its utility is concerned other than its usefulness in making dental fixtures and plating electronic connections (or as I’m fond of saying, “you can’t eat gold”). In the real world we know that the gold standard causes a positive feedback effect upon the natural up and down cycle of money supply caused by fractional reserve lending and its money multiplier effect, where bank lending expands and creates inflation during upturns and contracts and creates deflation in downturns, while the printing press can smooth out those wild inflation-deflation cycles that typified the 19th century economy and thereby actually create a more stable money supply than the gold standard did. In the real world we know that a modern economy cannot function without fractional reserve lending because that is how a modern economy marshalls current assets in order to create future assets in a much more nimble manner to meet demand than is possible in an economy without fractional reserve lending, where you must wait to slowly accumulate capital before you can make the capital investments needed to match supply to demand. But that is not the world that gold bugs live in. They live in a medieval world without fractional reserve lending, without a modern economy, and appear bound and determined to drag the rest of us there.

In the real world, we should not have to deal with delusional people who live in fictional universes of their own making and make unsupported (and unsupportable) statements of “facts” that have no data to support them. Those people should be relegated to the same status as that crazy guy beneath the freeway underpass who is pushing the shopping cart while wearing a bathrobe and fuzzy slippers and muttering to his invisible friend, because they have as much attachment to reality as that guy. Unfortunately, we have to keep explaining how things work in the real world as vs. in the fictional universe they’ve built inside their heads over and over again, because that fictional universe is *pretty* (oooh, gold, shiny shiny!) and has superficial plausibility to people who have never looked at the data and, indeed, lack the statistical expertise to properly evaluate the data. And unfortunately, some of these people appear to be our leaders. SIIIIIIIIIIGH!

-- Badtux the Reality-based Penguin