Gold, the economy, and other musings

I was talking about the economy and the bailout with a co-worker of mine, and talking things through generated a couple of interesting insights.

1) Economies can be compared to individual budgets with surprising accuracy. I live in a small condo that I truthfully paid too much money for. Housing prices are going down, but the percentage loss is progressive: the more expensive the house was before, the larger the percentage drop in value. That means that while I will have to pay out of pocket to get out of my mortgage, the next house that I will want to move into will be significantly cheaper than it was before the market collapse. So, if I lose $15K on my home, but the next home I purchase is $50K less than what it was before, I am $35K better of after the collapse than before. So how do I, as an individual, put myself into a position where I can grow the size of my house? I have to save my money in order to pay out the difference between my homes real value and the artificially high cost of my mortgage. So, the first thing I need to do is SAVE. Next, I need to sell the house that I am in at a loss, and pay off the difference with my savings. So, the second thing I need to do is LIQUIDATE the inflated assets and TAKE THE LOSS. Then I will be in a position to purchase my next house, which will be larger and will be more representative of the actual value of the home. This is the same procedure for the economy. We have borrowed heavily and saved little as an economy. In aggregate, we need to increase the amount of REAL SAVINGS available as credit for business expansions. We cannot substitute printed money for real savings, and we cannot substitute confiscated money for real savings. Next, we must collectively liquidate the businesses and capital investments that are not generating wealth. This will mean that assets are sold for a loss. Companies go out of business. Employees are laid off. Lastly, we reapply these people and assets to industries that ARE performing. Once the capital is saved, and the people are positioned in the right sectors of the economy, standards of living will increase again, and the economy will grow.

2) Monetarists think we should target 3% monetary growth for the economy every year. Since the market knows that the money supply will grow by 3% every year, people factor that growth (inflation) into their long-term calculations. Austrians say, "If it is theorized that growing the money supply 3% every year will have virtually the same effect as keeping the money supply constant, then why not just keep the money supply constant? Instead of increased productivity resulting in wages increasing at a FASTER rate than prices, increased productivity will reduce prices, and wages will stay the same." Most Austrians recommend tying the money supply to gold in order to reduce the possibility of excessive increases to the money supply. What Austrians do not always say, although most of them recognize, is that the supply of gold is increasing at a reasonably constant rate as well. You can still have a drastic increase in the money supply, even if it is tied to gold. My coworker described to me the devastation that took place in Spain because the Spanish government was wasting so much of its resources mining gold in the new world. This drastic increase in the money supply in Europe wrecked the economies of Spain and many others because the inflation rate was more than the market could consistently adapt to. The productivity that was spent mining and coining gold was essentially wasted, becuase adding more gold currency to the money supply added no real wealth to the economy of Spain. The English government, on the other hand, invested their wealth in growing cotton and tobacco in the new world, which were desirable consumable products that increased the standard of living of Europe.