The Gold Standard?

[flurec]

Thanks Flurec,

Interestingly, there is gold (and just about any other mineral) not just here but in any planet, whereas there's oil, as far as we know, only on Earth.

Are you saying that a fiat currency is needed to expand credit? as I put it to 'incentivate' growth?
In a very deflationary scenario (like Switzerland the last century) there would be next to no credit?

When you say that a fiat currency is backed by the government that issues it, it implies that a currency is only as strong as such government.

Goldhoarders and Productives alike,
Can we all agree-setting aside any political alignment- that the value and popularity of the US Dollar came into effect at the same time it replaced its backing from gold to military might?

The loaded question there is simply, could a non interventionist state (like Switzerland or even China) ever make its currency popular? Like the yen was at some forgotten point in history?

I've got to run and I'm no expert but your post made me think of this-

http://en.wikipedia.org/wiki/Iraqi_Swiss_dinar

If you have not heard of this it will blow your and the gold bugs' minds

 

[Matt84]

I've got to run and I'm no expert but your post made me think of this-

http://en.wikipedia.org/wiki/Iraqi_Swiss_dinar

If you have not heard of this it will blow your and the gold bugs' minds

Well played but I wonder what the lesson is. I believe someone already called it when pointed out that Saddam payed dearly from trying to sell 'his' oil in Euros. Not that I like either Saddam or the Euro...

Just for the record I'm not a gold bug I'm just more familiar with that theory because it's easier to grasp than the monetarist one. I guess I'll work my way up until I fully grasp what a derivative is. Has anyone read 'The Fear Index' recently? Or Ray Kurzweil's essay on the subject?)

 

[redrum]

You are right that Buffet does have dividend income outside of BK but it is from his personal holding and is a negligible part of his net worth. You can also invest in stocks and take part in his scheme. Buffet has got to be one of the least evil rich guys around. He is giving away 99% of his wealth AND trying to convince others to do the same. I would much rather him do that than cut a check to the US Treasury.

ok fair enough.

I refer to the apocalypse because it seems to be a common theme among gold bugs. Why else would gold be a worthwhile investment? If the US dollar hyper-inflates it will be a major worldwide event. There will be much greater worries than the relative value of gold.

ok but again, if the dollar hyper inflates, one of the biggest beneficiaries will be gold, along with other tangible assets such as commodities and properties. what's unique about gold however is that it is a monetary commodity. it's portable and extremely liquid. you're not going to walk around carrying a barrel of oil on your back or a bushel of wheat in your pocket. with gold, i can visit any country in the world and exchange it for its equivalent value in the local currency in order to buy the products i need.

Dollars are the most liquid, circulated and trusted currency on the planet based on its history. It has been fairly well managed relatively speaking which put it where it is. The US is also the world's biggest consumer. The US is able to payoff its debt- the debt is denominated in dollars...

yes to everything you just said - for now. but don't think it can't happen to the dollar. it happened to rome and england and the US is no different than any other empire throughout history.

Other than industrial, dental and jewelry I am completely baffled with the fascination with gold. Yes is is shiny, doesn't corrode, is malleable but why would you invest in something that produces nothing with the hope of finding a greater fool? Why gold? There is more in the ground. It is not magical.

you're right in the sense that gold doesn't have much value apart from being universally accepted as a currency. what gold has going for it is history, 5,000 years as money, scarcity and culture(china, india et al). instead of gold, you could just as easily have coke bottles, sea shells or salt - but we're talking about gold here. none of us are going to reinvent gold's place in history.

1) Why did we move away from gold?
In a modern financial world there is no need for currency to be backed by gold. For the most part people can freely trade in any currency (excluding Argentinians of course). Gold has to be stored, traced, secured etc. If you do not trust a countries currency why would you trust their gold deposits?

you don't trust a country's currency precisely because it is not tied or backed by something physical. the fact that nothing tangible backs it means that it can be debased, which means you lose purchasing power unless the amount of goods/services increases by a proportional amount to the increase in money supply. having gold deposits and actually backing your currency with gold are 2 different things.

Argentina can't even produce an accurate inflation number. If they backed the peso with gold what kind of games would they play. Look at what happened with Hugo messing with Venezuela's gold.

if they backed the peso with gold then it would be extremely difficult to generate inflation. as far as chavez goes, he took back control of his country's gold precisely because he knows the value is increasing and does not want other countries holding their gold reserves. if some kind of crisis were to occur, it would be that much more difficult to get the gold returned.

As long as the country will allow its taxes to be paid with its own currency that currency will have real value and be traded among the people. Try and send the IRS a brick of gold.

this same scenario can occur with a tangible backed currency and is in fact what the US had when the gold standard was in effect. you would not send the IRS a brick of gold. you would exchange it for its equivalent value in dollars and pay your taxes accordingly.

2) Is it because it seems, instinctively, that a fiat currency allows for more growth? The money supply grows to match up with the products and stuff that is being made in an economy. Credit allows many things and our world would be much worse off without it. Ask any farmer or entrepreneur how they would have started their business. Limited inflation is not a bad thing. It forces companies and individuals to do things with their money as opposed to hoarding it.

right. the problem is when money supply and inflation increase in amounts far greater than the rate of products/services or interest rates as is almost always the case, hence price inflation.

What if a bank had to come up with $300,000 of gold to back the mortgage they just gave you? What if every country had to accumulate more and more gold to back their currencies as their economies grow. Not gonna happen.

a bank would not need to accumulate gold necessarily in order to make a loan. the currency that it uses as its reserves would already be backed by gold when the currency was first created and introduced into the economy. banks would however be required to amass reserves that would be equal to the amount they loan out. fractional reserve banking would not be allowed as it is inflationary.

as far as countries go, they would only need partial backing. again, gold is not the perfect solution. the real power and abuse lies in who controls the quantity of money.

3) What is FIAT money backed by? The government that issues it.

and what is the government backed by? just take a look at all the sovereign debt crises happening all around us.

4) Isn't there a difference between oil which is consumed, and gold which is traded, melted, but never consumed? No difference. They are both material things that are fungible. For cultural reasons gold has a "mystical" value that makes people crazy. Oil, I would argue, if taken away would affect our lives in a much more profound way than gold.

you are 100% correct. the most important commodity is oil. without relatively cheap energy modern society cannot exist. oil is not a monetary commodity however in the sense that it is not portable, not easily liquidated and does not possess the history and cultural value as gold.

Like gold there is more in the ground. The more people are willing to pay for it the more reserves that can be profitably extracted.

right again - just like oil, the higher the price goes, the more mining companies can invest to dig it up. try as they might however, there just isn't that much gold in the ground that is easily found. i believe the supply of world gold increases by about 3% annually. you must consider however that current and near future demand will far outstrip this small increase in supply. in short, you will have much more demand than you have supply. this won't last forever of course. that's why, when your dentist or mailman or taxi driver starts talking to you about the gold they purchased last week, that's the time for you to sell your gold and get into something else.

 

[HeyBA]

There's a book called The Lost Science of Money, written by Stephen Zarlenga. Anyone read that thing?

Is anyone hear a progressive/liberal/on the left? At all?

Does anyone pretend to be well read about the monetary history of the world, at all?

He's right in line with Bill Still who made the movie mentioned previously. But Bill is a Conservative, gosh darn it. Crazy. Karl Denninger, also a US conservative, actually goes along with this whole line of thought, as a remedy to the financial crisis.

Currency can be sovereignly issued, by a government. By a nation-state. Easy as pie. You can buy neato things like infrastructure and healthcare with your currency. You don't even have to go into debt over it, because private banks don't issue it. But you should be cautious. Because it can cause inflation. OMG! I'm really glad privately owned central banks, backing privately owned banks that create new money through credit, have really kept inflation in check.

 

[HeyBA]

Glad we have those banks!

 

[HeyBA]

Glad we have those private banks creating new money every time you need anything!

 

[HeyBA]

Super, super wonderFful HAPPY that FRACTIONAL RESERVE BANKING was born out of commodity backed money.

 

[willwright]

I also ask solution to what, but I also want to try and understand monetary policy. I'm not selling gold and I'm nor marketing it (I'm not even buying for myself, but that's besides the point). I also cringed when I read 'photograph with Lord Rotschild' (I have pictures of myself with Senor Rotschild, a herb-smoking old time hippy who lives in El Bolson, so?) as if that were evidence of 'conspiracy'.
In any case, I'd like to ask now more humbly,

1) Why did we move away from gold?

2) Is it because it seems, instinctively, that a fiat currency allows for more growth?

3) What is FIAT money backed by?

4) Isn't there a difference between oil which is consumed, and gold which is traded, melted, but never consumed?

and btw @All that talk about not being able to sleep inside a gold bar, or eat it like a potato. Well what can you use paper money for? It's not even double ply!

Here the answer to your questions. 1. Gold was abandoned back in the 30's because it was making the depression worse. 2. Its a bad idea because a gold standard would reduce economic growth. It's also impractical is there isn't very much gold in the world. The world population has at least doubled since it was dropped. The worlds economies are many times larger as well. 3. It isn't backed by anything, thinking that some sort of backing will solve any problems is silly. A gold standard is just another way of having a fixed exchange rate. Even if you have a fixed exchange rate it doesn't mean you can't have big problems resulting. Look no further than Argentina and the fixed exchange rate they used until the problems of 2001 put it to rest. The same thing is happening in Europe today with Greece and the weak economic countries. There wouldn't be the problems in Greece and other countries today if they had their own currency which could be devalued. Right now they are in a straight jacket of a fixed exchange rate they can't change just the same as if there were a gold standard. 4. Gold basically has no use other than making jewelry. Oil obviously has lots of uses and is therefor a much more valuable commodity. Using gold or some other commodity to back a currency causes more problems than it solves. It simply removes the ability of governments and central banks to logically and rationally manage their economies. Sure plenty of mismanagement has occurred, however replacing this with a fixed exchange regime doesn't solve the problem, it only creates others.

 

[duanestorey]

The same thing is happening in Europe today with Greece and the weak economic countries. There wouldn't be the problems in Greece and other countries today if they had their own currency which could be devalued.

Devaluing a currency is basically theft - you can't create value out of nothing, the money they are creating to pay debts comes about because it devalues the holdings of all the people who have the currency in possession. So yes, while going off the gold standard caused many countries to be able to print more money and pay off debts, it's basically the same as stealing. It's like celebrating the fact that you are in a great financial position because you go down to the grocery store every few weeks and rob them. Right now it's just a massive race to the bottom in terms of currency devaluations.

A gold standard (or any standard where you can't arbitrarily print currency) forces a country to live within its means. The lack of one is what has contributed to pretty much every country increasing its standard of living by the means of debt, effectively sacrificing the well being of future generations to simply satisfy the current one.

 

[redrum]

willwright and flurec, you guys should come along to the next economic meeting discussion, whenever it is arranged.

before the meeting however, i would recommend watching the 2 videos that towncryr mentioned if you haven't already seen them: the secret of oz and money as debt.