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Gold Standard (10)
  • Gold Standard  [ Fri Oct 10 2008 11:50 AM ]

    A coworker (jokingly?) suggested I research to see if the current economic crisis was engineered by people who want to go back to the gold standard. (Blame Ron Paul!)

    It occurred to me that, yeah, the biggest advantages of leaving the gold standard (or any other monetary standard based on a commodity or mix of commodities), do seem to be getting nullified by the current problem.

    Artificially low interest rates to encourage growth? Oops. We appear to be losing that.

    When you get down to it, is commodity ownership the only objective and realistic measure of wealth, regardless of whether or not the system acknowledges it? What advantages of fiat currency still appear to be real?


    Last edited [10/10/08 11:55 AM]
  • Is that co-worker or cow-orker?  [ Sat Jan 3 2009 3:26 PM ]

    What is a cow-orker?

    From our standpoint, there are no real advantages to fiat currency (period). From the government's standpoint, the main advantage is that it can print all the play-money it wants to without that pesky triviality of having to back it up with something of actual value so I would say that regarding the gold standard, that ship has sailed and it ain't comin' back to port.

    'Course, you can still sorta make your own gold standard by taking all the play money you can come up with and buying gold with it but you'd better do it pretty darn quick before there is so much play money floatin' around that it ain't worth the paper it's printed on.

  • no advantages? everyone disagrees with you.  [ Mon Jan 5 2009 9:32 AM ]

    From our standpoint, there are no real advantages to fiat currency (period). From the government's standpoint, the main advantage is that it can print all the play-money it wants to without that pesky triviality of having to back it up with something of actual value

    Sure, but presumably they wouldn't get away with that, unless the people felt they were somehow benefiting from it. Getting us off the gold standard hasn't ever really cost anyone politically (e.g. Nixon got easily re-elected in 1972), nor have any political candidates advocating a return to the gold standard performed well compared to their fiat-currency-advocating competitors. The voters consistently support the "play money" model, and there's got to be some reason for that.

    The joke was that Ron Paul was conspiring behind the scenes to score points by making everyone else look bad. But the reality is that the voters said the economy isn't really all that bad and libertarians are nutcases for saying that it is.

    My understanding is that we generally vote in favor of the government manipulating the economy this way, because we like the results. The main beneficial result claimed by fiat currency advocates, is that inflation and weakening the dollar lets us lower interest rates, and we really enjoy having unnaturally low interest rates. We enjoy it so much, that we'll vote against anyone who advocates leaving lending to the mercy of the market.

    High interest rates == low growth expectations == unemployment == you're a dangerous nutcase if you don't want to dump more "money" into the banking system, so I'm voting against you.

    Low interest == high growth == low unemployment == vote for you instead of that nutcase.

    But that must not be the only advantage (from the voters' point of view) because we now have a weak dollar and a low lending / low growth / rising unemployment situation. Yet the system is still very strongly supported (Obama and McCain accounted for nearly all of the presidential vote, for example). So what's the other upside of fiat currency that the people are so excited about? 99% of us keep voting for it, so surely someone can put it into words.

  • The main advantage of a fiat currency  [ Mon Jan 5 2009 11:01 AM ]

    Is that it allows for economic expansion. All the gold mined to date totals about 140000 tons. For the sake of argument, let's say it's valued at $1000 per OZT. This would mean all the gold in the world would be worth $3.36T. That's less than half the currency circulating in the US at this very moment. In order to balance the money in the world right now gold would have to be really expensive and that price would have had to have been set in steps by the government, at which point you might as well have a fiat, currency. Under a gold standard, your economy can only grow one of two ways: find more gold, or devalue your currency relative to gold. The first method isn't reliable and puts a hard cap on your rate of economic growth and the second method is pretty much equivalent to increasing the money supply just as you'd do with a fiat currency and a Federal Reserve bank, only made more complicated since the whole world would have to be on the system and shift everything together or your exchange rate would jump dramatically every time you moved the price of gold.

    A fiat currency allows for much more flexibility with regard to growth and also allows for free exchange of currency which helps economic growth worldwide.

  • I'd rather drive a Fiat than have fiat currency  [ Tue Jan 6 2009 8:27 AM ]

    This is not the first, or the last time that a government has pulled the wool over the people's eyes but it is one of the most insidious incidences of it. Fiat currency is simply another form of taxation and a huge rip off.

    ..................Under a gold standard, your economy can only grow one of two ways: find more gold, or devalue your currency relative to gold. The first method isn't reliable and puts a hard cap on your rate of economic growth.....blah, blah, blah ...........................

    .

    This is absolute and total hogwash, bunk, and bullshit! The period from 1880 to 1914 is known as the classical gold standard. During that time, it was a period of unprecedented economic growth. Maintaining a gold standard ensures a stable economy and steady, reliable growth.

    Yes, a fiat currency does allow for much more flexibility and government control (which it will willingly use to its own advantage). With a fiat currency, the Fed can print all the money it wants at will and whenever it feels like it, okay, but the problem there is that without fail, historically, virtually every single time the Fed has done that and poured money into the economy, we have endured an extended period of inflation because the extra money cheapens the individual dollars which means that your money is worth less and you are more poor but your government makes out like a bandit for a variety of reasons.

    Here's why...

    The Federal deficit is the money that the government owes to its people through the sale of T-bills, T-bonds, and similar instruments

    We now have, by far, the largest Federal deficit in US history, what is it? 10 TRILLION DOLLARS?.

    Followed by the largest, by far, bailouts in history, MANY BILLIONS OF DOLLARS being poured into the economy.

    There is absolutely no question that this will soon to be followed by a VIRTUAL TIDAL WAVE OF INFLATION.

    Okay, so who will win and who will lose in this scenario?

    Well, the government will be a huge winner (go figure) because it will be able to pay-down its deficit, repay owners of those T-bills, T-bonds, and other instruments, in far cheaper dollars as well as paying entitlements such as social security, medicare, etc. in cheaper dollars.

    Anyone who owns high-end real estate, gold, high-end art, and similar blue chip hard assets will be a winner as they see those assets appear to increase dramatically in relative value as the dollar drops. In other words, the wealthy.

    The big losers will, of course, be anyone who has loaned money to the government by purchasing T-bills, T-bonds, etc., anyone with cash savings, anyone who owns few or no hard assets of any value, anyone who rents their living space, the working stiffs, the little old lady with her life's savings in a cookie jar, those on a fixed income. In other words, the working middle class, the poor, the elderly, and, of course, the average taxpayer.

    Nothing new here.

    Okay, so what can you do?

    DUMP any and all government instruments such as T-bills, etc. immediately.

    DON'T pay off your mortgage.

    DO defer any tax payments as long as possible.

    DON'T have anything but the minimum amount of cash on hand.

    If you can't go out and buy a mansion on Malibu Beach or throw down 40 million for an original Van Gogh, you can still mortgage your house, mortgage your car, mortgage everything you've got and establish your own "gold standard" (African Krugerands are not a bad choice and easy to buy). I would not be surprised to see gold double in "value" over the next couple of years or so. Of course the gold will only give the ILLUSION of doubling in value as actually, it is only the fiat dollars tumbling in value. Of course, when you've bought your gold at say, $1000/ounce and then sold it for much cheaper dollars at say, $2000/ounce, your friendly government is not above putting its hand out for tax on your "profit" which is only an illusionary profit created by the cheaper, less-valuable fiat dollars and the government scores again! What is more surreal than a tax on illusion? Wow!

    If you can't buy gold, go to the market and buy canned goods, they will never seem so cheap. My wife calls this the "string bean standard", and it is a valid and safe place to put your tumbling fiat dollars.

    Of course, it's really a lot more complex than I've made it out to be, the "dismal science" is nearly as complex as it is dismal but I have tried here to make it both more understandable via simplification and less dismal. Also, it goes without saying that you don't have to believe me either and you are free to buy into one of the biggest scams ever perpetrated on a people by a government, other than "global warming", and most will. Fiat money only has "value" because the government that issued it says it has (by government fiat). Do you really believe your government? Do you really believe that politicians have your best interests at heart? Well if you do, bless your little pea-pickin' heart.

  • yadda yadda  [ Tue Jan 6 2009 10:22 AM ]

    Hi, Hotrod:

    DON'T have anything but the minimum amount of cash on hand.

    Fiat proponents might say you're not only correct, but that's part of the goal. By punishing the use of money, we theoretically encourage investment in stocks. Apparently that's a big deal, because when I hear people talk about the economy, they don't talk about how many widgets anyone produced last month; they talk about the Dow Jones average.

    Fiat money only has "value" because the government that issued it says it has (by government fiat).

    We say it does, too. I can't quite take the position we're victims of government sneakiness, because not only do we vote for it, but we do play along. If you'll give me a sixpack of beer for my 5 dollar bill, then fiat currency has value because you say it does.

    On to you, Jonas:

    Under a gold standard, your economy can only grow one of two ways: find more gold, or devalue your currency relative to gold.

    Now wait a minute, let's not get confused. The economy grows when people do work or produce things. You might make a case for fiat currency facilitating that, but fiat currency's ability to measure growth has no direct relationship with underlying production itself. The government could mail everyone a billion dollar bill and then then numbers would show that the economy grew immensely, but no growth would have actually happened at all. Likewise, it could burn some paper bills and (virtually) nothing is really destroyed.

    All the gold mined to date totals about 140000 tons. For the sake of argument, let's say it's valued at $1000 per OZT. This would mean all the gold in the world would be worth $3.36T. That's less than half the currency circulating in the US at this very moment.

    If you're worried about an undersupply being inconvenient, then throw some other stuff in there. I don't care if it's pounds of silver or bushels of wheat or kilowatt-hours of energy. If the economy is truly growing, then there will always be something to use, and its supply will be growing to accommodate whatever additional currency is needed. There may be arguments against hard currency, but this isn't one of them.

  • Okay Sloppy  [ Tue Jan 6 2009 6:37 PM ]

    But what will you say when your six pack of beer costs you not a $5 bill, but a $10 bill, a $20 bill, or a $50 bill?

  • Bushels of wheat!  [ Tue Jan 6 2009 11:26 PM ]

    Amen. Fuck the gold standard, we need to back our currency with a real commodity. You can't eat gold - you can't even burn it.

    If the economy is truly growing, then there will always be something to use

    Exactly, and isn't that the reason we are in the economic cluster fuck that we are right now?


    Last edited [1/6/09 11:27 PM]
  • Sloppy, a fiat currency is effectively  [ Wed Jan 7 2009 8:11 AM ]

    backed by the labor and productivity of the nation. So, there's your backing. Sure, it's a little more abstract than even something like a bushel of wheat (which will spoil and can't be stored indefinitely) or a kilowatt hour of power (which is also rather difficult to store) but it's the basis of currency values relative to each other.

    >This is absolute and total hogwash, bunk, and bullshit! The period from 1880 to 1914 is known as the classical gold standard. During that time, it was a period of unprecedented economic growth.

    Yes, and this couldn't possibly be related to the massive gold deposits in California and Colorado reaching peak productivity during this time, now could it? There were also major placer deposit discoveries in Alaska, Nevada, North Dakota, Montana and other states during that time. So, this allowed the money supply to expand at a pace that kept up with economic growth. A gold standard can work if you have sufficient sources of additional gold. When the US was opening up the West and new territory was there to be mined, it wasn't much of a problem. Now that we no longer have vast untapped areas where we expect new major gold finds to occur a gold standard would be disastrous to our economic growth.

    Furthermore, what does it matter that money is based on gold or any other material object? Gold is only worth what people decide it's worth. Same for everything else. So, if all value is set by mutual agreement why not just cut out the middleman and decide that our little sheets of printed paper or digits in a computer file have value? Presto. It's just as "real" as the "value" of gold in that it only exists as an agreement among humans and it's much more flexible.

  • Oh, and you're right, Sloppy  [ Wed Jan 7 2009 8:39 AM ]

    I misspoke. The gold supply in a gold standard doesn't necessarily limit economic growth, it limits the money supply. This can in turn limit economic growth and it can also cause deflationary pressure. This is why there's high long term price stability in a gold standard economy, but the coefficient of variation (ratio of standard deviation of annual price changes to average price changes) of prices is high. So, a gold standard economy shows very little inflationary pressure (except locally and when large deposits of gold are found) but short term shocks caused by the real economic growth bumping up against the money supply are far more severe than in a fiat currency system with a central reserve bank.










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