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The US Dollar vs. The Gold Standard

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#106    questionmark

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Posted 04 October 2012 - 01:13 PM

View Postsam12six, on 04 October 2012 - 12:23 PM, said:

I know and I'm being ruder and a little more sarcastic than necessary because I have friends who believe this too. Sure, buying gold might be a good idea. Whether it's a self-fulfilling prophecy or not, gold has historically gone up in tough economic times. That concept doesn't bother me at all. I have had pretty much this entire discussion with friends in real life and it gets frustrating when they try to apply the concept to something as large as the US dollar supply and think that means all Americans will be sitting on a pot of gold even if our economy collapses.

Anyway, I'm bowing out of the discussion anyway because it's reached the point where we'll only run around in circles if it continues.

Gold going up is always a sign of dollar weakness, nothing else. As soon as other countries have real problems it is going to crash into the cellar again. Always happened, always will. If you want to make money out of gold buy it when it bottomed out and sell it when the speculation reaches 200% of its realistic value.

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#107    Br Cornelius

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Posted 04 October 2012 - 04:07 PM

Let us go to Wiki for a list of the issues with the Gold standard - so as to lay to rest the idea that I am just making them up off the top of my head;

Quote

Disadvantages


Posted Image

Posted ImageGold prices (US$ per ounce) from 1968 to 2010, in nominal US$ and inflation adjusted US$.
  • The unequal distribution of gold as a natural resource makes the gold standard much more advantageous in terms of cost and international economic empowerment for those countries that produce gold.[49] In 2010 the largest producers of gold, in order, are China, followed by Australia, the US, South Africa and Russia.[50] The country with the largest reserves is Australia.[51]
  • The gold standard acts as a limit on economic growth.[52] “As an economy’s productive capacity grows, then so should its money supply. Because a gold standard requires that money be backed in the metal, then the scarcity of the metal constrains the ability of the economy to produce more capital and grow.”[52]
  • Mainstream economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns.[53] Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession.[54] Such reason is often employed to partially blame the gold standard for the Great Depression, citing that the Federal Reserve couldn't expand credit enough to offset the deflationary forces at work in the market.[55]
  • Although the gold standard has brought long-run price stability, it has also historically been associated with high short-run price volatility.[56][57] It has been argued by, among others, Anna Schwartz, that this kind of instability in short-term price levels can lead to financial instability as lenders and borrowers become uncertain about the value of debt.[58]
  • The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons[59] and arguments have been made that this amount is too small to serve as a monetary base. The value of this amount of gold is over 6 trillion dollars while the monetary base of the US, with a roughly 20% share of the world economy, stands at $2.7 trillion at the end of 2011.[60] Murray Rothbard argues that the amount of gold available is not a bar to a gold standard since the free market will determine the purchasing power of gold money based on its supply.[61]
  • Deflation punishes debtors.[62][63] Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. Lenders become wealthier, but may choose to save some of their additional wealth rather than spending it all.[64] The overall amount of expenditure is therefore likely to fall.[64]
  • Monetary policy would essentially be determined by the rate of gold production.[65] Fluctuations in the amount of gold that is mined could cause inflation if there is an increase, or deflation if there is a decrease.[56][65] Some hold the view that this contributed to the severity and length of the Great Depression as the gold standard forced the central banks to keep monetary policy too tight, creating deflation.[66][67]
  • James Hamilton contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak, although others contend that this very threat discourages governments' engaging in risky policy (see Moral Hazard).[67] For example, some believe that the United States was forced to contract the money supply and raise interest rates in September 1931 to defend the dollar after speculators forced Great Britain off the gold standard[67][68][69]
  • If a country wanted to devalue its currency, a gold standard would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation.[70]
  • Most economists favor a low, positive rate of inflation. Partly this reflects fear of deflationary shocks, but primarily because they believe that central banks still have some role to play in dampening fluctuations in output and unemployment. Central banks can more safely play that role when a positive rate of inflation gives them room to tighten money growth without inducing price declines.[71]
  • It is difficult to manipulate a gold standard to tailor to an economy’s demand for money, providing practical constraints against the measures that central banks might otherwise use to respond to economic crises.[72] The demand for money always equals the supply of money. Creation of new money reduces interest rates and thereby increases demand for new lower cost debt, raising the demand for money.[73]
http://en.wikipedia....d#Disadvantages

Before anyone bleats about the credibility of Wiki - if you don't believe them - follow up their sources. Its a damn site more credible than a YTube movie.#]

Another exposition of why Gold doesn't cut it;

Quote

Historically speaking, Roubini says, during the days of the gold standard economies were constantly imperiled by spasmodic cycles:
"When you had a traditional gold standard, boom and bust with severe swings in economic activity were the norm—really big ones. It was only once we moved to fiat money that central banks were able to smooth the business cycle, and make it less volatile, as we did during the financial economic crisis," Roubini said.
So the historic reality was that Gold destabilized the smooth functioning of the economy.

http://www.cnbc.com/...dard_Won_t_Work

Quote

Ramesh Ponnuru says;


The doctor’s prescription is as mistaken as his diagnosis. The drawbacks to a gold standard are well known. If industrial demand for gold rises anywhere in the world, the real price of gold must rise — which means that the price of everything else must drop if it is measured in terms of gold. Because workers resist wage cuts, this kind of deflation is typically accompanied by a spike in unemployment and a drop in output: in other words, by a recession or depression. If the resulting economic strain leads people to fear that the government may go off the gold standard, they will respond by hoarding gold, which makes the deflation worse.
If another country’s government begins hoarding gold, the same thing happens. This is not a theoretical concern: It’s what France did in the early years of the Great Depression. Countries were forced off the gold standard, and recovered in the order they left it. Representative Paul’s strategy for dealing with the theoretical and historical arguments against the gold standard in End the Fed is to ignore all of them. All he says is that problems arose in the 1930s because of the “misuse of the gold standard.” But note that the great advantage of the gold standard is supposed to be that governments cannot manipulate it. Concede that they can and the argument is half lost.

http://www.themoneyi...on.com/?p=13155

A set of objections, some better than others - but the last one is the clincher;

Quote

1. The Federal Reserve destabilizes the economy with its "boom and bust" monetary policy. This is hard to square with the fact that the longer the Federal Reserve has been in existance, the more stable the economy has been. Dr. Paul's words strongly imply that he believes that there was no business cycle in the 19th century, which is untrue; as best we can tell, recessions were much longer and deeper before America had a central bank.

2. Americans don't save because they're afraid inflation will erode their savings. This is daft. Moderate inflationary expectations are built into the interest rates that banks offer. After thirty years of stable monetary policy, a good portion of the population doesn't even remember high inflation, and the ones that do are mostly retired and spending down their savings. Americans don't save because . . . well, have you tried the Wii? It's awesome.

3. American exporters are whipsawed by our fluctuating currency. Unless Dr. Paul has plans to put the entire world back on the gold standard--which I mote would require the kind of powerful international organization he's so suspicious of, or invasion--our currency will still fluctuate relative to others if we're on the gold standard. Every time the price of gold changes in another country, American exporters will either be helped or hurt by a change in the relative prices of their goods. The gold standard will shelter exporters from currency fluctuations only in their trade with other countries on the gold standard. There are no other countries on the gold standard.

4. Fiat money inflation benefits those shadowy figures who receive access to artificially inflated money before the inflationary effects kick in. Those shadowy figures being the bankers who loaned it to you so that you could buy your house. At any rate, this would only be true if we were talking about unexpected inflation. Expected inflation is already built into asset prices. The US economy does not have significant unexpected inflation.

5. Fiat money inflation "also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state". This is an extraordinarily primitive view of the money supply. The Federal government is not Caesar cutting his denarii with lead. The revenues from seignorage on 2% inflation are trivial. The Federal government gets the money for the "welfare-warfare" state just where it says it does: by taxing the bejeesus out of your wages.

6. Congress does not have constitutional authority to delegate its power "the authority to coin money and regulate the value of the currency". Hmm. Okay, but I'm pretty sure none of our legislators are qualified to operate a printing press, much less the annealing ovens and upsetting mills needed to mint coins.

7. Congress "should only permit currency backed by stable commodities such as silver and gold". Commodities, almost by definition, are not stable. The price of gold looks as if it used to be stable, because the dollar was fixed relative to an ounce of gold. This does not mean that its value relative to other economic goods was unchanged. You could fix your currency to the price of a bushel of wheat, and suddenly "wheat bugs" would be claiming that wheat is the only reliable, stable commodity in the world whose price never changes. That wouldn't stop fluctuating wheat supplies from whipsawing your economy back and forth. To be sure, the supply of gold changes more slowly than the supply of wheat. But demand for it is not so fixed.

http://www.theatlant...ard-crazy/2407/



Br Cornelius

Edited by Br Cornelius, 04 October 2012 - 05:01 PM.

I believe nothing, but I have my suspicions.

Robert Anton Wilson

#108    Br Cornelius

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Posted 04 October 2012 - 05:19 PM

Krugman goes into some detail as to why Gold just doesn't cut it;

http://web.mit.edu/k...ww/goldbug.html

The main problem can be characterized as - it is assumed that Gold currently represents the real underlying value of money - rather than just another speculative commodity bubble. How do we attribute a real value to Gold in an inflated flight driven market. How do we prevent a collapse in the value of Gold.

Br Cornelius

Edited by Br Cornelius, 04 October 2012 - 05:42 PM.

I believe nothing, but I have my suspicions.

Robert Anton Wilson

#109    questionmark

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Posted 04 October 2012 - 06:01 PM

View PostBr Cornelius, on 04 October 2012 - 05:19 PM, said:

Krugman goes into some detail as to why Gold just doesn't cut it;

http://web.mit.edu/k...ww/goldbug.html

The main problem can be characterized as - it is assumed that Gold currently represents the real underlying value of money - rather than just another speculative commodity bubble. How do we attribute a real value to Gold in an inflated flight driven market. How do we prevent a collapse in the value of Gold.

Br Cornelius

We can't, as soon as the marks notice that they'd been had there will be a downwards spiral.

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The most dangerous views of the world are from those who have never seen it. ~ Alexander v. Humboldt
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#110    Br Cornelius

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Posted 04 October 2012 - 06:37 PM

More witty analysis;

http://rationalwiki....a_gold_standard

Br Cornelius

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Robert Anton Wilson

#111    Br Cornelius

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Posted 04 October 2012 - 06:52 PM

All these technical difficulties mean that the actual transition to as Gold Standard and the continued maintenance of the same would be all but impossible.
I am also troubled by the whole issue of how Gold transfers between countries could be practically managed when they would lag behind the market flow of the virtual promissory notes (which would be the main trade currency) by many thousands of times. This failure to settle accounts in a timely fashion was one of the main reasons for the failure of Gold standards in the past, and would be many times more so now. If that is not considered a problem - what actual role does the real Gold serve in the system ?

Some more analysis. Detailed and easily understood and from a market traders perspective;


Quote

STORE OF VALUE
CPM Group's Christian also smashes another widely held myth about gold: that it is a store of value. In inflation-adjusted terms "the price of gold has never been stable," he says. See Figure 1 below, courtesy of the CPM Group. The inflation-adjusted or real price has gone down over the centuries.
Posted Image



"It is a myth. People think that the purchasing power of gold is stable over time and if you hold your wealth in gold that inflation will not hurt your purchasing power. Statistically, that is not true," Christian said. He points to the 1980 to 2001 period as an example. During that period "gold was falling in nominal terms from $800 to $250 and in real inflation adjusted prices it fell even more. In between [that time period] fortunes were lost. It is not a stable asset. It is not a stable store of value," he said.


http://www.traderpla...r-more-malaise/

Maybe the real problem with the economy has little to do with our choice of money - and more to do with the fundamentals of a market system which lost the run of itself and started to believe that money actually was value.

Br Cornelius

Edited by Br Cornelius, 04 October 2012 - 07:20 PM.

I believe nothing, but I have my suspicions.

Robert Anton Wilson

#112    Br Cornelius

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Posted 04 October 2012 - 10:03 PM

Interest free fiat currency - the real solution to the real problem;



A more detailed analysis;



Br Cornelius

Edited by Br Cornelius, 04 October 2012 - 10:10 PM.

I believe nothing, but I have my suspicions.

Robert Anton Wilson

#113    Yamato

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Posted 05 October 2012 - 08:11 AM

View PostBr Cornelius, on 04 October 2012 - 05:19 PM, said:

Krugman goes into some detail as to why Gold just doesn't cut it;

http://web.mit.edu/k...ww/goldbug.html

The main problem can be characterized as - it is assumed that Gold currently represents the real underlying value of money - rather than just another speculative commodity bubble. How do we attribute a real value to Gold in an inflated flight driven market. How do we prevent a collapse in the value of Gold.

Br Cornelius
Paul Krugman is a shameless defender of fiat.   It would seem to me your true colors have finally surfaced here.

Gold is like anything else.  When a bubble forms, the price will collapse.   That's not the issue here.  Fixing a weight to our currency will give it value whether it is fluctuating value or not.   I can't believe the resistance to making our currency stable to a weight of the best alternatives we have available (gold and silver) that I see here.  

If you want your basket bases, how is that basis even going to work?   Who's going to calculate how much of your dollar goes where?   How is the bank going to store and transport these things, and who's going to want them? Who's going to be hauling grain out of a bank?

Sorry, if you would actually prefer fiat over a metallic standard given your sheer number of word count and what it's obviously been trying so hard to do here, I have to conclude that you cannot fathom the moral hazard this monetary policy of ours represents.  

Krugman is a Keynesian blowhard and Ben Bernanke is his ideology's agent.

Edited by Yamato, 05 October 2012 - 08:17 AM.

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#114    Yamato

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Posted 05 October 2012 - 08:15 AM

We are now actually worried about preventing a collapse in gold?   Is that the problem now that we just can't guarantee safety from to be able to end our Keynesian poison?   LOL I've just witnessed the queen mother of all bait and switches.

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#115    Yamato

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Posted 05 October 2012 - 08:24 AM

View Postsam12six, on 04 October 2012 - 10:58 AM, said:

There's nothing wrong with fiat currency.

I see what you're saying. You want our currency based on something that can't degrade. Would a monster vault full of plastic suit you? No, you want it to be gold. It is shiny. If ancient civilizations could formulate it, there's no way they would have used plastic instead of gold as their money medium, right? I mean, the fact that civilizations throughout history have used virtually every useless material available to them to create money doesn't show us that it's a feasible option?

What a surprise, we're butting up against the fact that you don't seem to realize what money is again. Money is a promise (in the modern world, a promise by a government). It's a way of overcoming the big weakness of the barter system. It's a token that represents value. It only works if everyone agrees on what it's worth. All the major currencies in circulation today work because (as an example) every dollar bill is worth the same as every other dollar bill. Even if the government could amass enough commodities to match the <GOOD GOD!!>$ in existence today, there would be no purpose to it if people could show up at this imaginary super Fort Knox and demand to trade in their money for the commodity.

If you must have gold, have it. I'll even tell you a secret, you can use any recognized fiat currency to buy it. If you want to trade that gold for food instead of paper and can find someone who wants to trade food for a shiny piece of metal, awesome. Barter on an international scale is pretty awkward though.

View Postsam12six, on 04 October 2012 - 12:23 PM, said:

I know and I'm being ruder and a little more sarcastic than necessary because I have friends who believe this too. Sure, buying gold might be a good idea. Whether it's a self-fulfilling prophecy or not, gold has historically gone up in tough economic times. That concept doesn't bother me at all. I have had pretty much this entire discussion with friends in real life and it gets frustrating when they try to apply the concept to something as large as the US dollar supply and think that means all Americans will be sitting on a pot of gold even if our economy collapses.

Anyway, I'm bowing out of the discussion anyway because it's reached the point where we'll only run around in circles if it continues.

What you just said is more extreme than Paul Krugman himself.

Might be a good idea?   You might want to check the chart!   Your friends should be telling you.   The mass media pundits told us to buy every hard asset we can find in the wake of QE3 and yet look at any other asset you can think of against gold since QE3 launched.   Gold is the king.   Does this mean we throw all our money into it?  Good heavens no.  If you don't own any gold and you don't like gold, you shouldn't own any gold.

You seem to be confused, not being able to understand that fiat currency, Ben Bernanke, the Federal Reserve, and Quantitative Easing sends gold to the moon.   And I'm trying to stop it from happening while you put your head in the sand denying reality, and sitting in a Krugman drum circle having meandering op-eds together about how what is happening is not happening. Quantitative Easing means the end of the dollar if we can't get Keynesians into supporting alternative monetary policy.   This is the reason to get rid of the Federal Reserve.  We're not doing that just to throw a wrench into the economy because we trust the Congress more than a central bank.   Good heavens.  Your long winded bait and switch that wants to end the Fed (why do you even want to end it after what you've just said?) telling me fiat is fine shows me that the curtain finally raised and I now see who's behind it.

Your mind suddenly can't understand the difference between anything at this point because money is just an idea to you.   Just a government promise.  Just fiat. No I don't want plastic.  You're not even listening to half of what I've said here to even be capable of asking such a question at this point.   We'll be going in circles alright because I'm talking to a wall of Keynesians who kinda sorta understand the problem but then all of a sudden "there's nothing wrong with fiat currency".  

Dude if you think there's nothing wrong with fiat currency, we are done here.

Edited by Yamato, 05 October 2012 - 09:02 AM.

"Peace cannot be achieved by force, only by understanding."  ~ Albert Einstein

"To deny people their human rights is to challenge their very humanity.   To impose on them a wretched life of hunger and deprivation is to dehumanize them." ~ Nelson Mandela

#116    Br Cornelius

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Posted 05 October 2012 - 03:03 PM

Essentially your misunderstanding Yamato is that you actually believe money isn't just an idea. You think that money is in some way an objective reality which isn't just a collective projection of our own minds. That is why you are trapped in a literalists version of money - the GOLD STANDARD.

Outside of the human imagination - can you point to any other example of money in reality. You may think this an insane distinction - but it is the real nature of money.

As such you really are on a different planet.

Br Cornelius

I believe nothing, but I have my suspicions.

Robert Anton Wilson

#117    acidhead

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Posted 06 October 2012 - 03:16 AM

View Postquestionmark, on 04 October 2012 - 01:13 PM, said:

Gold going up is always a sign of dollar weakness, nothing else. As soon as other countries have real problems it is going to crash into the cellar again. Always happened, always will. If you want to make money out of gold buy it when it bottomed out and sell it when the speculation reaches 200% of its realistic value.

Are you giving investment advice now?

lol

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#118    questionmark

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Posted 06 October 2012 - 08:27 AM

View Postacidhead, on 06 October 2012 - 03:16 AM, said:

Are you giving investment advice now?

lol

Nah, that is just common sense. Can't remember ever owning any gold save a marriages band.

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The most dangerous views of the world are from those who have never seen it. ~ Alexander v. Humboldt
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#119    Br Cornelius

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Posted 06 October 2012 - 09:22 AM

View Postquestionmark, on 06 October 2012 - 08:27 AM, said:

Nah, that is just common sense. Can't remember ever owning any gold save a marriages band.
Not even a marriage band. A few graphics cards is all I will ever own :tu:
Its all a bit comical to imagine going down to the local grocery store and bartering a bit of Gold for a loaf of bread. If it gets to that stage we might as well go out and shoot outselves.

Br Cornelius

I believe nothing, but I have my suspicions.

Robert Anton Wilson

#120    acidhead

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Posted 08 October 2012 - 03:08 AM

View PostBr Cornelius, on 06 October 2012 - 09:22 AM, said:

Not even a marriage band. A few graphics cards is all I will ever own :tu:
Its all a bit comical to imagine going down to the local grocery store and bartering a bit of Gold for a loaf of bread. If it gets to that stage we might as well go out and shoot outselves.

Br Cornelius

The gold in those worthless graphics cards will always remain extractable for future use. The current fiat dollar uses Petrol as it's main driver of value.  And for good reason because it's currently the #1 energy source and thus the driver of the leading global currency, the US$.  But it has it's fallbacks because it's supply will diminish while Gold will not.  Just like every single other commodity or every other mineral known it will evaporate without careful control.  Gold will not... even silver to an extent.  They're too common to not go out of existence.  There exists an obvious reason why Diamonds don't control the market share.

Even in a society that manages it's resources responsibly there will come the day man's intuition blindfolds the rest of society.  It will happen in any GOV.  It's the human instinct to be greedy.  Nothing will ever change this.  Greed is part of our survival instinct.  We cannot escape this natural phenomena.  This is why I believe that no other system other than a system that gives value to something that will remain constant forever on Earth while everything else will perish is the correct path to embark on a successful journey... it's above all fair.

Edited by acidhead, 08 October 2012 - 03:17 AM.

"there is no wrong or right - just popular opinion"




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