Gold Standard

Then we'll have to disagree. The only value of gold or a gold standard is the control over the issuance of additional currency. And for this purpose, a 60% or 40% or whatever gold backing for the currency is about as good as you are going to get. Germany ended their inflation in the 20s by "backing" the new currency with all of the land in Germany. Alexander Hamilton did the same thing to end the inflation in the US. The popular but shortsighted all or nothing approach ususally ends up with nothing in practice.

 

Log in or Sign up to hide this ad.

One of the chief benefits of reserve currency status is the ability to export inflation. Another would be the ability of the US to exert some level of control over a world economic system that is so tightly tied to the dollar. I'm in the America first crowd and do not think the US is evil nor are we alone in manipulating our currency. The point is we have an advantage that others do not have and that fiat systems are conceptually feasible but usually fail because they are corrupted by man.

If we were to move to a gold standard we would lose these advantages and would either have to become more competitive or accept a net decline in standard of living. The system would be more "fair" and perhaps less corruptible, but it's no utopia.

 

I could visualize a hybrid standard incorporating gold. But that's what we have now with most central banks holding at least some gold.

The direction appears to be towards diversification, holding various currencies, sovereign debt as well as PM's.

The poster (justafarmer) who commented that a gold standard might put us at the mercy of certain countries has a valid point. It's not out of the question that some gold resource rich countries would mercilessly scrape the earth within their borders to boost their own reserves and exert influence over gold poor countries.

It might resemble the oil cartel re-dux.

I'm sure there are good reasons to support a gold standard, but I believe it's a huge stretch to think it will happen.


Presently, among the global economies, I don't see much support for a gold standard, although the subject is raised from time to time. I seem to remember in the past year, the head of the World Bank spoke at length about it. As I recall, his speech was not so well received.

 

I think it's a mistake to include unfunded entitlements. They aren't the same as debt because they can be eliminated by the stroke of a pen, and eventually will be. For example, if you increase the age at which folks collect social security and medicare by a year, you receive one more year of payments and eliminate one more year of benefits to the entire population. A simple move like this, which eventually will be forced, instantly eliminates a very large portion of the unfunded liabilities. There are other things that can be done also such as means testing. It's going to happen because it has to happen whether the current crop of politicians do it or not. State and personal debt will be defaulted/restructured at some point and state employee benefits will be cut. It's already happening.

The point is that even though the doom and gloomers won't like it, the current problems will be solved over time and society will not collapse. I know those folks are going to miss the opportunity to live in their bunker and defend their stash of canned goods to the last bullet, but that's just the way it is.

 

I don't expect gold to be money again in my lifetime [although I believe it could work], but it could play a major role as a reserve behind currencies. So will will never see a gold standard in the sense that gold coins circulate as the only form of money, as some purists demand. But we may see currencies backed by a fairly significant percentage of gold to control the expansion of the money supply.

Foreign countries can do nothing to damage the system because the stock of gold is too large in relation to gold production. If world gold production doubled, it wouldn't make a dent in the value of gold if it was used as a reserve. And the cartel idea won't work because the gold that the US holds is not consumed and does not have to be replaced.

But the larger problem is that the current system requires fiat currency to be backed with Treasury debt or some other asset. If all or part of the currency was issed in the form of the old US Notes, it could have a significant impact on decreasing the national debt.

 

Society probably won't collapse though anything's possible. But what's more represented in history is hyperinflation. Do you believe that is impossible here in the US? That would be bad enough for a time even if it's not a full collapse.

 

There isn't any pain-free way out of the present situation. The trick is to never get into this sort of situation in the first place. But now that the country is here, the debt problem has to be dealt with. I think there is about a 50/50 chance that we will see serious inflation or deflation. It really is a choice and a policy decision that doesn't seem to have been made yet. I don't think the Fed or Treasury will choose hyperinflation since governments tend to not survive in those circumstances. The difficulty with choosing inflation is that every new dollar printed is backed by a new dollar of Treasury debt. So the debt is rising as fast as the money is printed and the ghost of future deflation remains. The difficulty with choosing deflation through some sort of debt restructure or default is that the economy will probably go through a decade of pain like the 1930s. If the decision is to do nothing, then you can look at Japan and see the future of the US - permanent stagnation. This is why I believe that eventually the grownups will get back in charge of the Federal government and do what has to be done - raise both corporate and individual income taxes, perhaps use tariffs, raise the age of eligibility for Social Security and Medicare, and eventually cut military spending by, say, 75%. If they get real brave, they might even take a fresh look at the role of the Federal Reserve. Nobody is going to be happy about it. The biggest danger in my mind is television. It's the greatest brainwashing tool ever devised, and if they continue to convince people that certain actions are philosophically unacceptable to both the left and the right and cloak their opinion in the American flag, then all bets are off. In that case, maybe we really are too stupid to survive. Time will tell.

 

What I don't get is why are so many people stuck in a gold mindset.

Look at it this way, 2500 years ago we were agrarian people. Most things produced were disposable, not much long lasting items were produced, and PM was about the only store of value that wouldn't rot. Ok, then it makes perfect sense to use PM as a store of value.

Fast forward to today. Is PM STILL the only thing we manufacture? We make computer chips, airplanes, industrial equipment, buildings, dams, etc etc. Why is PM or gold the ONLY commodity worthy of our worship? I call it worship because it seems gold bugs have a religion based upon acquiring and holding it. Basing world economies on one single commodity seems just retarded. Why not pick molybdenum, aluminum, graphite, or silicon if you want to base an economy on a single commodity. Why pick the one commodity that has almost no use for it? Is it "the chosen one"? What would happen if we did this and we found a massive, pure gold asteroid? Or, what if for some reason our major gold mines failed. This is the danger of tieing an economy to one single commodity.

Has humankind not advanced one year the last two and a half millenia? Or is it just a religion that all devotees do not question the gospel?

 

I don't think the idea is to base the world economy on gold. I think it is to find a control mechanism to limit the issuance of currency and to instill confidence in it by giving it some sort of tangible value. Some other metals might work just as well. The "religion" isn't so much faith in gold as the lack of faith in a guy with a printing press. Academics love economic formulas, but none of the formulas contain a variable for sociopathic behavior by the person in charge of issuing currency.

 

Those that are stuck in the gold mindset are mostly the people that have a material amount of their net worth tied up in it and expect a financial windfall by converting to a gold standard be it through legislative action or anarchy associated with economic collapse.

 

But is currency our problem? I thought it was debt. How would tieing issuance of currency stop debt being issued? Printed FRNs are nothing in the scheme of things.

Are we trying to say a gold standard will affect the politicians spending us into a hole? How?

 

Wikipedia says US gold reserves are 1833.5 metric tons, and current population is around 307 million. That works out to 26.5g per person, about 0.85 troy ounce. Gold's density is 19.3g/cc, so 26.5g would make 1.37 cc^3, or a cube 11 mm on a side. A 25mm cube is an order of magnitude more.

 

I just find it fitting that a farmer is against a gold standard. I remember reading Bryan's "Cross of Gold" speech and how it was about bankers using a gold standard to strangulate the farmers and other small businessmen in this country. I guess we haven't came as far as we think in the last 100 years. Honestly, the same arguments apply today, making this speech almost required reading here.

 

Cloudsweeper, you are obviously pro-entitlement and anti-military spending. Many others, especially young people, don't have faith in the entitlements being there when we retire. I don't see how any tax increase can fund Medicare the way it is. I see Social Security as both a welfare scheme and a ponzi scheme, not an investment. I would instantly opt out of it and never collect a dime if I could. My 401k could more than double under such a scenario.

I agree any solution will be painful, but I don't agree with your solution.

I have always hated Social Security, but it is a popular program. I'm sure I am in the minority on a coin forum when I attack Social Security.

To keep it solvent, my plan would be 3 parts:

1) Raise tax cap for Social Security way above current. Social Security tax is a reverse progressive tax. This is ridiculous. Working poor and lower middle class have to pay a full percentage of their income while people making more stop paying at $106,500.

2) Rich retirees should not receive Social Security. If you are still making say $250,000 in retirement, you don't need Social Security. It is a welfare plan, not an investment plan. Some sort of sliding scale should lower social security payouts for those already making plenty of money.

3) Raise the eligibility age like you said. Though who wants to hire 66 or 67 year olds? I'm sure I don't know. But this is needed to save the program.

I think Social Security is the least of our problems...Medicare would be much harder to fix. The problem with the entitlements is mainly demographics, and raising taxes to the moon doesn't mitigate that.

 

Well, see that's sort of the point. America issued much more nominally "gold-backed" currency, especially in the years after the Panic of 1907, than the Treasury had gold on hand. FRNs were issued at a five-to-one ratio, silver certificates were "backed" by silver dollars that had less than thirty cents worth of silver in them. National Currency was fractionally backed by government bonds. United States Notes had no backing at all. Only gold certificates were backed dollar-for-dollar by Treasury gold. Nonetheless, all those various forms of currency circulated freely and were freely exchanged for one another.

So long as people perceived that if they wanted to exchange their paper notes for gold, they could do so easily, then most people felt no need to do so. Gold is heavy, clunky and makes you walk funny if you're toting a lot of it. A 1908 Model T sold new for $860. Who would want to haul forty-three double eagles into the dealership to buy one, when he could just bring in a few pieces of paper that everybody saw as worth the same?

The problem only became evident in 1932, when large numbers of banks across the US began to fail in the wake of the ongoing depression. Then, people were afraid of what the future would bring, and wanted to keep their money at home and in gold, not currency. As the gold in the banking system vanished into mattresses and coffee cans, the unbacked portion of the currency in circulation became proportionally greater, FRNs began to be withdrawn because they was no longer gold to back them, even at a five-to-one ratio, and by the following year the banking system had ceased to function and the economy was moribund.

Any attempt to reintroduce a gold-backed currency would be similarly at risk today. Speculators would be tempted to make sudden, coordinated large demands for gold, to see if they could manipulate the market value and profit (that was a major contributor to the Panic of 1907, and to other financial crises beforehand). Even if they were unsuccessful, and people again perceived they could get gold on demand for currency, a disaster, severe economic downturn, war or other event could easily trigger a sudden run on gold, with the same disastrous consequences as in the 1930's.

While it is true that the introduction of a nominally asset-backed German currency, the Rentenmark, did break the hyper-inflation that plagued that country in 1923, it was a wholly psychological effect. People couldn't freely exchange the new currency for anything, and the reasons it worked were wishful thinking and a new government policy of giving the Reichsbank independent control of the money supply.

Basically, if a currency is perceived as being stable, the details of the legalese under which it is issued don't matter, and if it's perceived as being unstable, no claim that it is asset-backed does, either.

 

I am relatively young, but disagree. First, they have raised retirement, I have to work until almost 69 to get full benefits. Second, it is NOT a welfare program. There is a cap on what you can draw, based upon how much you put in, (sort of). This works against your argument to raise the threshold as well, since if they cap the benefits, why should all income be exposed to the tax? Social Security should not become another welfare program, it is a retirement program in which what you draw out should depend on how much you put in. Personally I wish we could opt out if we were forced to invest the money privately, but that will never happen because the politicians want control of your money.

To fix social security, they should predicate the benefits on all money you contributed, not just the last 5 years, or highest 5 years, and reduce the SSDI which is abused greatly, and scale back the payout. The payout has been way too generous the last 40 years. I strongly disagree with raising the amount of income subject to tax. Remember, the really wealth in this country do not have income, they have investment returns which are immune to this tax anyway.

 

The debt is the money and the money is the debt. And all of it stands like an inverted pyramid with a relatively small amount of currency and coin at the tip. If currency is mere paper [or the electronic equivalent] that can be printed in unlimited quantities upon demand, there is a valuation issue but no credit issue. If currency must be backed by something tangible by law, then it limits the US Government's ability to borrow to the amount that the lenders believe the government will be able to reasonably tax from the citizens since the ability to create more is limited to what can be backed by a physical asset, and credit quality becomes an issue.

 

Yes, they say we will take 10% of your money and give you back 20% using fairies and unicorn dust. This is obviously impossible.

It is a welfare program since they spend the money immediately and pay out shortfalls (like the one this year) with regular Fed money. If it was an investment plan there would be a true lockbox but there is none.

I agree with you that they pay out too much. On that we can agree. If you live a long life, there is NO WAY you are coming close to paying for what you receive.

 

I agree with you that our debt is consider USD. However, people talking about a gold standard talk about making our currency backed by gold. That does no good if it doesn't limit the amount of T-bills we can sell. All US debt would have to be limited by gold holdings, not just currency. That was my point, limiting this discussion to just currency is meaningless.

Now, if you say the US can only issue currency AND DEBT to a percent of gold holdings, that would be a different matter. It could be extremely dangerous if we got into a war would be a major drawback.

I am all for fiscal responsibility, I am just not sure a gold standard really is doable anymore. I am more in favor of a Constitutional amendment limiting the ability to borrow, though we all know none of these things will happen with our current political setup, (both parties included).

 

I never intended my post to be read as a comprehensive plan. It is just to point out that things can be done, and you pointed out a few ideas. Young people will naturally be anti-entitlement. But historically, poverty among the elderly was a serious national problem that the entitlement programs addressed. That doesn't mean they shouldn't be changed, as you suggest. To eliminate them entirely will probably mean a return of the problem. One thing that could be done to help the problem of medical care would be to enact policies to increase the number of doctors and hospitals. Every piece of legislation is designed to increase the access to and demand for medical care. But as we all know from economics 101, the way to bring down prices is to increase the supply of medical care. As for the military spending, it is way beyond what the nation can afford to pay perpetually. It can be reduced in an orderly manner or it can continue to grow and eventually collapse as it did in the Soviet Union.