| How can we switch to the gold standard when US Wealth is 6x that of all the gold in the world? Seriously, explain that to me! What am I missing? Some ignorant people genuinely want the US Dollar to return to the Gold Standard, meaning every dollar would be exchangeable for a fixed amount of gold. But there are under 6 billion ounces of gold in existence. Amount of gold (<6 Billion) x Price of Gold ($1400) = $8.4 Trillion is the maximum total value of all the gold in the world! >>> But the total Net Worth of U.S. Households and Nonprofit Organizations is over $50 Trillion. http://en.wikipedia.org/wiki/File:Graphic.png So how can every U.S. dollar be exchangeable for gold? The Net Worth of the entire U.S. would have to drop by over 80% or the price of gold would have to skyrocket to over $8000 an ounce just to make the arithmetic work. Even worse, the gold standard doesn't allow for the viable & desirable concept that we could (and can and should) "grow the size of the pie". We can make (and have made) more stuff that people want and therefore there can be more wealth in existence. With a fairly static amount of gold then that would de facto limit the growth of the economy (otherwise the price of gold would have to go up increasing the wealth of gold-owners regardless of their productivity/"contribution to pie growing"). Ok, the above was just my personal but random rants on the subject. You're better off learning serious facts about it. So... EDUCATE YOURSELF... 1) Here's one fun NPR "PLANET MONEY" podcast explaining the origin & evolutionary advantage of gold (historically). http://www.npr.org/blogs/money/2011/02/07/131363098/the-tuesday-podcast-why-gold 2) Here's an NPR "PLANET MONEY" podcast featuring an advocate for the Gold Standard... http://www.npr.org/blogs/money/2011/02/15/133781593/the-tuesday-podcast-the-gold-standard 3) And here's an excellent NPR "PLANET MONEY" podcast destroying The Gold Standard...The Friday Podcast: Gold Standard, R.I.P.http://www.npr.org/blogs/money/2011/02/18/133874462/the-friday-podcast-gold-standard-r-i-p |
CAVEAT! I'm an amateur philosopher and idea-generator. I am NOT an investment professional. Don't take any of my advice before consulting with an attorney and also a duly licensed authority on finance. Seriously, this my personal blog of random ideas only for entertainment purposes. Don't be an idiot.
Monday, March 07, 2011
Switch to the gold standard? But U.S. Net Worth is 6x that of all the gold in the world!
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9 comments:
This post suggests unfamiliarity with the gold standard's history. Does Corpania understand that the world monetary system was linked to gold as recently as 1971? Does he think there was 100% gold reserves at that time?
Or for that matter, does he believe the 19th century British gold standard relieved on a 1:1 gold/pound sterling ratio?
In the last sentence above, it should say "relied" not "relieved."
SEAN R - Great Question!
My hope is that you ask it of all supporters of "the gold standard" to thus educate them that there has NEVER been a "1:1 ratio" of gold to any modern money supply.
And so, my main point is further validated: even with a fully-executed gold standard there would STILL be issues of market vagaries (like any "fiat money").
QUESTION FOR ALL: Given that the US Dollar's market swings have been less than 100% compared to most other currencies in the past 30+ years but Gold's market swings have been 200% or more in most currencies >>>
How would pegging the US Dollar to gold necessarily reduce the swings? How can a less volatile price be made even less volatile by entirely connecting to a more volatile price?>>>
That would be like claiming a bicycle can be made safer by welding it to a bucking bronco.
ANOTHER POINT: Can you imagine a future where gold can be made very cheaply by technology (nanobots)? What would happen if we all went on the gold standard and then, 20 years from now, scientists then develop the capability to turn lead into gold?>>>
It would be the most damning "counterfeiting" ever because one piece of pure gold (chemical symbol "Au") can never be differentiated from another.>>>
You gold-standard folks would hitch our entire economy to a counterfeiting nightmare. There would be third-world inflation until we fully switched to "fiat currency" that had actual anti-counterfeiting strategies.
Also, here's a response to the NPR piece:
http://blogs.forbes.com/briandomitrovic/2010/11/12/the-slanders-on-gold-have-got-to-stop/?partner=contextstory
I’m not sure who needs educating on the historical gold standard outside of this blog’s author. Can Corpania provide examples of gold standard supporters who believe past systems were based on 1:1 reserves?
Re-reading Corpania’s original post, it's clear he really has no idea what a gold standard is, or how it contrasts with today’s system. Nevertheless, he leads off the discussion by calling gold standard advocates ignorant.
Corpania says: even with a fully-executed gold standard there would STILL be issues of market vagaries (like any “fiat money”).
Who knows what this means and where he thinks he made that point previously.
Corpania seems to be saying that short of specie money, all currency floats. This is, of course, nonsense and further proof that Corpania has no comprehension of the gold standards that made first Britain and then the US the world’s leading financial powers.
In his second comment, Corpania says gold has been more volatile than foreign currencies, revealing he doesn’t understand that gold represents the currency’s absolute value, as opposed to other currencies which are relative values.
Gold is prized because it maintains its value over the long term. What Corpania sees as gold’s wild instability is in fact the accurate reflection of the dollar’s wild instability. When gold’s dollar price rises, it doesn’t mean gold is rising, it means the dollar is falling. This instability causes significant problems in the world economy, which is precisely why it should be fixed.
The simplest way to stabilize the dollar is for the government to announce its desire to maintain a specified weight of gold at a particular dollar price. For 120 years, it was $20 to one ounce of gold. What this meant was a dollar bought the same in 1800 as it did in 1900, a remarkable achievement which allowed capitalism to flourish.
Corpania also gets it wrong when he suggests an economy’s growth under a gold standard is limited to the gold supply. Under a gold standard, money supply must grow in tandem with economic growth to maintain price stability. If money supply grows too slowly, the currency will rise, creating deflationary pressures and pushing down gold. Gold will be turned in in exchange for dollars. Such automaticity means the value of money is set by government, while its price, through interest rates, is floated.
Corpania’s third point illustrates he misses the point. Gold is not the issue. The issue is, the monetary system is the major source of economic friction in the world today. We’re in the 40th year of an unsuccessful monetary experiment that marks a departure from the previous 200 years.
The goal is to create a monetary system that is non-discretionary and stable, one that facilitates trade and investment while emitting accurate price signals. If gold becomes unavailable, alternatives such as a basket of commodities could be substituted quickly and easily. No mass inflation need occur.
Even without gold, a system of fixed exchange rates among currencies with an international currency to settle balance of payments would work quite well.
In the meantime, gold is the best currency measuring stick we’ve got. With an untenable status quo, I would use it as a guide until the day alchemy prevails.
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