A tale of two quarters

[xd9fan]

YouTube - Chinese dumping worthless currency for gold (17May10)

 

[ClayTrainor]

Great story OP. I was just comparing Canadian dollars the other day, pondering the effects of inflation.

I have a bunch of old Canadian dollars from the 50's and 60's that have 1/2 ounce of silver in them and are valued at about $13-$14 today. Todays dollar (the loonie) is only has about 10 cents worth of metal in it.

So in terms of the actual value of the coin, the loonie is worth an very tiny fraction of what a dollar coin used to be worth. Gotta love the national counterfeiting standards .

 

[PaulFrazee]

I appreciate that article, but the question is not whether gold would effectively limit the creation of credit. That much is certain. The question is whether a gold-standard would subject the currency to the tumult of the gold market, and whether it would accurately reflect the value of all assets held by a nation.

My (admittedly limited) understand is as follows:

Rather than subjecting the value of currency to human oversight, you're subjecting its value to the happenstance of gold mining. The discovery of a new vein of gold would be similar to the Fed printing more money. All currency would devalue, and prices would inflate.

By the same token, if we completely mined every ounce of gold on the planet, that would suggest that all production has leveled off. At that point, no value could be added to the economy; value could be only traded. That would not accurately reflect the growth and loss of production.

A nation that increases production two-fold while gaining no gold would still value its currency at the same rate. Prices would be forced to drop, and the amount of capital gained would not outweigh the capital invested. Money would devalue by the act of production, and prices would deflate.

Perhaps I'm wrong; I'm not much of an economist. Poke holes in my argument, please, because I do want a way to limit creation of credit. I'm just not yet convinced that gold is it.

I agree with Greenspan that we're seeing non-producers receive wealth. There are two primary excuses for that redistribution: poverty and war. It's almost an even split if you look at the budget. (War, of course, is the justification to pay out to the weapons-manufacturers and the reconstruction firms, which are generating a false need for production.)

My question is, can we limit the Fed's credit creation by using our republic, which is meant to unseat those who do not serve the good of the nation as a whole? Can we make deficit spending such an unthinkably poor political choice that our leaders can't help but choose otherwise?

That is the concept I'm suggesting when I say we reinvest in our existing system, (somehow) reinvest in education, and keep the power in the hands of people who represent us. Find a way to actually tie politics to good policy. A properly informed citizenry could make that possible.

Honestly consider that before you write it off as overly-idealistic. We can't mistake pessimism for wisdom. There is no greater mistake than to defeat ourselves with our own despair.

 

[PaulFrazee]

Anybody? I would actually really like an answer to my questions. If the gold standard really is the solution, I'd gladly adopt it.

 

[TomtheTinker]

Anybody? I would actually really like an answer to my questions. If the gold standard really is the solution, I'd gladly adopt it.

http://www.the-privateer.com/gold1.html

 

[brandon]

Not entirely even handed I must say..

For instance what would that quarter be worth if it was invested yearly at the 10 year treasury rate, or converted into an index fund...

a heck of a lot more than 25c

have to remain intellectually honest here, I'm just sayin....

Good point. If you put it in a DOW index fund in '64 it would be worth about $4 now. Only in the last 2-3 years would the quarter be worth more if you didn't invest it, and even in that period silver dipped down to $8/oz making investing it a better idea.

 

[PaulFrazee]

http://www.the-privateer.com/gold1.html

I'm sorry Tom, but, yet again, that does not answer my question. I'm not denying that we need a way to limit the debauching of currency by our government. I'm asking whether the gold-standard can be debauched by natural happenstance (discovery of massive gold veins) or by market manipulations (investors manipulating supply/demand). Unless you can relieve those concerns, the gold is far too vulnerable to peg currency to.

 

[JoshLowry]

I think the answer you are looking for is that we should legalize competing currencies.

The market should sort out which one is best regardless of what it is pegged to.

Ron is often smeared with he wants to go back to the gold standard, he realizes that system had it's faults.

 

[Jordan]

I'm sorry Tom, but, yet again, that does not answer my question. I'm not denying that we need a way to limit the debauching of currency by our government. I'm asking whether the gold-standard can be debauched by natural happenstance (discovery of massive gold veins) or by market manipulations (investors manipulating supply/demand). Unless you can relieve those concerns, the gold is far too vulnerable to peg currency to.

That is my problem with any commodity currency or a market of "competing currencies."

Using gold and silver as the only currencies, IMO, is a poor idea. Their value would be artificially inflated to all hell, as the value of every good and service produced would have to be divided by a very small supply of metal. Gold and silver, at those relative prices, would have utility as currency only, nothing else. Paper, gold bugs claim, has the same problem.

Competing currencies are an equally poor idea, due to the loss of the benefit of easy units of account. Competing currencies would also give another opportunity for larger businesses to prosper with economies of scale. (Walmart could handle accounting in 49058305 different currencies, the corner store probably couldn't.) If also commodity money, we run the risk of allowing overproduction to create a volatile currency. That's a real "currency war" right there.

OT: There are two problems with currencies, you have either persistent deflation or persistent inflation. One rewards inaction, the other adds disincentives to savings. Pick your poison.

 

[TomtheTinker]

My (admittedly limited) understand is as follows:

Rather than subjecting the value of currency to human oversight, you're subjecting its value to the happenstance of gold mining.

I also am no economist and do enter this conversation with limited understanding..but none the less I would like to bounce some thoughts around.

So basically your concerns about a gold standard are based on a belief of gold being volatile and the negative effects of over or under supply of gold could be similar to the same problems presented by our current fiat system.

You are saying that our problem is the corruption of our system not our system in it self. You think the answer to the problem is an educated people to engage in the system cleansing it of the problems instead of relying on a gold system that can be affected by some what random events

The discovery of a new vein of gold would be similar to the Fed printing more money. All currency would devalue, and prices would inflate.

While it is obviously true that the discovery of a gold mine would increase the supply of gold and I am neither a gold miner or a money printer/zero adder(a.k.a. central banker)...but something tells me that a central banker can expand a paper or digital money supply a lot faster than a miner could expand the above ground supply of gold.

By the same token, if we completely mined every ounce of gold on the planet, that would suggest that all production has leveled off. At that point, no value could be added to the economy; value could be only traded. That would not accurately reflect the growth and loss of production.

Value is something that one person cant put a figure on... today there is about 160,000 tons of gold above ground, if that amount was to decrease to 1 ounce over night..it would be logical to assume that the value of that 1 ounce of gold would be a lot higher that it was the night before.

I think the same concept applies in your hypothetical situation where there is no more physical gold to account for an increase in population, goods, services, production and so on . In my opinion the less there is of something desired the more valuable it is...as it becomes more valuable "prices" of other goods go down in terms of gold..so basically less gold is doing the same service ..the money supply is adjusted naturally as it should be.

A nation that increases production two-fold while gaining no gold would still value its currency at the same rate. Prices would be forced to drop, and the amount of capital gained would not outweigh the capital invested. Money would devalue by the act of production, and prices would deflate.

The way I look at it and somebody please do correct me if I am wrong..if production were to increase two-fold there would be twice the amount of products...wouldn't it be natural for the price of that product to decrease based the supply and demand fundamental??? Wouldn't prices going down be a sign that the goal of being productive enough to supply the goods or services needed were met and now since that goal was met certain people would have to find new innovative things to do using their extra sir plus of resources to fund the solving of problems that have not been addressed. Isn't this where economic growth comes from??

 

[Zeeder]

When a free market person says"Gold standard" they don't mean what the United states government has done in the past. The simply made up the value of gold when they wanted.

If we decided to use gold and silver as money again, it would definetly fluctuate, but do so naturally and gradually. I don't think the concept of "limited money supply" is a valid concern. In a free market people will start using copper if gold and silver become too valuable. You'll be able to use anything as money.


Half the worlds population dies: The gold you have becomes less valuable.

A ship full of gold sinks and sharks eat all the gold: Your gold becomes more valuable.

We also forget that in a free market, inflation won't be happening in the same way it does now(artificially by the FED). And productivity and innovation will change prices and increase your own personal "money supply".

 

[Travlyr]

Anybody? I would actually really like an answer to my questions. If the gold standard really is the solution, I'd gladly adopt it.

Honest money is not created; commodity money is produced from natural laws.
Fiat money is "created" and extremely profitable for whoever (counterfeiters) are granted with the privilege of "creating" money by force of man's law.

A "gold standard" represents what a laissez-faire free market economy will choose as the most efficient honest means of exchange.

For example, a farmer produces a garden, pigs, chickens, cattle and grains, then a miner comes along and offers to trade some silver for some food... it is a good deal for both because the farmer can store silver more easily than food. The farmer is getting rich producing goods and the miner is getting rich mining silver.

A city slicker banker comes to the farmer and pulls a piece of paper out of his wallet with a $50 written on it, the farmer tells him that the paper will only burn for a couple of seconds, or perhaps he could use it for toilet paper. "What else you got?", asks the farmer. The banker says well I have 10 - $50 bills. The farmer says come back when you have something of value to trade. The banker only thinks he is rich because he has a bunch of electrons and paper... electrons will disappear and paper will continue to lose value as faith in paying off debt erodes.

This dollar version of a paper money system is coming to an end. The people of the 21st century will be using new money soon. In 1913 one dollar would purchase $21.57 worth of goods produced in 2008. I am convinced that the dollar is worth less today than it was in 2008. The value of the dollar will eventually go down to the value of the paper it is written on... it always does.

The Great Tomato Bubble is a good analogy.