"Sound Money" (and where am I going wrong?)

[jlink7]

Please help me out with my discussion/argument with my brother. I think I've done a pretty good job at illustrating my position, but I'm looking for the "Aha" to give him that will make him see the light. The beginning of the conversation begins at the bottom and moves up (as in an email). Thanks for the help!

FROM: Eric

In rereading your message I was struck by something:

"I would doubt that we could go back to a purely GOLD standard, and
instead would have to go back to a commodities standard or something
similar. Don't tie all our money into one thing, like gold, but tie it
into SOMETHING, even MULTIPLE things."

Isn't the currency already tied to something? In my mind the currency
is tied to EVERYTHING. Why has the USD fallen in the last 24 months or
so in relation to most commonly used currencies?
Think it has something to do with the US sub-prime market? I do.
Think it has something to do with your statement about Iran and
Venezuela asking to be paid in Euros? I do.
Think it has something to do with the price of oil? I do.
Think it has something to do with a multitude of other things? I do.

It's an all or nothing thing. If we tie the currency (in whatever form
that may take) to something, instead of everything, you open up the
opportunity for arbitrage on the "things" that are not tied. If people
realize there is an arbitrage situation they will exploit it and the
factors that went into creating that arbitrage disappear. Meaning the
values of the "currency" will fluctuate. Maybe I'm completely missing
your point, but I don't see how the ideas you are advocating will work.

Another point:
"Currently, our biggest export is the U.S. dollar, which we use to
import all sorts of goods. We should be able to export something of
true value if the dollar actually has any value."

This will never happen as long as countries have differing levels of
education, living standards, cost of living, labor laws, etc. The US
cannot compete in a commodity based production environment. Not when
you have third world countries paying their employees pennies on the
dollar of US employees. So if we can't compete on commodity based
production items in the current state, we have two options. First, we
can work to level the playing field by demanding third world countries
to pay their workers more (because we don't want to accept lower wages
for our US workers). But won't that cause an inflationary environment
here in the US? We might have to do without that new DVD player or game
console or hot new pair of shoes. No, we like getting those things for
relatively cheap (relative based on if we made it in the US with US
workers at a higher wage). Our second option is we can do what we've
always done and adapt. Like it or not, the US is a service based
economy. Professional, retail, financial services, etc. is our bread
and butter. Someone might say, well what happens if a country with a
low cost of living (and low wage base) becomes just as educated and well
funded as we are (maybe like India is becoming)? Well we adapt. We
move on to the next thing. What that is, no one knows. But I have
faith we will be on the front lines in identifying that being the front
runner in the future.

FROM: jesse (me)

You are exactly right. Both gold and the US dollar (and most other currencies, based on the U.S.'s lead) are worth only what people are willing to pay for them. The difference being that you just cannot create gold out of thin air. The value of gold (or more accurately, since I changed my argument from a true "gold" standards to a "tangible goods" standard) still fluctuates based on value. It sounds a bit like bartering, but there are subtle differences. The value of gold and other goods IS more stable that of the dollar, it's hard to argue that fact (granted, when compared to the U.S. dollar, gold seems to have exploded in value, which it has, but that's because the dollar is unstable, not gold.) It's all about PERCEIVED value though, which you point out, not ACTUAL value. Once people start cashing in their loans, the PERCEIVED value of our dollar goes down the proverbial shitter. People start using their DOLLAR savings to buy things that have at LEAST a nominal ACTUAL value-- in effect driving prices up (that is, the price in U.S. dollars, those same items will still trade with each other on a marginally equal scale. Two bananas will still equal one apple, etc, based on supply.) There is something to be said that when (yes, I said when, not if) these loans are demanded to be paid back that people will immediately take their paychecks, paid in dollars, and go around and immediately buy goods, "blowing" their paycheck to get as much as they can with their money before it becomes worthless or buys significantly less. This is called "velocity." It's the only other cause of inflation besides creating more money, is usually only temporary (because no new money is created) but is arguably much more devastating to an economy than normal (even high) inflations. If my example is clear enough, it is when there are significantly more fiscal transactions that occur than normal.

Also, when you ask who creates the intrinsic value of the USD, and then answer, I think you're wrong. The Federal Reserve creates the value, we, as a society, placed a misguided trust in a private institution (after all, the Federal Reserve is about as "federal" as the "Federal Express") to ensure that there actually is value to our dollar. Today our gold may be $900/lb, tomorrow it may be $950/lb not because the demand for gold is that much more, or people are suddenly valuing it that much more, but because the Fed increased the amount of Federal Reserve Notes by 7% or so (granted, they don't create that much all at once, but for sake of an example...)

There are multiple ways to save our dollar. The easiest and most acceptable way is to stop overspending. Quit creating a need for all this additional funny money. By simply stop intervening in 90% of the world's issues, or by simply stop supporting BOTH SIDES of every issue, we'd save BILLIONS of dollars. People say this may be immoral of the world's strongest and richest country... But are we? Why are we fielding 95%+ percent of the world's aid? Why is it the responsibility of the Government? If people want to help support international interests, then by all means, they should... Either volunteer to help themselves or use their checkbook.

In closing, screw "fixing" the Fed.... Get rid of the damned thing.

From: Eric
Sent: Friday, December 21, 2007 5:51 PM

While we are at it, let's open up the sewer lines and have then run down the sides of the street, because what you are advocating is very similar to Ancient Roman times. Sorry for the dig, it's early and I'm cranky today as my meeting was cancelled.

I didn't give any reasons to back up my argument because it is based on Econ 101, simple supply and demand curves. If you increase the demand for something scarce (supply), i.e. by letting people pay with gold bricks/coins/etc., the price of that commodity will increase. And as people move away from the dollar, a decrease in demand, the supply will increase and the price will drop. I can send you some graphs if it will help.

Answer me this. What is the difference between gold and USD? Neither is "backed" by anything. Who creates the intrinsic value of gold? Who creates the intrinsic value of USD? The answer is no one and everyone at the same time. We assign a value to it, collectively (granted the Fed has a significant impact on the supply, but NOT the demand). Why is a NY Strip worth more than a flank steak? Because people have determined that NY Strip is a "better" cut of steak (i.e. demand). It doesn't take any more labor or materials to create a NY Strip than a flank steak. The same argument can be made for gold and USD. I don't think it is wise, nor fair, to blame the currency. There is nothing wrong with using Federal Reserve Notes, just like there was nothing wrong with using Treasury Notes (i.e. Gold Backed).

It is completely fair to critique the powers that be at the Fed. You can say that their policies are bunk. But unless you fix the Fed, you are going to have the same issues regardless of the currency you are using.

From: jesse
Sent: Thursday, December 20, 2007 11:11 PM

I think you are misguided. You say what you believe but don't really give any reasons to back up that. The world economy isn't based on the American dollar anymore. Iran and Venezuala are already asking for their oil to be paid for in Euros.

One thing you're failing to realize is that the dollar is already worthless. The only thing it would take to destroy the American economy would be a well coordinated "attack" by all of the U.S.'s investors to claim "payment due" on their loans to us. Unlikely? Sure... But not impossible. We continue to expand our debt to China, would is, at the very least, a cautious ally with us. Our economy was backed by gold until the early 1900's. Then the Fed was created... The Fed basically caused the first (and only real) Depression. In Nixon's era, France tried to cash in some of its dollars for the gold that it was told a dollar was worth (something like $35 for 1/16 oz, something ridiculous like that.) A lot of this information was in that speech I asked you to read like a month and a half ago. When we officially went off the gold standard, other countries went off the gold standard because they HAD
to-- the U.S. dollar at the time was "the currency."

"US gov't pegged the dollar at the open market gold price" The price of gold wouldn't determine the price of the dollar, it wouldn't be fixed.
But the dollar needs to be backed by something. What we have now is FIAT money, based on absolutely nothing but the Federal Reserve's word (what word, I am unsure...)

Gold/silver/oil other resources are generally stable in "value." It may LOOK like their price is unstable but that's because the DOLLAR is unstable, not the other way around, and commodities prices are quoted in dollrs (the price of one commodity compared to another commodity is generally fairly stable). I would doubt that we could go back to a purely GOLD standard, and instead would have to go back to a commodities standard or something similar. Don't tie all our money into one thing, like gold, but tie it into SOMETHING, even MULTIPLE things. Currently, our biggest export is the U.S. dollar, which we use to import all sorts of goods. We should be able to export something of true value if the dollar actually has any value.

This obviously cannot happen overnight. There will be no president or congress that will go, "ok starting May 7th, 2011 we're going to go to a "gold" standard." What we need to do is control spending, ensure we have a "balanced budget", stop MAKING more money.

The Fed makes loans to banks at 4.25% (is that correct still? I think is may have just gone down another 1/4 point?) which in turn loans that money to us for, usually, greater than 6%. This is UNEARNED profit, why can't I borrow directly from the Fed at 4.25%? Perhaps that is opening an another entire can of worms....

Anyway, there is a bill in the house right now that addresses much of
this: read about it: http://action.downsizedc.org/wyc.php?cid=85. It would basically repeal this small sectin of U.S. code:
http://www.law.cornell.edu/uscode/html/uscode31/usc_sec_31_00005103----0
00-.html Sure, it seems insignificant, but if you read the first link it's actually pretty brilliant. Instead of forcing people to go back to a gold standard, it simply allows the use of other currencies, including gold. Simply put, it's make the Fed accountable for the inflation that it creates by creating more money.

From: Eric
Sent: Thursday, December 20, 2007 5:28 PM

That's an interesting position...

It would completely decimate the world economy. But nonetheless is interesting. If the general public starting buying gold and/or if the US gov't pegged the dollar at the open market gold price, the price of gold would go up so much I would hate to even speculate what that would do to the price of gold. I'm guessing it would go up exponentially while decreasing the buying power of the dollar to make $1 practically worthless (probably would have more worth as heating fuel than currency). There would be a contraction in the world economy, ordinary citizens would spend all of their time waiting in soup lines, basically the rich would get richer and the poor would get poorer and the middle class would disappear.

From: jesse
Sent: Thursday, December 20, 2007 8:21 AM

Not THE gold standard, but something like a gold standard, sure. Fixing the price of gold to that of a dollar (say, $100/oz of gold) wouldn't solve much. Letting a gold coin (as an example) "compete" with a dollar as a currency would force "the fed" to be more responsible in the creation of money though.

Some people argue that going back to THE gold standard would encourage hoarding... To me, I would use a different name: saving.

From: Eric
Sent: Thursday, December 20, 2007 5:17 PM

Perhaps you would like to clarify your position, Jesse. Are you saying that we should go back to the gold standard?

From: jesse
Sent: Wednesday, December 19, 2007 11:19 PM

Yes, when we say "print money" we really mean "create money out of thin air." In fact, I think the second one is what should be used, but "printing" sounds more tangible, doesn't it?

From: Eric
Sent: Wednesday, December 19, 2007 11:20 PM

Well anytime the Fed "puts" money into circulation it can create an inflationary environment...same for "taking" money out of circulation, it can create a deflationary environment. They don't actually print money. I'm not sure what the percentage is, but there isn't paper or metal (coins) money to back all of the USD "out there". The Fed only prints as much money as is needed. If I had to guess, I'd say for every USD 100 "out there", there is only USD 4 - 8 in tangible currency.



Maybe even less. Here is what the Bureau of Engraving and Printing produced for the last three years:



Denomination

FY 2005

FY 2006

FY 2007

$1

3,475,200,000

4,512,000,000

4,147,200,000

$2

0

230,400,000

0

$5

576,000,000

800,000,000

1,401,600,000

$10

512,000,000

851,200,000

83,200,000

$20

3,059,200,000

889,600,000

1,971,200,000

$50

345,600,000

0

428,800,000

$100

668,800,000

950,400,000

1,088,000,000



Extend out the FY2007 and that's $181.7 billion. Keep in mind that Exxon/Mobil has a market capitalization of $502.22 billion. I'm not sure what the life expectancy is for paper money, but I think it is less than two years. So there probably isn't enough paper money to buy Exxon/Mobil in "cash". Not to mention going to the store to buy a couple of diapers.

From: Joseph Sent: Wednesday, December 19, 2007 1:57 PM

My bigger concern is whether or not this money is already in circulation or if this is where they print more money to do so....

On Dec 19, 2007 12:23 Eric wrote:

One thing to keep in mind, companies will always try to make money. So if they can get money at a cheap rate, they'll take it and use it, presumably, to make their organizations money. Good or Bad? Probably Good.

---ORIGINAL MESSAGE---

http://money.cnn.com/2007/12/19/news/economy/fed_auctions/index.htm?eref=rss_topstories

 

[fsk]

Gold and silver are what the free market chose as money before government got strong enough to interfere.

People should be free to use whatever they want as money. Why should the law force me to use Federal Reserve Points as money?

Historically, every fiat monetary system has ended with a hyperinflationary collapse.

Fiat debt-based money is an inherently unsound system. The primary reason is "The Compound Interest Paradox".

When you use gold or silver as money, you're protected against inflation. Under the Federal Reserve, banks and large corporations receive a massive subsidy, paid by everyone else as inflation. This discriminates against individuals and small business owners.