I'd just like to know that I'm on the right track here, and haven't left my brain down the PM rabbithole. It's still a bit of a second language for me, atm, and I still feel I'm shoehorning ideas together. Anyway , I was discussing today how new Gold regime would work, if reintroduced. I'm not fully across it yet,, but I've just been presented with some past and potential (Keynesian flavoured) problems which are involved with gold regimes, so I thought I'd have a go to test myself. I would also be interested to see how some of more learned members would respond. Please expose any ignorances I may have, and feel free to tell me I'm full of shit -just please explain to me why Constructive feedback/opinions/corrections will be greatly appreciated. Cheers! -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Questions. 1. The gold standard places undesirable constraints on the use of monetary policy to fight unemployment. In a worldwide recession, it might be desirable for all countries to expand their money supplies jointly even if this were to raise the price of gold in terms of national currencies. 2. Tying currency values to gold ensures a stable overall price level only if the relative price of gold and other goods and services is stable. For example, suppose the dollar price of gold is $35 per ounce while the price of gold in terms of a typical output basket is one-third of a basket per ounce. This implies a price level of $105 per output basket. Now suppose that there is a major gold discovery in South America and the relative price of gold in terms of output falls to one-fourth of a basket per ounce. With the dollar price of gold unchanged at $35 per ounce, the price level would have to rise from $105 to $140 per basket. In fact, studies of the gold standard era do reveal surprisingly large price level fluctuations arising from such changes in gold's relative price. 3. An international payments system based on gold is problematic because central banks cannot increase their holdings of international reserves as their economies grow unless there are continual new gold discoveries. Every central bank would need to hold some gold reserves to fix its currency's gold price and serve as a buffer against unforeseen economic mishaps. Central banks might thereby bring about world unemployment as they attempted to compete for reserves by selling domestic assets and thus shrinking their money supplies. 4. The gold standard could give countries with potentially large gold production, such as Russia and South Africa, considerable ability to influence macroeconomic conditions throughout the world through market sales of gold. Quoted and paraphrased from Krugman & Obstfeld (2009): International Economics - Theory and Policy. 8th edition. Because of these drawbacks, few economists favour a return to the gold standard today. As early as 1923, John Maynard Keynes characterized gold as a "barbarious relic" of an earlier international monetary system. ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Solutions. A1. Unemployment, as we understand it in a debt based currency, will be negated due to the nature of a capital based hard money system. As net-savers, the money people earn will carry an incentive that it will be utilised for present and future purchases of goods and services, rather than past spendings. Savings wouldn't need to be invested or loaned out (essentially turning it into more debt) just to combat inflation, keep up with the infinite growth paradigm, ect. Investments, speculation, as well as loans made to the bank (in the form of savings) would be for pure profit taking, excluding taxes. This would help stimulate the economy without the need for interest repayments or a banker or financial middleman involved in all transactions, such as in a debt based economy. With confidence in stability, people with wealth would have incentive to both save and invest. All investments would be backed by real capital, not just the promises of someone who is looking to take on more debt. This incentive and confidence in the markets would help prevent hoarding- which is the only way I could imagine a recession would occur outside of unsustainable population growth. Otherwise the money can only disappear if it is literally stolen, making a recession highly unlikely. ^^^ <I'm sure there's a better way to explain this> Also, a country could not simply increase it's money supply to debase the currency. Increased money supply would bring with it the corresponding capital gains. A2. New finds and extra gold, including mining will need to be rationalised with population growth. After that, new finds will act as an organic growth opportunity, not as 'inflation'. The extra resources will be inclined to be used to fund new parts of the economy in a horizontal fashion, rather than the vertical models we have today. Business would be more confident and willing to take on more diverse risk, rather than cannibalizing and building on past success, as is the current practice. The example of the basket of goods assumes that the new resources will act as a general 'inflation' within the economy, which is not the case for a fully backed currency. In a stable economic environment the extra gold would simply be assigned it's currency value, and used for it's own purpose. If the basket of goods were to rise in value (price), it would directly correlate to lower prices in other areas. Even if the amount of available gold was to double overnight, the basket of goods would have the same value relative to everything else. The price would stay stable because the extra wealth would naturally flow to underinvested parts of the economy, stimulating more innovation and employment. I don't believe past examples of localised metal economies to be relevant to any future global standard. Globalisation and technology will make it much easier to facilitate the process in a way we could never have imagined in the past. ^^^ <again, I'm sure there's a simpler way to put it> A3. Banks would be used mainly for regulation, storage and distribution. They would have no incentive to keep any more than they need on hand. Gold is not a dividend paying asset with no real capital growth. Domestic assets would generally be in the hands of the people, not controlled by the banks through debt. Another benefit of having a society built on net savings. A4. I see absolutely no problem there from where I'm at But these countries won't have more influence on macroeconomic level per se, rather than just having the privilege of the direct economic benefits (mainly employment opportunities) of a mining industry with all it' associated support services, in a metals backed economy. At the end of the day, there is still a universal gold price. You just enjoy a healthier mining industry.
Hi Bart, I like your logic. These 3 articles from ZH went a way to explaining things to me about this topic. (Top link is the best.) http://www.zerohedge.com/news/guest-post-open-letter-ben-bernanke http://www.zerohedge.com/news/must-...es-fed-explains-why-gold-standard-best-option http://www.zerohedge.com/news/robert-wenzel-addresses-new-york-fed-lots-head-scratching-ensues
Consider reading FOFOA... he has a slightly different approach fofoa.blogspot.com Warning: there is a lot to read.
Thanks mate. Great to hear it made some sense. Yeah, that's the main rabbithole I thought I may have lost it in, to be honest. I swear it's the modern "Catcher in the Rye". I hoped his philosophies might have started melded itself to my thinking, but another revision of his stuff could be good. In what way would you say his approach is different?
Savings under a hard currency system would have a better incentive for investment as the return on those savings (interest/dividends) would be higher. The savings base would increase providing the critical capital for business to grow and cut down on speculative activity. Such an environment where capital will mostly find the most productive uses and returns will provide for increased employment. Inflation will be kepted in check and for the most part price deflation will come with productivity gains which would unlock consumer spending. The last thing we need is a system where government can use monetary policy to attempt to manipulate the employment levels. It doesn't work long term and only makes things worse when the cycle corrects like it was trying to do in the first place... Unemployment would only be a problem under a gold standard if labour prices are inflexible. There should be no need for this if price deflation is making the cost of living cheaper. With a gold standard, debt levels should remain relatively low so this shouldn't be a cause for concer IMO.
I'd actually say FOFOA's most recent post highlight's it fairly well: (from the last sentence of the current post) Besides that, i'd also argue that the gold standard people tend to aspire to replace paper money with physical money, whereas Freegold does not. I've been reading a book by Jacques Rueff recently (see this post http://forums.silverstackers.com/topic-28064-fofoa-and-jacques-rueff-the-age-of-inflation.html), and although it was written in the 60's, it is very relevant to today. JR could foresee the same issues we're having, 50 years ago. I see so many of the foundations of the freegold thesis within the book that I have to wonder if freegold was not based on JR's own ideas. In the book JR talks a lot about 'convertability', which is being able to convert paper money to gold. However he goes to lengths to differentiate between the 'gold standard' of old, and the 'gold exchange standard' which operated from the first decades of the 1900's until the time Nixon closed the gold window altogether (JR didn't quite make it to 1980 to see the final results of that). He argued that the gold exchange standard is a bastardised and useless version of the gold standard. Back to FOFOA - personally I think some of what he writes really requires that a person undergo an internal paradigm shift to understand. Eg, the flow of gold, gold's unique monetary properties such as it's ability to absorb value and increase it's utility even as supply dries up, and a few other fairly unique reasonings that I don't think you'll find elsewhere. Each to their own of course. It's a lot to read and if you don't get much from it then there are plenty of other sources to choose from Incidentally, i've almost finished reading JR's book and it's enlightening. One of the best i've read (which isn't very many actually). Edit: The king of typos
