http://www.bbc.co.uk/news/business-18644230 A popular solution to the financial crisis has been to print more money, but is there another way of fixing our economy? Would the financial system be more stable if each pound, dollar or euro in our pocket was once again backed by gold? Brian from Manchester has lost faith in money. After selling his house, he decided to turn his cash into something he says he can trust - gold. "I started in 2005 and now I've got 200,000 worth - about half of what I own - in gold. "If I kept all my money in the bank, the value of my work would either devalue over the long-term or it would be wiped out." Brian's worry is that inflation will erode the value of his savings over time, or worse still, that fragile banks and governments will fail to protect them in another financial crisis. And he is not alone in these fears. Frances, who lives in London, sold her flat in 2008 and invested 40,000 of the profit in gold, which she bought via the internet and keeps in a vault in Switzerland. "I don't fear a financial Armageddon," she tells Radio 4's Analysis, "but I do fear governments, in their desperate search for wealth, constantly printing more money to deal with the debt that they have at the expense of people like me. "So I need to protect against that." Both Frances and Brian have hitched their fortunes directly to the value of gold. They have put themselves on a gold standard, if you like. The Bank of England has printed billions of pounds in its quantitative easing programme Some economists and politicians argue that currencies need to do the same - that we need to reforge the link between money and something tangible. As central banks around the world print trillions of pounds, euros and dollars in new money through measures like quantitative easing, which makes more sense: believing in money that is conjured out of thin air or believing in a yellow metal you cannot eat, put in your petrol tank or even take to the shops? It is an argument that reveals deep divisions between economists. In the green corner are those who would print more money to get us out of trouble and in the gold corner are the folks sometimes dismissively referred to as "gold bugs", who believe we are heading for a monetary reality check. Detlev Schlichter is a former banker and the author of Paper Money Collapse and he says the current system is fatally flawed. "The problem is that what we use as money can be created and produced by the privileged money producers - which are the central bank and the banking system. "They can produce as much of this money as they like. And so the supply of this form of money is entirely elastic, it is entirely flexible." Detlev Schlichter believes this will, ultimately, lead to people losing faith in our current system of elastic money and turning to something that does not stretch - like gold. He advocates a radical free-market system where there are no central banks and where currencies - which are no longer tied to nation states - compete for credibility. He believes that, in such a system, money that can be exchanged at the bank for something valuable - like gold - would be more attractive than a 10 note that can only be swapped for two 5 notes or change. For centuries money that was either made with or backed by gold was the norm. The United States still operated under a form of the gold standard until President Richard Nixon abandoned it in 1971 because foreign governments started swapping the dollars they held for gold and the US started to run out of bullion. And that, says mainstream thought, is the problem. If the power to create more money is restricted, then as the economy grows, producing more goods and services, prices are likely to go down. You might think that sounds good, but gold standard opponents argue there is a problem. After all, why would you buy something today if you know it is likely to be cheaper tomorrow? Consumers stop spending and the economy grinds to a halt - and this is why most economists are so scared of deflation. DeAnne Julius of the think tank Chatham House was a member of the Bank of England's Monetary Policy Committee - the body that decides how much money is in the system. She says that if the amount of money in the system was limited by pegging it to gold it would limit economic growth, which is the last thing we need right now. "I think to put your faith in gold as the basis of a country's monetary system would be extremely foolish," says Dr Julius. And not just because it would limit growth but because, in practical, terms it would be chaos. "We currently have less than one per cent of our GDP locked up as gold reserves in the Bank of England, so the kind of multiplier you would need to create pound notes which were very strictly tied to gold would be something of the order of four, five hundred times," she explains. "Every time the price of gold moved, you would find the value of that money in your pocket leaping up and down - an extremely volatile and unstable way to run an economy." This volatility of gold prices means it is also risky for investors like Brian and Frances, who have large amounts of their personal savings tied up in gold investments - 40,000 of gold might be worth less a year down the line. Detlev Schlichter says giving this sort of power to the monetary authorities is part of the problem, because it only postpones a financial crisis: "The present system is a policy tool. It allows the central bank and by extension the state to manage the economy. It creates near-term booms but we pay for them with a big hangover at the end of the boom." If we had stuck to the gold standard, it is probably true we would not be in the mess we are today. Yes, our economy would be much smaller - but perhaps its foundations would be more solid if the only money in circulation was money that tied to something tangible like gold. But in a world where monetary systems are controlled by central banks and governments, would a return to the gold standard work? "You can't force a government to stay on gold, so therefore gold has no credibility," says Lord Lawson, chancellor of the exchequer in the 1980s under Margaret Thatcher. "Because [leaving the gold standard] has happened in economic history on many occasions, gold no longer exerts that discipline." Countries have indeed abandoned gold when the going got tough - as they did in the 1930s and the 1970s. So if currencies did return to the gold standard, it might please the so-called "gold bugs" who have lost faith in paper money - but equally, it might introduce a new wave of sceptics, for whom the golden ring of trust has already been broken. Listen to the full report on Analysis on BBC Radio 4 on Monday, 2 July at 20:00BST and Sunday, 8 July at 21:30BST. You can listen again on the Radio 4 website or by downloading the podcast.
You got to admit...this wasn't a typical fluff piece...which the average 'joe' would just breeze over. It had real world examples 'Frances & Brian'. It gave equal billing to each side of the debate. The average joe can smell a advertisement/advertorial a mile away these days, so there was no pandering. This might raise the interest of a few more people who smell something's wrong, but don't yet know what to do.
The importance of a metals backed currency Julius isn't the amount of metal each dollar, pound, euro, or yuan is representing, but rather that a metals standard requires that currency issuance remain flat until more gold or silver are obtained. This restricts central banks and world governments from creating hidden inflation. Either the issuer must obtain greater stocks or metals or devalue the currency in plain sight by resetting the value of the currency to a new weight of metals.
If the Brits were using gold and silver as a currency in their own right, why would you be comparing them against the Pound. Unless you were running two currencies in tandem, in which case Gresham's law would come into play and you would be hoarding the gold and spending the paper. There would be no volatility, 1oz is always 1oz, the volatility would be in the pound and how much gold it could afford to buy. It also assumes that the things you buy have no volatility, Petrol and Bananas are both very volatile. I think the whole volatility argument is a smokescreen, tell the public that gold is volatile and they could loose half their savings overnight and you won't get many takers. Tell them that their money is losing purchasing power through inflation and even though they are earning interest on it they actually have less purchasing power than they had before they put it in the bank and their eyes glaze over. More gold for the rest of us!
What I don't understand at all is this idea that economies need to keep expanding? If you would be so good to explain it to me i would appreciate it. The idea that you would buy something cheeper next week and not this week is flawed. So would you really buy this weeks food shopping next week? How long would you wait to buy that TV or other white goods?
Yeah, saw that, and I agree with what he said. It's a good place to start and I hope it's the first of many, but it will be very interesting to see how the tone of future pieces evolves as the world of fiat continues its collapse.
I have a theory that this is linked to: 1) Mans fear of death. If something is not growing it must be dying, and we fear that. 2) Greed, and an easy way to satisfy that is to give people numbers that always go up. It only becomes a problem when you attempt to link the numbers to reality and find out that there is a disconnect between the two. Well, actually the idea that things get cheaper has basis in reality. But ideally it is linked to increases in manufacturing efficiency and not to a decline in the value of currency. Some things you do need to buy each day (food, petrol, etc) and the prices for these should be relatively stable and only affected by things such as natural disaster, short fall in production, decline in demand due to emerging tech, etc. The reason that they are so volitale is due to traders attempting to make a profit without doing any actual work. At least that's the way I see it.
I think that should read appreciation. Furthermore, unlike Julius suggests, items do get 'cheaper' week by week when real interest rates are positive and your money is in a bank. Gold would do the exact same thing, without the need for the bank.
Well if things didn't expand there wouldn't be enough money in existance to repay the loans stemming from the fractional reserve banking system. And if Banks couldn't make use of the Fractional Reserve system they couldn't loan the same money out over and over again to make a profit. They would actually have to have the money before they could loan it. That would cut into the bottom line, we have to have an expanding economy because the people who make money out of the expanding economy say that we have to have an expanding economy.
+1 And when regular borrowers dry up wars are a wonderfully easy way of expanding the money supply as to accommodate repayment of existing loans
You know, I first read this as "the fictional reserve banking system" and had a good chuckle :lol::lol:
Lack of expansion by definition is contraction (if not static). Central bankers have nightmares over deflationary spirals (http://en.wikipedia.org/wiki/Deflation#Deflationary_spiral) and/or the Paradox of Thrift (http://en.wikipedia.org/wiki/Paradox_of_thrift). The 'solution' to this, from a central bankers perspective, is to keep inflation in the 2-3% range. This means that you're a few percent away from deflation (so a small buffer), and yet inflation is not high enough to appear to cause too many problems in the economy (plus they get to rip everyone off by 2-3% annually with a stealth tax). Inflation at low rates causes people to release their money and not hold on to it for extended periods, as its value is slowly eroded. The central bankers like this as they think it 'greases the financial wheels of the economy'. What they're basically saying is that monetary velocity increases slightly, as people are too scared to put money under the mattress, and instead they invest it in the vain hope that they'll get a return that beats the 2-3% inflation rate (and the tax man). In regards to the second part of your comment - it all relates to the Paradox of Thrift and Deflationary Spiral. People may not forgo the purchase of Weetbix for breakfast, but they just may forgo spending on an iPad, or a car, or a plumber, or a toothbrush, or cement for their driveway, a new pet, etc. And one other thing they avoid like the plague - debt. Because in deflation, debt becomes harder to pay back. Basically with deflation people prefer to hoard money than to spend it. With inflation people prefer to swap their money for anything that will hold or increase in value. There's a lot more to it, but that's the basics. And the premise of your initial question, it is fairly innocent, but it is exactly the kind of question people should be asking. Because we don't need inflation or deflation. The current system gives that to us, but it is by no means mandatory for an economy to experience either of those. If anyone tells you otherwise they're selling you something.
Whenever someone buys a tangible asset that increases in value they are quick to comment on how wise they were. Why not convert your fiat into crude oil or Arabica coffee beans ? I think the coffee did better than gold. I invested in gold and yes I am pleased, however, based on the consensus of many contributors to this forum I invested in a lot of silver and now nursing 30% losses on paper. Had I put more cash into silver I would be really worried. Fortunately I am not forced to sell but anyone converting more than 10 or 20% of their wealth into metals might be a bit naive, and might do better in a casino in Las Vegas.
I completely disagree: The Permanent Portfolio The Permanent Portfolio is a simple investment strategy in which the investor divides his portfolio equally among four primary asset classes 25% in each: Stocks - Represented by a broad-market index fund, such as one that follows the S&P 500 or a Total Stock Market index. Bonds - Represented by Treasury bonds with a maturity of 25-30 years, or high-grade corporate bonds of similar maturity. Cash - Represented by short-term Treasury bills with a maturity of one year or less. Gold - Preferably in bullion form.
