ShumaGorath wrote:

Going off the gold standard was a terrible idea. Thanks nixon.

Having our currency pegged to a volatile international commodity was never a good idea. In the last five years our currency would of deflated 500% for instance. That would of forced us off the standard during a global recession or it would just made a third of our population starve. Gold standard advocates never understand the actual concept of currency pegging in my experience.

Melissia wrote:One problem is that deflation means less investment because return on investments can be smaller than deflation (which it would be if money was tied to a gold standard).


Similarly, it really hurts debtors, and with a nation that is quickly approaching 1 trillion dollars in student loan debt, that'd be a very, very bad thing.

ShumaGorath wrote:Now look up the reasons why we left the gold standard and gold as a trade-able commodity in a globalized economy.

ShumaGorath wrote: It also hurts exports significantly and gold prices rise during global recessions which compounds their impact by reducing the value of work significantly.

Melissia wrote:One problem is that deflation means less investment because return on investments can be smaller than deflation (which it would be if money was tied to a gold standard).Similarly, it really hurts debtors, and with a nation that is quickly approaching 1 trillion dollars in student loan debt, that'd be a very, very bad thing.

Cannerus_The_Unbearable wrote:Is the gold STD like the golden gun of James Bond lore? You just die on the spot?

AustonT wrote:To put the USD back onto the gold, or a silver standard again would require us to do something similar to what Israel did with the shekel. We haven't suffered the rapid inflation and devaluation Israel did, but the end result is the same. Things have a high cost, wages are high, the value of the dollar is low. Pegging a new Dollar Sterling at 13.77 grams of silver or 0.8887 grams of gold and setting an appropriate exchange rate to the USD. debtors pay thier debt on standardized currency, neither the debtor or the lender benefit from inflation.

AustonT wrote:Historically speaking metallic based currency is subject to neither.

AustonT wrote: The value of work remains the same relative to the value of currency.

AustonT wrote:
So the value of work in Switzerland seems very comparable to the US, and above that of all the members of the commonwealth, France, Japan, and Germany. All notably strong global international players. The burden of proof lies with you to support your claim that a gold based economy hurts exports and reduces the value of work more than a floating currency does.

AustonT wrote:Historically speaking metallic based currency is subject to neither. In a modern sense, the Swiss franc. You could provide some sort of background or supporting information to substantiate the claim that a metallic currency will always deflate, or that debtors on those currencies are under undue hardship.

Melissia wrote:

AustonT wrote:Historically speaking metallic based currency is subject to neither.

... yeah it is. As gold becomes more common it becomes worth less; in times where the population growth exceeds the production of gold, it becomes worth more.

Just like any commodity really.

AustonT wrote:

Melissia wrote:

AustonT wrote:Historically speaking metallic based currency is subject to neither.

... yeah it is. As gold becomes more common it becomes worth less; in times where the population growth exceeds the production of gold, it becomes worth more.

Just like any commodity really.

Ok, now talk about money.

Melissa wrote:Fiat currency (IE currency not tied to a commodity) is intrinsically worthless and used solely for payment; therefor it tends to be slightly less susceptible to market forces than currency based off of a commodity (a commodity's value can be quite easily manipulated compared to a currency's value, and gold is no exception)

Indeed, the value of a fiat currency is pretty much defined by the government's willingness to tax that currency-- IE, to accept it as legal tender to pay for debts owed to the government.

AustonT wrote: Creating a fixed ratio means gold, or silver, or copper what ever you peg it to can only be money. At that point the only inflation in the system is the real inflow of the metal.

AustonT wrote:
Deflation and inflation do not effect metallic currencies in the radical way they effect fiat currencies. The fundamental differences protect the average person. Savings retain thier worth, debts are repaid at stabilized rates with lower interest, and money remains a constant rather than a variable.

dogma wrote:

AustonT wrote: Creating a fixed ratio means gold, or silver, or copper what ever you peg it to can only be money. At that point the only inflation in the system is the real inflow of the metal.

And the fluctuation of that metal's value.

AustonT wrote:The downside to a fiat currency is that it IS subject to runaway inflation, and jagged devaluation. Typically neither applies to a metallic currency.

Once pegged to a ratio, the buying power of the dollar is related to the actual buying power of gold. Gold naturally inflates at an incredibly slow rate.

The notable difference being that the purchasing power of Gold has increased by something akin to 300% and the purchasing power if the dollar has reduced by 81%.

Foreign exchange
A brief post on competitive devaluation

Oct 31st 2011, 16:21 by R.A. | WASHINGTON

AFTER the First World War, most large economies worked to get back on the gold standard that had facilitated a huge increase in trade prior to the war. Inflation had been a problem for most every economy during the way and immediately after, and so different countries opted for different strategies in returning to gold; some chose to go on gold at new rates reflecting their higher price levels while others, like Britain, opted to pursue years of painful deflation in order to return to their pre-war gold rates. The end result was a world in which several important currencies were structurally overvalued while others were undervalued, a situation made worse by a substantial imbalance in the distribution of the world's gold supplies. America and France had accumulated substantial gold reserves while Britain and Germany had very little gold. Countries without much gold were at constant risk of speculative attack.

When the Depression struck, this gold standard became a noose around the necks of struggling economies. Economies with overvalued currencies struggled to compete in export markets and ran trade deficits which led to gold outflows. These prompted central banks to raise interest rates to retain gold, which had the effect of further gutting weakened economies. Other countries often responded in kind, lest their gold reserves come under threat.

The situation deteriorated until countries began going off gold. When an economy left the gold standard, several things happened. First, it typically experienced a substantial devaluation against gold bloc economies, which supported domestic producers (at the expense, of course, of those in the gold bloc). Second, central banks in economies off gold were freed from the need to raise rates to protect reserves, and monetary policy was thus far more expansionary in these countries. Third, gold bloc countries responded either by themselves succumbing to pressure and leaving gold or by meeting the loss of competitiveness with the erection of high tariff barriers or both.

Unsurprisingly, leaving the gold standard was very good for an economy. Importantly, the benefit of leaving gold didn't much erode as others did the same, implying that the freeing of monetary policy was at least as important as the boost from devaluation. Unfortunately, the fracturing of the world into tariff-protected currency blocs did help pave the way toward the military conflicts that followed.

What's the point of all this? This morning, the Japanese government intervened in a significant way to bring down the value of the yen. It's not the first time Japan has done this in recent months, and neither is it the only country to try and devalue its currency; the Swiss National Bank famously did so after the franc's flight-to-safety status led to significant appreciation and pain for domestic exporters. What are the potential implications of a world in which many large economies are weighing the benefits of competitive devaluation?

The first point to make is that Japan is not particularly good at this game. Large, one-off interventions against a backdrop of sustained deflation are unlikely to be effective; markets know the yen will be going back up again in no time. Second, a real intervention would be very good for Japan. Consumer prices are falling in Japan, as they tend to. Were the Bank of Japan to make a concerted effort to print yen and sell them for other things—dollars, say—then deflation might finally be vanquished and the economy might stumble into sustained growth for a change.

Third, that kind of intervention would have a direct, negative impact on other economies, whose currencies would appreciate relative to the yen. This negative impact could easily be offset, however, if those economies were to respond by printing their currencies and using them to buy yen. No one would get an exchange rate advantage, but broad monetary easing would lead to reflation, a higher level of aggregate demand, and better conditions in depressed economies. If everyone plays along, the net effect is of a coordinated monetary stimulus. Fourth, however, if other central banks are reluctant to play along, then elected governments may respond to pressure from foreign exporters by adopting trade restrictions. This was the common response among gold bloc countries to devaluations by other economies.

In sum, a crummy economic situation will encourage economies to pursue competitive devaluation. This action needn't be globally harmful and it could kick off a beneficial series of imitative efforts, approximating coordinated stimulus. There is a risk, however, that it will lead to a troubling unravelling of liberal trade regimes. It would therefore seem to be a good idea to skip right to the coordinated stimulus, which would reduce the pressure for risky economic policies in the first place.

About Free exchange

In this blog, our correspondents consider the fluctuations in the world economy and the policies intended to produce more booms than busts. Adam Smith argued that in a free exchange both parties benefit, and this blog's aim is to encourage a free exchange of views on economic matters.

youbedead wrote:I hope you like not having computers, cell phones, ipods, CD or anything technical, because those all use gold. The reason gold was useful as a currency was that it was useless, now that it has a purpose it makes for a very, very bad currency.

sebster wrote:

AustonT wrote:The downside to a fiat currency is that it IS subject to runaway inflation, and jagged devaluation. Typically neither applies to a metallic currency.

It is subject to runaway inflation, where government is inclined to print vast amounts of surplus currency. This was a serious problem in the 1970s in many developed countries, but has since been brought under control by making the reserve bank (or central bank, or whatever each individual country chooses to call the body tasked with control of the money supply) politcally independant and tasked primarily with keeping inflation under control.

As you can see from the following graph, inflation in the US in the last 25 years has been outside the upper limit of the target range of 4% three times, and not since 1991. In fact, you actually the rate dipping below 2% as often. Across the whole period it has averaged 2.96% in that time.

Basically, you're trying to fix a problem that doesn't exist.

Once pegged to a ratio, the buying power of the dollar is related to the actual buying power of gold. Gold naturally inflates at an incredibly slow rate.

Except that isn't true. Lets look at the last 25 years of gold prices... The number of times gold grew in price between 2 and 4% was exactly no times. In those 25 years, gold declined in value on 9 occasions, and grew in double digits on another 9. In amongst all that fluctuation it averaged 5.9% growth, well beyond the inflation rate desired for sustainable economic growth.

The notable difference being that the purchasing power of Gold has increased by something akin to 300% and the purchasing power if the dollar has reduced by 81%.

You really, really need to understand that money is just a piece of paper we use for trade. It has no inherent value. It doesn't matter if the dollar itself is less valuable, if there is more of it. What we desire of money is that it is stable, and doesn't get in the way of people trading goods and surpluses.

This is something fiat currency has delivered for 25 years. It is something gold would not have delivered.

Melissia wrote:The author of the FreeExchange blog on Economist?

AustonT wrote:I'm confused as to what you think the Fed did between 1913 and 1970 if they weren't an apolitical reserve bank tasked with keeping inflation under control.

The CPI-U is a more accurate representation of inflation. It indicates that since 1982 inflation has risen 120%. If real inflation rate averaged 2.96% over 25 years to 1986 that runs out to 74% I find it hard to believe that between 1982 and 1986 the inflation rate was 46%. te missing percentage in inflation number comes from the BLS calculations being based off the core CPI whic doesn't include food or energy. So if you don't eat, get cold/hot, watch tv, turn on the lights...you get the point. Inflation is fine.

You are confusing the market price of gold as a commodity with the official price of gold.

The price of gold as a commodity is driven by fear, and speculation. like oil. The official price of gold is determined by actual availability.

You really, really need to understand that the more dollars there are the less valuable they are. That does in fact matter.

You even said so. 75-120% inflation over 25 years in not stable.

I love when the argument devolves into "it has no inherent value" niether does gold or anything else. But if you would like to exchange chickens for pens and oil at the grocer that's up to you.