This kind of information boils my blood. There's an entire generation of thinkers out there that just need to step aside.....
What’s wrong with the logic in this article? My comments at the end (cuz I know, right?).
Stop The Madness: Make The Dollar As Good As Gold
Mar. 30 2011 - 1:04 pm | 3,451 views | 0 recommendations | 4 comments
By LOUIS WOODHILL
Unstable money creates anxiety. By now, the dollar has been unstable enough, for long enough, that this anxiety is popping out everywhere. TV commercials are urging people to buy gold, sales of “survivalist” books are rising, and consumer confidence is plunging. And, on March 22, “money” featured more prominently than tax cuts at a “Supply Side” conference in New York City, at which luminaries such as Robert Mundell, Steve Forbes, Arthur Laffer and Larry Kudlow offered their views.
Many of the participants in this conference called for “a return to the gold standard.” However, it is important to recognize that there are at least four distinct types of gold standards, and that some will work and some will not.
The most “fundamentalist” type of gold standard could be called the “Specie Standard” system. Under this system, the dollar is defined as a fixed weight of fine gold, and the monetary base consists of gold coins. Paper money is allowed, but only as warehouse receipts for gold coins. The size of the monetary base is determined by the amount of gold that is presented to the Treasury (or private banks) to be minted into gold coins. There is no central bank, and no attempt by government to influence interest rates. Fractional reserve banking is not allowed.
Proposals for setting the gold value of the dollar under a Specie Standard range from $20.67/oz (the gold price in 1930), to $14,300/oz, which is the gold price required to make it possible to replace all of M1 (currently about $1.9 trillion) with coins minted from half of the U.S. government’s gold holdings (which currently total about 261 million ounces).
A Specie Standard would not work. Gold cannot be used as money — there isn’t enough of it. Setting the gold price high enough (more than $14,000/oz) to make it possible to replace all of the dollars of M1 with gold coins would produce explosive inflation (as the rest of the world gleefully sold us gold and bought up our assets), followed by a steady, grinding deflation.
If it were possible to get past the “start up” issue, a Specie Standard would be operationally stable — it would not be prone to sudden, acute financial panics. However, it would yield a chronic deflation that would produce high unemployment and would likely make long-term debt financing too risky (for both lender and borrower) to be undertaken.
The second basic type of gold standard could be called the “Classic Gold Standard” system. This is what we had in the 1920s. Under this system, gold is the “final” money, and the dollars of the monetary base are redeemable for a fixed amount of gold upon demand. However, the monetary base consists not only of gold, but also of paper money and bank reserves created by the central bank. The size of the monetary base is under the discretionary control of the central bank, but is ultimately limited by a “gold coverage” law. The central bank sets short-term interest rates, and fractional reserve banking is allowed.
A Classic Gold Standard also will not work. Any monetary system that uses gold as money will produce deflation, as the economy grows faster than the supply of gold. Also, the central bank and the (fractional reserve) banking system would face a nearly irresistible temptation to use their ability to create money to hold the deflation at bay as long as possible. Unfortunately, this would cause deflation to build up in the system, and would guarantee a banking panic/liquidity crisis/economic collapse at some point. This is exactly what happened in 1930.
The third basic type of gold standard could be called the Bretton Woods system (after the monetary system that was used from 1948 to 1971). Under a Bretton Woods system, the monetary base consists of fiat dollars (both currency and bank reserves) created by the Federal Reserve. The monetary base is convertible into gold at the Fed or the Treasury (in the case of the actual Bretton Woods system, at $35/oz, but only for foreign central banks). The Fed sets short-term interest rates, and fractional reserve banking is allowed.
A Bretton Woods system could work. As in the case for all gold standards, setting the gold conversion price at the correct level would be crucial.
The actual Bretton Woods system failed because the Fed did not manage the size of the monetary base so as to keep the free market price of gold equal to the official price. However, a Bretton Woods system can be “attacked” via mass conversion of dollars into gold. It also creates the potential for the Fed to (mistakenly) provide opportunities for arbitrage between the official gold price and the interest rates set by the central bank.
The fourth type of gold standard could be called the “Dollar Bill” system. The name comes from the title of the bill that Congressman Ted Poe (TX-02) is planning to introduce into the 112th Congress for the purpose of fulfilling Congress’ Constitutional mandate to “…coin money, (and) regulate the value thereof…” (Article I, Section 8).
Under a Dollar Bill system, the monetary base consists of fiat dollars (both currency and bank reserves) created by the Federal Reserve. The Fed is not allowed to set interest rates, and it is relieved of responsibility for promoting full employment. Instead, the Fed is tasked with employing its Open Market operations to adjust the size of the monetary base so as to keep the COMEX price of gold as close as operationally practical to a target gold price. Fractional reserve banking is allowed.
The target gold price is set by naming a “date and time certain” sometime in the near future, and then fixing the target price at the market price on the COMEX at that moment. This is similar to the approach that was used to establish the final exchange rates for the currencies that were replaced by the euro.
A Dollar Bill system could work. Unlike a Bretton Woods system, it cannot be “attacked” in an effort to drain Fort Knox and panic the Fed. And, because the Fed is not involved in setting short-term interest rates, it creates no opportunities for arbitrage. The mechanism used for setting the target gold price would force the markets to disclose “what gold is really worth”, thus avoiding both inflation and deflation at startup.
The Fed’s discretionary, fiat money, “dual mandate” system is failing. It is creating inflation, impeding economic growth, and provoking rising anxiety. It is sowing the seeds of a sudden, violent “dollar crisis”. It is time to stop the madness and make the U.S. dollar once again “as good as gold”. The “Dollar Bill” will show the way.
Finn: The main flaw in all of these past and future scenarios and anything else anyone could dream up is that the price of gold has to be “fixed” or “set”.
The Classical gold standard did NOT cause inflation. Fixing the price of gold caused inflation. Had gold been floating they could simply have produced more dollars to accommodate transactional needs and the price of gold would have gone up.
The Bretton Woods system failed because again, they fixed the price of gold. Any “attack” conducted on the “system” is converting dollars to gold because you are printing too much freaking fiat!!! Politicians hate to be discovered. They don’t like the “little people” knowing what they are up to. If gold was floating and the price kept rising we would all know what they are up to.
Today this system is failing and the price of gold is rising because of their nocturnal, nefarious activities (spending). Now all they can do is manage the price of gold. What you are seeing is a controlled retreat from a losing battle. They will lose and they know it.
The real reason you do not see any real solutions (like simply letting the price of gold float) is because the banks and wealthy of the wealthiest want all the gold for themselves so they can always maintain control and power. If the people have metal, you have power; spending power. As it is all your saved up fiat (dollars) are NOTES. They are representations of debt. They can be canceled at any time and devalued at will and there’s nothing you can do about it. Chump!
No one can devalue your silver and gold. It simply is what it is. It has it’s own inherent value regardless of what anyone thinks about it or regardless of anyone’s opinion about it.
It is what it is and you have to deal with reality or reality will deal with you!
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