Posted on 08/11/2005 6:52:22 AM PDT by thinking4me
I have been preaching the same to the woe-is-me crowd about trade and current account deficits.
I am not a Trump fan but I recall during the '80s real estate and S&L crisis that he owed the banks lots of money he couldn't pay. They threatened him an he told them to loan him even more so he could stay in business or take over the mortgaged property and run it themselves. He got the money and seems to be pretty solvent now. However, I bet he still owes the banks a ton on new loans.
The really big boys like to talk about leverage as the golden key. That boils down to operating on someone else's money.
That keeps the banks happy because they like moving money in large chunks rather than millions of nickel and dime loans, and it keeps the big players happy. That is also where the large debt comes from, that and hundreds of millions of credit card transactions, and it is all part of the system. To eliminate it is to throw the brakes on the entire world economy.
It is idiocy to consider going back to the gold standard. After all, over time the equation has been reversed. It is no longer what is a dollar worth in gold but what is gold worth in dollars.
In 1, 5, and 10 years out what do you see gold being worth in dollars ?
Whatever the hype will take it too. Gold is only good for making jewelry and some industrial applications. Gold is like anything else, what someone will pay for it. Suppose you have a ton of it. What are you going to do with it? Same as diamonds or oil. It is a commodity. It is not rare, it is only historically mysterious and "precious". To use it you have to exchange it for something else. Right now that is likely to be US dollars. If the dollart collapses you will have more problems than a hoard of gold will solve.
I agree with you that it would be far too painful for us to revert to the gold system as a means of exchange. However, one thing that gold did provide when it was the backing of our currency was a limit on the expansion of the money supply and how much our government could spend. Without this limit our government has inflated the money supply to the point that the dollar has lost 95% of it's purchasing power since we came off the gold standard. I'm not suggesting people hoard gold. But I do believe you will see gold outperform other investments (stocks, bonds, real estate) going forward the next 10 years.
With a gold standard, with a certain percent of gold required to be at Ft. Knox, and the price of gold fixed at #35.00 per oz., as it was back then, how does the money supply expand to accomidate increased economic activity and increased population? Do you keep the supply fixed and make each dollar worth more and more gold, keep it fixed at the $35/oz price, or what? How would you provide for expansion?
A really good article about the gold standard was written by Alan Greenspan of all people back in 1966. Here is an excerpt I think answers your question:
When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade.
Anyway, like I said when I agreed with you earlier I don't think we can return to the gold standard. It would be far too painful for our economy to handle in the short run.
I do believe investing in gold/silver and precious metal mining companies will offer better returns on investment than general stocks, bonds, and real estate for the next 10 years.
They may but who knows? The investment world seems to have become more of a casino than a business proposition. However, precious metals are more dependent on hype and manipulation than others unless they are considered, the companies not the metals, as providing raw materials for production, like iron and coal.
I agree, the general stock and real estate markets have taken on a casino mentality.
"However, precious metals are more dependent on hype and manipulation than others"
Really ? When you open the Wall Street Journal or listen to CNBC or pick any mainstream business publication, how often do you hear/read stories about precious metals ? Hardly ever ! What you do hear about is Google, Real Estate, and everything else the establishment wants consumers to buy.
Gold and Silver by any number of valuations are at all time lows. You want to talk manipulation ? There is currently more silver contracts sold short (push price down) on the futures and options exchanges then there are actual ounces of available silver in the world. How can you sell more of something than actually exists ? Silver and Gold are manipulated downward because price rises in these two commodities have always been the canary in the coal mine of inflation.
Perhaps I should have said, every time I read about gold, etc., it seems to be gloom and doom hype by gold pushers.
The commodities market is the ultimate casino.
And it seems every time I or someone else attempts to have a discussion about the economy and precious metals as an investment, accusations of hype and gloom n' doom are thrown out as the counter argument. It does not matter how much of a logical/polite argument is presented, it ends with that.
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