Steve Forbes: Ted Cruz's Golden Rule

Forbes ^ | Nov 4, 2015 | Steve Forbes

[Isara]

LOST AMID all the fireworks in that CNBC debate of the GOP presidential candidates was the answer Texas Senator Ted Cruz gave to a question about the Federal Reserve, advocating that the dollar be tied to gold. Other than Ron Paul, who has long been a gold-standard advocate, and his senator son, Rand, no other presidential candidate has pushed serious monetary reform since yours truly ran 16 years ago. This is stunning, given the immense damage our central bank has inflicted on the U.S. and the global economy. In fact, few economists, politicians or pundits are even aware of the harm that's been done.

A country can "get it right" on policies concerning spending, taxes and regulation but experience economic trouble if its approach to money is wrong.

The reason monetary policy is so fundamental is that the way we live and progress is through the transactions we carry out with one another countless times a day. Life would be chaotic and our standard of living far lower if weights and measures weren't fixed-60 minutes in an hour, 16 ounces in a pound and 12 inches in a foot. We assume, for instance, that a gallon of gasoline is the same volume each day.

...

Senator Cruz's endorsement hardly means that the dollar will soon be fixed to what Keynes wrongfully called the "barbarous relic." But it will help start a much needed discussion and debate-and, critically, an education in how a gold standard actually operates and what needs to be done to have it function properly.

...

The reeducation effort must start. Kudos to Senator Cruz for bringing this crucial subject out of the closet. Truly, our future well-being and that of the world depend upon it.

[Isara]

FYI

[cripplecreek]

There is a reason gold and other precious metals become a hot commodity in times of economic uncertainty.

[ctdonath2]

Despite Cruz being my by-far top choice, the “gold standard” rhetoric loses me - not because I don’t like it, but because it’s practically impossible.

There simply isn’t enough gold.

Exact figures I’ve computed prior escape me at the moment, but it’s something like:
- we’d have to acquire around 1/5th of all gold ever mined
- gold price would have to increase some 33x what it is now.
Ain’t happening.

What we need is a proper way (I’ve not yet developed an opinion on how) to have a currency whose sum total represents the total value of the USA, increasing quantity of units as the national value increases a la annual GDP, without changing the amount (”slice”) of value represented by that currency unit.

[ctdonath2]

BTW: I don’t believe the USA has any meaningful “gold reserves”. Maybe a few pallet loads being shuffled around, but I’m assuming Fort Knox et al is practically empty relative to “let’s go back on the gold standard” quantities.

[thackney]

we’d have to acquire around 1/5th of all gold ever mined
gold price would have to increase some 33x what it is now.

Do not the second greatly change the first?

[ConservativeDude]

I love Steve Forbes. I would have gladly voted for him if he ever would have made it to my state’s primary.

too bad he was a terrible candidate...but I sure love his ideas, and his writing....

[Alberta's Child]

I don’t think fixing our currency to a gold standard requires a government to own enough gold to back every dollar in circulation. I’d be curious to hear what other folks here have to say about this.

[Don Corleone]

Returning to a Gold standard would probably crash the worlds economies.

[wattsgnu]

In the article, it states, “ A country doesn’t need a pile of gold to make a gold-based arrangement work any more than a builder needs to have a warehouse full of measuring tapes to construct a skyscraper. “ I have to admit to being ignorant to how the gold standard works and how our system now works. (And I consider myself educated- college degree, electrical engineering.) I am weak on other economic issues like QE as well.

[ctdonath2]

Without trying to recount the details, IIRC both points were required together.

[thackney]

A quick math checks shows greatly different numbers than your claim.

1,390,000,000,000 dollars

http://www.federalreserve.gov/faqs/currency_12773.htm

1,123 dollars per ounce

http://www.jmbullion.com/charts/gold-price/

So the dollars in circulation equals at current prices

1,237,535,613 ounces or,
77,345,976 pounds or,
38,673 tons

In 2011, this stated all the gold that had ever been mined at:
181,881 tons

http://www.numbersleuth.org/worlds-gold/

So at current prices, 1/5 of the existing gold.

If buying gold to make that happen quadrupled the price, it would drop to 1/20.

And further, would it have to only be gold?

[Alberta's Child]

There was interesting phenomenon unfolding a few years ago that might offer some insight. The long story short is that Tide laundry detergent had become something of a “currency” for drug dealers for a whole bunch of reasons. The parallels to a gold standard were interesting.

[thackney]

A better source on the gold existing states:

At the end of 2014, there were 183,600 tonnes of stocks in existence above ground. If every single ounce of this gold were placed next to each other, the resulting cube of pure gold would only measure 21 metres in any direction.

http://www.gold.org/supply-and-demand/supply

183,600 Metric tonnes equals 202,384 short tons

That changes my estimate above a little, 10% easier to accomplish.

[TBP]

I agree with Ted and Rand on this.

And while we’re at it, let’s go back to the old bills.

[Rodamala]

There was interesting phenomenon unfolding a few years ago that might offer some insight. The long story short is that Tide laundry detergent had become something of a “currency” for drug dealers for a whole bunch of reasons. The parallels to a gold standard were interesting.

Only the "good sh*t" that is loaded with phosphates!

[Impy]

The idea of it sounds good but I wonder if it’s realistically viable.

[ctdonath2]

(IANAEconomist, just a highly opinionated idiot.)

Go study how money supply figures M0, M1, M2, M3, etc layer & interact. For purposes of this post, M0 is the total value of physical currency. What you’re basically doing is replacing M0’s current set of fiat paper dollars with gold. There’s currently something like M0 = $4T in actual physical US currency. From there every other “dollar” is really an IOU, with each M# throwing another layer of fractional-reserve IOUs on the stack.

Big problems happen when too many people try to move their Mn money back a layer at once, running out of available M(n-1) money to replace it - the worst case being a “run on banks” where everyone tries to withdraw their savings into cash (M1 to M0 conversion, insufficient M0 funds).

Methinks a proper/tolerable conversion to a gold standard would be making each current physical dollar (ALL OF THEM) tradable for gold. Alas, that would require something like 150,000 tons of gold. Unfortunately, that’s pretty much all of it - we’d need all the gold ever mined, so that’s not happening ever.

That leaves us with the only viable solution being creation of a fractional-reserve “M-1” money supply, with something like a 10:1 dollar-to-gold holdings ratio. ...which still leaves us with the problem of acquiring 1/10th of the gold ever mined and getting it into Fort Knox (and securing it). Increase that to or above 100:1 and we approach possible (mayyyyyybe...) but are now faced with the increasing potential of a “run on gold” where more people want to trade their dollars for gold than there is gold available. And I’m not going to back a system where I _can’t_ go to the Reserve, Treasury or Mint and do a 1:1 exchange of paper dollars for metallic gold, any more than I will put my money in a bank where I can’t cash out on demand (small fee grudgingly tolerated).

All this boils down to the problem that if we go to a tolerable gold standard, all the gold will be “cashed out” and hoarded - causing system collapse.

Nixon et al pulled off the greatest heist in history when making it illegal to own gold (as currency), then took us off the gold standard.

“Bad money drives out good.” That economic principle explains why we’re off the gold standard, marginalizing cash, swapping debit cards for credit cards, transitioning our possessions from outright ownership to rental, running up an un-repayable national debt, and “quantitative easing” our currency onto the virtualized debt of “$0 = ($1) + ($-1)”. Reversing the trend is hard to do individually, and at this point d@mn near impossible nationally.

A gold standard is a great idea.
I don’t see how we can get back to it without completely destroying our economy.

[ctdonath2]

“A country doesn’t need a pile of gold to make a gold-based arrangement work any more than a builder needs to have a warehouse full of measuring tapes to construct a skyscraper.”

More like: a skyscraper isn’t a solid block of steel 100 stories high, but you do need sufficient iron girders & concrete slurry to enclose & support the airspace it occupies. Still a LOT of iron & concrete involved.

[wattsgnu]

Random fact: I read that one near earth asteroid called 433Eros has been estimated to have 125,000 metric tons of gold (as well as other precious metals). I am betting that more commercial interest will be in mining asteroids than going to Mars. Of course it would crash the price of gold here.

[Georgia Girl 2]

Yes my problem with the gold standard is that first the US has no gold to speak of and also it would push gold to about $66,000 per oz. I don’t see how you make that work although I wish we could.