Boost Employment By Ending The Fed And Resurrecting The Gold Standard

Forbes ^ | 9/08/2011 | Bill Flax

[billflax]

Another month and another lackluster employment figure. Both parties profess to be fixated on job creation. Where are they? In normal recoveries GDP booms and firms invest in exciting concepts that spur new hiring. Why not now?

Despite corporate profits exceeding $1.5 trillion in the recent period, which elevated corporate cash balances over $2 trillion – both records – few firms dare expand. Uncertainty paralyzes both those with capital to invest and those with investments seeking capital.

Several probable causes catalyze this economic confusion: looming tax increases, time-wasting regulatory demands and anti-business rhetoric emanating from Washington. All have merit, but not spoken of enough is a more effective economic cure, which would be to reform our monetary system.

Money is so fundamental to investment that bolstering the dollar represents the surest route to prosperity. Unfortunately, the dollar glides downhill as if on a rollercoaster. It suffers new lows against a host of currencies. Gold poises for $2,000/oz.

[Travis McGee]

You are so right. The basic ignorance concerning money and gold on this thread is truly embarrassing.

[Durus]

I’ve been here for awhile and I’ve never seen any zotted for advocating the constitutional principle of the gold standard, or calling Bush a pro illegal alien RINO.

[IncPen]

Small chance of that happening now
Global markets makes it preposterous

Dunno. The point of FDR's scheme was to take control of the most solid means of storing wealth (gold), basically to break the public's trust in it by confiscating and devaluing it.

And there's more than one way to break the public trust in trinkets like gold. Because if there's nothing for the middle class to invest in, they'll have no choice but to throw in their fate with the Government.

Consider that home ownership until very recently was considered an almost faultless investment. Home prices always go up, right? The only time they go down is when Government screws up-- hello California! So... how could you destroy peoples' faith in the home as a means of storing and protecting wealth? By legislating its devaluation, via the Community Reinvestment Act.

Before that they broke the banks, the auto companies, and attacked the Christians.

And I have no horse in the current runup in gold, it certainly seems justified on some level.

But when you look at the playing field you have to scratch your head; you've got a guy in the White House who began his political career in Bill Ayers' kitchen, who we know consorts with Soros and has a grudge against this country.

Would they like nothing better than to runup the gold market, then crash it in a heap, taking out much of the middle class?

Isn't that essentially what FDR did?

[PieterCasparzen]

However, cheapening the alloy is a matter of currency more than money.

All currency is money but not all money is currency. Demand deposits are money. A checking account has money in it, but not paper currency.

The number total dollar value of all paper U.S. dollars in the world is far less than the total dollar value of all U.S. dollars. I believe there are somewhere the neighborhood of 1 trillion in paper dollars, but the total of U.S. dolars in the world is I believe somewhere around 8 trillion (a figure which includes the paper dollars).

Not only would the paper dollars have to be "backed" by gold, but all dollars would.

At the current market price of $2,000 per troy ounce of gold, there is somewhere around $8 trillion worth of gold - in the world.

Now, since the U.S. government can't simply demand that everyone in the world give them all their gold, the number of U.S. dollars backed by one ounce of gold would have to be much higher than 2,000.

And voila - we have our devaluation problem the moment the U.S. government sets a conversion ratio. Say they set it at $24,000 per troy ounce. Let's just say the have 334 million ounces, and we start off using our new gold-backed dollars.

Now let's say we're the U.S. government and we want to create another trillion dollars. Do we need to somehow acquire more gold, specifically, another 41,666,667 troy ounces ? We could print dollars or write a check and use that money to pay a gold miner for the 41 million ounces of gold. And then the government, as long as it just put that gold in a vault - and never touched it - would have backed the dollars with gold and put the dollars into circulation. Wonderful.

But let's put our reality hat on for a moment. Suppose the miner just doesn't have that much gold when they come to buy it. This will inevitably happen some day years from now. Will the government just smile and shrug, when years from now there are 350 million Americans trying to conduct business instead of only the 300 million there are today, and these people start clamoring that the $8 trillion money supply is just not enough any more, there have to be more dollars because there are more people ? Certainly not. All they need to do is arithmetic. They say to themselves - we need another 1 trillion dollars in the money supply and we can't aqcuire enough gold. Let's just say each troy ounce of gold is now backing $27,000 instead of $24,000. Now let's create $1 trillion and spend it to get it into the economy - woo-hoo ! Every dollar is now backed by 1/27,000 of a troy ounce instead of 1/24,000 of a troy ounce. Who cares - everybody's happy - the U.S. dollar is backed by gold !

I've heard (and haven't verified) if you look at how much gold it takes to buy a suit now, it takes about as much as it did 200 years ago. A suit costs a lot more now, indicating that the government has devalued the currency by a great deal.

Gold was $300 per ounce about 10 years ago. That would only buy a cheap off the rack suit. A benchmade suit would start at somewhere around $5,000 both then and now; some high quality cloth and some extras and you're talking $10,000. Gold is now about $2,000 per ounce. That will buy more than off the rack, but perhaps only a made-to-measure suit.

There are various factors at work in an economy that functions well which cause inflation and a different concept, the need for more money in circulation.

Everyone wants to gather up wealth during their life, many are successful at it. As their net worth goes up, their need for on-hand cash goes up as does their transaction volume in money units, i.e., dollars. People earn more as they get older. People want more income and wealth as they get older. It beats being broke. Consequently, there is a propensity for the economy to have higher transaction volumes and consequently a need for more money in the money supply.

Businesses all want to have higher sales every year. This fact, coupled with people having increasing incomes and the desire for stuff helps push prices up.

From time to time, the supply of various things might go up faster than demand. Land in a city that's falling out of favor. A abnormally large corn crop. Etc. That will make prices go down until supply is worked off or demand rises.

Also, the population creeps up over time. Every person is a new financial entity that has a job, a bank account, a place to live, a car, etc. They earn money in their job and deposit it into their bank account. So 330 million people require a larger money supply than 320 million if they are both populations in the same nation around the same time, in other words, all other things being equal.

There are more variables in motion in an economy that most people realize. Those who have invested in gold, at the moment, are playing a few old riffs to try to gin up interest amongst everyone to buy gold, as that will help propel the price higher. There are also those who are simply mixed up and push the old riffs because they believe them. Commodities can be a good alternative asset to cash when the value of the currency is under assault or in times of high inflation. Aged cigars might be preferable to cash if the cash isn't needed at the moment. Gold is simply the king of commodities because of it's relative rarity and it's inertness. But we must remember that commodities do not produce a return and therefore would not be nearly as attractive if the supply of U.S. dollars was not so irresponsibly increased and was better managed and if government spending comes under control so government debt can start being reduced. The fall of 2012 may well prove to be the time to sell one's gold.

Bottom line, prices of everything have changed over time, and productivity levels and technology levels have dramatically increased over time and those are the primary driving factors of standard of living, earning potential and the accumulation of wealth.

Fiat money eliminates one problem with commodity-based money, that of the supply and demand for the underlying commodity itself affecting the value of the money.

But even with that problem eliminated, the greatest challenge with money is still found in the combination of it's necessary characteristics:

A) the authorization of it's creation is by the government so private entities don't run wild producing it.

B) the amount in circulation must be maintained at levels that are both adequate to facilitate the volume of transactions in the economic system and not so large as to invite poor decisions by the entity in the economic system through which the superfluous money is introduced, whether they introduce it via spending or lending or investment.

C) Governments are people, and they have a tough time resisting the urge to create too much money.

Increasing efficiencies dictate more goods should be produced per person, thus lowering the cost.

An overgeneralization that shows only part of what's going on. If you consider that with one item, like computer memory chips, the statement holds true if there are no other intervening factors significant enough to disrupt the downward trend. We are seeing the effect only of technology increases in a single type of technology.

If we look at all goods and services that we buy today - as a whole (sum them up) - we see there are other factors involved. Things available today were not available then. If you look at how much the average Joe earned back then, what he had to buy and how much those things cost, today's average Joe gets a lot more bang for his working hour. If we wanted to live the same simple life as people did back then, our costs would be far lower - but this is only possible to evaluate theoretically, of course. Think of the "lower cost" of this: we "common people" can travel coast-to-coast on an airplane for perhaps a few days or few weeks pay. How did King George travel ? The most common person today in a civilized country would consider themselves "roughing it" if they had to live like the king did then. The common man today is much wealthier than hundreds of years ago, and does not mind spending what would seem like untold amounts because he earns what would seem like untold amounts to the man of yesteryear.