The flaw in your thinking is that you are using todays inflated dollar totals that our GDP is expressed in to determine how much gold we ‘need’. If we express todays GDP (approx $14 trillion) in 1913 dollars, it comes out to around $638 billion. That isn’t too far off of what the GDP of the US was in 1913, suggesting that nearly all of our GDP ‘growth’ to this point has been inflation.
It is only a fair approximation, to be sure, because we do have a larger economy now than then by a pretty large factor. But in net terms we haven’t progressed very far off the dime.
World-wide GDP: $65T.
http://en.wikipedia.org/wiki/World_economy
Total Gold Ever Mined: 10 billion ounces.
http://money.howstuffworks.com/question213.htm
Okay. Let's monetize the economy of the world in ounces of gold. $65T / 10B = $6,500 per ounce.
That's what I've been asking, but nobody has been answering.
The problem with that math is that it is just the amount of productivity (GDP) expressed in ounces of gold for one year. I don't think that's the right comparison, since the value of the world is far more than one year's production. So, based on this calculation, the current (admittedly paper) dollar value of an ounce of gold is certainly "worth" at least one year's production ($6,500 / oz) or possible vastly more than that.
And, let me for argument's sake take the gold folks' arguments at face value, and that gold is a proper measure of value, not paper money.
Why is it then that gold does not trade for at least $6,500? If the economics of gold are so true, the market will devalue paper money, and someone is going to get rich hoarding gold. It must really be worth at least $6,500 of our readily combustible paper dollars. So, someone who is really smart and can put together enough of the lousy paper capital can crash the entire paper money system by buying all the gold in the world at less than $6,500. The Hunts should come back from the grave and corner the gold market.
The fact that this has not been done tells me something. It tells me that it is not a proper perspective to just look at the value of tradeable stuff each year in terms of gold. I'm no brilliant economist (just a regular-joe econ BA). But the gold-backed currency argument just doesn't pass my sniff test. It is wrong by about an order of magnitude ($6,500 v. $800 / oz today).
Huh. I've been thinking about this for awhile, because clearly the Fed is willing to just print dollars, a horrible idea.
When dollars and productivity change at the same rate, the value of the dollar is stable (see Friedman). When dollars expand faster than goods and services, you get inflation. The Fed may be institutionally incapable of resisting the impulse to inflate. Been there done that, gonna happen again. This is a serious argument in favor of a gold-backed currency. I get it.
But if the economy expands again in the future by 10X+(which it will, we human critters are incredibly capable), will the value of gold eventually equate to a year's pay for an ounce? Why not?
I feel (but can't prove from my little desk) that a pure and perfect gold standard is a constraint. Gold cannot be voluminous enough to support a medium of trade given the vastness of trade.
I'm more in favor of a basket of commodities approach. I would like to see a currency backed by several of the major available liquid commodities. I'll propose a list from scratch:
Gold, Oil, Copper, Wheat, Coffee, rolled steel, lumber.
There. I'll go with you gold-bugs to an asset backed currency, but let's just have one that is expansive and broad enough to avoid constraining the massive economy we are able to create.