Posted on 01/04/2011 9:49:48 AM PST by Toddsterpatriot
In the new Congress, Ron Paul (R-Texas) will head the House committee that oversees the Federal Reserve. Thanks to the title of his book, we know he wants to end the Fed and paper money. But what will he replace it with? The short answer: metal-based currencies.
I recently participated in a hour-long radio debate on the Progressive Radio Network's Freedom News Hour with two Paul supporters who wanted to take me up on the challenge of being proven wrong in my disagreements with seven of Paul's points about the Fed. I really enjoyed this debate and learned some important things.
Of these, none is more significant than what my debate partners believe Paul would do if he could end the Fed. According to them, Paul isn't ready to go directly back to the gold standard. Instead, he wants to keep the dollar and add three more currencies. Those would be based on gold, silver and copper.
(Excerpt) Read more at dailyfinance.com ...
Haven’t had time to read the article (first week of law school Winter/Spring semester) but I agree with Forbes and Friedman on the idea of a gold (or silver) standard.
Okay, so even if we go to metal backed currencies, the civil war proves we can and will come off it in a crisis. So it's really not secure like it's been sold. Everyone who thought their dollars were backed by gold suddenly saw 78% inflation over three years, because we can come off it with a simple legislative act.
And of course the value of the dollar popped right back after the war right? Wrong. It would be 30 years before the CPI was back down to 8.54.
How about these other episodes of currency instability while on gold? Did we come off it these times too?
Yes, some things just never change, like government ripping off the citizenry via currency debasement.
Ron Paul is a NUT!
http://www.minneapolisfed.org/community_education/teacher/calc/hist1800.cfm
From 1866-1896 was a period of persistent mild deflation. We were expanding fast as a nation, and the gold/bimetallic standard was unable to keep up, even as new sources of the metals were discovered. That is one of the chief disadvantages of the gold/silver standards. Limited monetary supply and debasement are its two greatest flaws.
The gold standard, or the bimetallic standard, or the debt standard; it doesn't matter. Legislative acts can upend them at any time. Every monetary system has its advantages and disadvantages. Today's has the great flaw of debt piled upon debt until the current system comes apart because of???
You guessed it. Limited money supply making it unable to pay interest on the debts incurred. Even running the proverbial printing presses can only work for so long. The debts keep being incurred, and in larger amounts, as money is pumped into the system, in order to create economic activity, creating ever increasing interest payments. Eventually we run into the hyperinflation problem. The FED has avoided it rather deftly so far. But they are bailing water right now, not fixing the holes. Congress is supposed to do that, and they haven't. They have been pouring water into the boat as fast, or faster, than the FED can bail it out.
Housing isn't a very good indicator of deflation right now because the market for real estate collapsed, and for the reasons I just listed. Autos had much the same problem. They priced themselves right out of a market. I maintain that we are in a mild inflationary period that has the potential to get out of hand.
The other falsehood is that there are only two options of extremes, the Austrian School or Keynesian. In reality, economic models proposed by people like Milton Friedman and others offered a more rational, and nationally secure approach that based currency on all production or multiple commodities instead of a single commodity- reducing the risk of outside influence and protecting economic interests. There is a reason why economies that are backed by a single commodity fail (with the exception of the Swiss Franc but there are a lot of factors as to why that is strong.)
If we cut out unnecessary spending, we'd have no problem paying interest on our debt.
Thats the part Congress is supposed to fix.
They took advantage of the smoothing of the boom and bust cycle that the FED created. If they hadn’t kept spending, there would be many years left in this currency.
BINGO! Our currency is based on the 'full faith and credit of the United States of America, which, in the past, was worth more than gold. But now, we've relied too much on the 'credit' part of that statement to the point we've over extended ourselves. Our economics are no longer based on the 'faith' in the US- that we will be the strongest producer and consumer, and instead, simply on our credit line.
An analogy, Bill Gates may be the richest kid on the block, but if he maxes out all his credit cards and takes out more than he produces, his wealth means little.
Those are two very great flaws, but I'd add another, the inflexibility on monetary policy relative to fiat money.
We were expanding fast as a nation territorial wise, but economically not so much..."The Long Depression is sometimes held to be the entire period from 1873–96."
Business and the market will eventually forecast and attempt to factor in future deflation or inflation. But deflation is insidious in that it incents people to hold capitol in currency instead of investing it. If you can make 3 or 4% by just holding on to dollars, why invest? Persistent deflation makes for an economy with a very inefficient use of capitol.
"Today's has the great flaw of debt piled upon debt until the current system comes apart because of???
But I don't see that as a limitation of the gold standard. There is nothing to stop congress from borrowing and promising that our children will pay the chinese back in gold. No monetary system will stop congress from borrowing. Only a determined citizenry can do that.
But they are bailing water right now, not fixing the holes. Congress is supposed to do that, and they haven't.
Exactly on Congress. But I don't see the Fed as really bailing water yet because of congressional spending. The FED has kept inflation down, telling me they aren't bailing due to congressional spending.
And while QE does raise inflation fears, I see QE as more a response to current unemployment situation. And I don't see the current unemployment as a result of congressional borrowing, but rather as the result of unwise trade policies, a failure to prepare for the oil price shock, and a failure to regulate derivatives and abusive credit practices.
The gold standard doesn't prevent any of this anyway because it doesn't count for 1.Changes in supply within the market, 2.People's perception of the value, & 3.Government manipulation of the value through controlling the production cycle. Having the currency based on a fixed point like this is even riskier as only one commodity needs to be manipulated to crash an economy.
Imagine a scenario where we have our currency based on gold, and ten years down the future, a South African mine hits a major vein and dumps 500 tons into our market. It would, over night, greatly devalue our currency. Or worse, what if there were a mining disaster in Peru and the courts there immediately froze all mining, with other countries following. Even a temporary freeze would impact the supply and affect value. The result of course would be the government comes in and manipulates the value by printing the 'gold notes' on credit to protect(sic) our economy.. and we have the federal reserve cycle all over again.
So if inflation, deflation, recessions and depressions must happen, why switch to a gold or metals standard? What possible advantage could it have? The only advantage I see is to the largest gold producer which is the Chinese and maybe the currency traders like Soros.
Dunno. How would the gold conversion work?
Gold, beyond a few industrial application, has value only in the mind. Its pretty and its rare but it has almost no utility.
That’s why I was thinking a commodity should be used instead.
I agree, I think a commodity based currency is very risky. And I see Ron Paul's 4 currency scenario as only slightly better. I still see the current Federal Reserve scenario as the best model I've seen.
It won't reign in congressional spending, but commodity based currencies wouldn't do that anyway. And we'd just legislatively pop off any commodity based currency at the first crisis anyway.
Which is why we had to leave the gold standard in times of crisis.
But I don't see the Fed as really bailing water yet because of congressional spending. The FED has kept inflation down, telling me they aren't bailing due to congressional spending.
That may well be true. I really don't know enough about the subject to argue against it.
I think that it is almost that simple. And that hard.
I think the term balanced budget implies to a lot of people not spending more than we take in. But really it implies you just have a plan on where you're going to get the money.
In other words, tax revenue forecast 10% + projected massive borrowings 90% = projected massive spending 100% is technically a "balanced budget".
We always need a balanced budget. But we need more than that. We need spending restraint and fiscal responsibility in the good times, so that we have means in the bad times.
I would never want to tie congress's hands from borrowing in case we have a war and we need to. I think a lot of people want a gold standard because they think it would stop congress from overspending. But only electing people of good character is going to do that.
That is one major concern I have that goldbugs are in denial of. It is too easily influenced by outside forces. The problem with promotion of the Gold Standard is it attempting to treat a cancer by giving someone a bath. Also, too many people believe that the fundamental issue we have with our economy is the Federal Reserve manipulating prices and are under the false notion that Gold can't be manipulated. You usually see misnomers like 'the price of a suit always cost one gold ounce no matter where the dollar is'. That is actually pretty false. Right now, the price of one ounce of gold could buy a high end bespoke suit while in 1899 it would by an every man Sears suit. For that example to be true, gold would only be $200/ounce now.
(I also believe a LOT of those pushing this are highly invested in Gold and are hoping for investment returns- Ron Paul had to disclose in the last election he had a lot of investments in Gold Mines).
The issue is basic economics, spending more than you produce. It is also Constitutional, with the government going well beyond its authorized purpose. The government is not a revenue producing entity so anything it spends must either have a specific governmental function (like defense) or in limited cases, infrastructure capital purpose. Everything else is like burning money.
Good post
In times of crisis, I would much rather my currency be based on oil or grain. Gold only has a perception value and in times of true crisis, could be worth nothing if no one found value in it.
In other words, if the SHTF, you can’t eat gold, you can’t shoot gold, and you can’t burn gold.
We also produce very little gold, so in times of crisis, we can be held hostage by external forces.
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