How Russia and China might bring down the dollar
The Russians and the Chinese may have finally figured out an effective way to deal a death blow to the US dollar's standing as a global reserve currency:
Arkady Dvorkevich, the Kremlin's chief economic adviser, said Russia would favour the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund.
Chinese and Russian leaders both plan to open debate on an SDR-based reserve currency as an alternative to the US dollar at the G20 summit in London this week, although the world may not yet be ready for such a radical proposal.
Mr Dvorkevich said it was "logical" that the new currency should include the rouble and the yuan, adding that "we could also think about more effective use of gold in this system".
Some of the Muslim countries have been talking off and on about a similar currency. It's about time that some major country finally started to debate the merits of fiat currencies versus precious metal-backed currency. The best argument that opponents of this policy have come up with that I have seen is that "there is not enough gold for the global economy." Even if that were true, the immediate deflationary impact of switching to a gold standard would be justified by the way that a gold, gold/silver or gold/silver/platinum standard would impose fiscal responsibility on governments and corporations. Let's not lose sight of the fact that a lot of the wealth that we take for granted under fiat currencies is little more than an illusion.
If this takes off, the best way for the United States to counter it would be to immediately go to a system based on gold and silver for the backing of our currency. Even copper could be thrown in there for good measure, as copper has a lot of industrial value and is increasingly expensive. Of course, won't actually do that because in this era of hope and change, that's too realistic and insufficiently idealistic.
That reminds me, I have to put my excess money somewhere. I'm not going to wait for the day when a $100 bill is worth less than a single grain of rice.
Tangible goods and commodities, but it's up to you to decide. Personally, I favor steel (tools), gold, silver, brass and lead.
Well, I'm not quite ready to believe the Chinese and the Russians are serious about a gold standard, no matter how watered-down it might be. The opportunites for mischief that are provided by a fiat monetary system are simply too tempting for modern governments to pass up. I think it will take a lot more than the current global depression to convince governments to adopt hard currency.
I'd like to be wrong, though.
The best argument that opponents of this policy have come up with that I have seen is that "there is not enough gold for the global economy."
Actually, I think that's the worst argument. The value of each unit mass of gold fluctuates in response to demand; in a free market, there would never be too little or too much gold. This is simple supply-and-demand stuff. And the argument holds even less water in the Information Age, where we can make transactions in amounts of "digital gold" that would be otherwise microscopic. We would still use checks and debit cards and such; the only difference is that the transactions would be in terms of gold.
There's a lot of literature on the subject at mises.org for anyone who is interested. For example, here is Ron Paul's The Case For Gold:
http://mises.org/books/caseforgold.pdf
By the way, Mike, how do I make hot links in your comment system?
Ha! Well, ok. Never mind my question...
The best argument that opponents of this policy have come up ...
How about, "we used to have one and it failed, resulting in every country in the world abandoning it"
or,
"Gold is just another commodity, like any other. There is nothing special about it that makes it more suitable than fiat currency. (unless you have large gold reserves you would like to sell and are hoping to spur a 2 x price surge)"
It only "failed" in the sense that it wouldn't let the government do what it wanted to do, which was spend recklessly. Gold forces discipline, and governments don't want discipline, they want free reign.
And gold IS more suitable than fiat currency for the simple reason that gold is valued in the free market for reasons that don't involve its use as money. We are not on the gold standard, yet Americans still by gold all the time, usually in the form of jewelry, but in other forms, too, including industrial uses. If paper dollars, on the other hand, were no longer useful as money, would anyone want to buy them? I personally don't own any paper currency from other countries, because if I can't spend it here, it's useless to me. Paper currencies only have value because governments force us to accept them as payments. You can not say this about gold and other commodities for which a non-monetary market exists.
Having said that, there is nothing magical about gold vis-a-vis other commodities. What makes it preferable to other commodities are purely practical considerations like its divisibility, malleability, resistance to corrosion and/or decay, portability, relatively stable supply, etc.
It "failed" in the sense that it did not control any country's ability to manipulate their currency. They all did it. They all printed more paper money than they had gold to back. In the end, the gold standard did not apply to private monetary exchange between citizens within a country, only to international exchange. At the end of WW1 and WW2, the USA had almost all of the world supply of gold bullion. In the periods that followed, we lost it all through the magic of balance of trade. In early WW2, Britain had to prevent their own citizens from buying anything from the USA because they needed all of their gold, silver and "american money" to buy war materials on govt contract. That didn't stop until Lend-Lease was enacted.
Obviously if paper money could not be used as money, no one would want it... though I have seen a few collectors of confederate money. But the same is true of a Ford Windstar with a blown transmission. Anything that I can't use, has no value to me unless I can find someone who wants it and trade with them. If I can't trade gold to someone else for something I want, IT has no value either, just like paper money. I don't have any of the tools to make jewery, microcircuits or gilding and I am not interested in learning it.
I can guarantee you that if the economy collapses completely and people go back to hunting and gathering, no one is going to want your gold except as a charity to you. I personally don't believe things are going to get that bad in our lifetime. There are plenty of examples in history of countries replaces a debauched currency with a new paper currency.
If you want to invest in metals, invest in black metals.
I read the Mesis article and was unimpressed. The introductions were full of unsupported claims about the benefits of a gold standard, as if they did not remember we used to have a gold standard in this country until 1971 and it did not work. It did not prevent any of the abuses or enforce any discipline on the government.
It "failed" in the sense that it did not control any country's ability to manipulate their currency. They all did it. They all printed more paper money than they had gold to back.
This only works when the holders of paper dollars are unable to exchange those dollars for gold at the rate they were issued. This is not a failure of the gold standard, it is what happens when governments make the gold standard illegal.
In the end, the gold standard did not apply to private monetary exchange between citizens within a country, only to international exchange.
Again, what you're talking about is not a gold standard, but is usually referred to as the gold-exchange standard.
But the same is true of a Ford Windstar with a blown transmission. Anything that I can't use, has no value to me unless I can find someone who wants it and trade with them.
But the car will still have some value, even it's just for scrap metal. With paper money, you're talking about a piece of paper that costs a few cents to make, but is forcefully valued at a dollar. Or a hundred dollars; the same commodity value of pieces of paper can have completely different fiat valuations. The paper, like the car, will still retain whatever commodity value it has; it is the fiat valuation of the paper dollars that is the issue.
I can guarantee you that if the economy collapses completely and people go back to hunting and gathering, no one is going to want your gold except as a charity to you.
I'm aware of that. But no one's going to want my dollars, either.
Eventually, though, society would mature beyond the subsistance stage, and an actual economy would develop. When that happens, I would much rather have gold than some paper currency from an organization that no longer existed.
I personally don't believe things are going to get that bad in our lifetime.
I doubt it, too, but I'm not ruling anything out in these crazy times.
If you want to invest in metals, invest in black metals.
Are you talking about guns? If so, then you are correct; over the last six months or so, firearms and ammunition have been one of the best investments one could have, with gains ranging from 25-40%. (I know what you meant, I just thought I'd add that.)
The introductions were full of unsupported claims about the benefits of a gold standard, as if they did not remember we used to have a gold standard in this country until 1971 and it did not work.
We had a gold exchange standard, not a gold standard. The French were exercising their right to exchange dollars for gold, and the feds didn't like it, so they changed the law in order to cheat the French.
In a true gold standard, I could deposit an ounce of gold at a bank and get a certain number of dollars in return. These dollars are, in effect, warehouse receipts. Then, any time I wanted, I could return to the bank and exchange my warehouse receipts for an ounce of gold. The rate of dollars to gold never fluctuates, because the warehouse receipt is a contract for delivery of goods, and changing the exchange rate would be a breach of contract. We used to have this arrangement at one time, but FDR ended it in 1933. To claim that a gold standard existed after 1933 is simply incorrect.
Dadgummit. Stupid tags.
I keep forgetting about the *ahem* unique properties of this commenting system.
I'll fix them for you when I get a chance ;)
Btw, part of the reason why I chose this is that <i> and <b> are deprecated in XHTML in favor of <em> and <strong>. That change was probably requested by telecoms, who saw an excellent opportunity to make people use slightly more bandwidth, but it is there nonetheless.
Ahh, Mike made my comment all better.
Thanks, man. :)