Skip to comments.Bernanke Doesn't Understand a Gold Standard
Posted on 04/17/2011 5:58:28 PM PDT by johnsmom
Ben Bernanke, testifying before the Senate Committee on Banking yesterday, was asked about a possible return to a gold standard his disingenuous reply was that there isnt enough gold in the world to cover the US money supply.
This really has to be one of the most pernicious fallacies that haunts the entire discussion of money*. The truth is there is always enough gold, it is simply a matter of price. Of course the dollar denominated price of an ounce of gold would be many multiples of the current price, but that just serves to demonstrate that gold is still significantly undervalued at the current levels. Creating a gold standard for the Dollar is simply a matter of dividing the total weight of gold that provides the backing, by the money supply to be backed. Each dollar is redeemable for a fixed weight of gold. The price does not matter. What matters is that new dollars cannot be created out of thin air without adding a proportional weight of gold to the reserves.** This is why Bernanke does not want a gold standard and perpetuates simple myths about money.
The Federal Reserve is arguably the most powerful institution in the world as it maintains the sole legal right to counterfeit the worlds reserve currency without limit and without oversight. This allows them to bail out the too big to fail banks, manipulate currencies, support foreign central banks and corporations and allow near endless government spending above and beyond what the government can pay for through direct taxation. A true, enforceable gold standard would put an immediate end to all of that. Responsible people who live within their means and save would not have the efforts of their labor stolen through inflation. These are all positive outcomes. So the problem isnt that there is too little gold in the world but rather too little discipline and honesty in Washington DC.
“The truth is there is always enough gold, it is simply a matter of price”
Gold is a commodity. Its primary use is ornamental and sentimental, with some smaller use in electronics.
It is THAT value apon which the value of gold is based. Because people want it for uses OTHER than a value store.
If you artificially inflate the price of gold because you say “this is money, I call this money now” - that is no different from saying of a paper note “this is money, I call this money now”.
MUCH more rational than a gold standard would be a “basket of commodities” standard, where gold is but one commodity to back a currency.
I once had all my money in gold. It removes all your good logic to have all your money in one thing.
...his disingenuous reply was that there isn't enough gold in the world to cover the US money supply.The entire pile of gold ever mined in history would make an approx 82 foot cube (more than half of that has been mined since about 1950), or 952,763,904 cubic inches, or 7+ humans per cubic inch. That quantity of gold would represent your lifetime earnings. His reply wasn't disingenuous.
I’ve felt for years that Richard Nixon’s greatest sin, hands down, no contest.....was taking us off of the gold standard.
I feel that even more today. I also am equally convinced that Bernanke is an absolute idiot.
Well, that and the fact that Ben can't push a button and have another thousand tons of the stuff just spit out, like he can with paper (or electronic) money. That gives it some additional value, perhaps.
“I also am equally convinced that Bernanke is an absolute idiot.”
I would say that he’s more of a complete whore for the Wall Street bankers and is doing/saying whatever it takes to make sure they get their bonuses at the end of the year. That makes him say some of the most idiotic things one can imagine but does not necessarily make him an idiot.
Depends on your definition of what makes an “idiot”.
I judge a man on his actions; not his education or his supposed IQ or his position/title.
Yes, the man’s an idiot on many levels.
This will make a nice rhetorical discussion of change that absolutely will not occur in our lifetimes.
OK then...but when I redeem my money will you pay me in gold for my barrel of crude oil and my sack of coffee?
(I don't drink coffee and I cant refine the crude)..... any commodity can be money..but over time...one becomes the standard......Historically...its always been gold as none-other then Sir Allen Greenspan so aptly understood in 1966! http://www.constitution.org/mon/greenspan_gold.htm (it's a shabby little secret!)
If one increases the money supply, devaluing the paper then it can be exchanged for a fixed quantity of that commodity and visa-versa.
If the commodity becomes undervalued relative to the paper, the commodity will be sold for paper. A paper/commodity linked system provides negative feedback.
There is no need to have enough of the commodity to cover all the world's wealth, just enough to stabilize the monetary system and stop the unscrupulous politicians from debasing the currency.
This said, Bernanke is an obvious fool.
The information in this link is very interesting...includes a chart (published in Barron’s)on paper dollar inflation 1945 to 2011 http://fisherpreciousmetals.com/2010/11/53957-in-circulation-for-every-ounce-of-gold/
“will you pay me in gold for my barrel of crude oil and my sack of coffee?”
That’s not how currency backing works. You don’t get the oil and coffee yourself.
“any commodity can be money”
No commodity can be money. Commodities are seperate to money. Commodities can back money, but it is not the same as money. We have money so we don’t have to barter commodities.
“over time...one becomes the standard”
Please read my post again. It contains important points that cannot be overridden by a simple argumentum ad antiquitum.
Nixon pulled off the greatest theft ever. All US wealth held in cash was stolen by refusing to pay in gold as promised.
Funny how little this is recognized.
*The close cousin of which is the fallacy that the money supply must continually be increased to match expanding production.Thread readers, please note my tag. Tied directly to this subject.
**In reality fractional reserve banking is not compatible with a true fixed gold standard. True monetary reform and discipline would require a full reserve banking model another massive limitation on the power and profits of bankers.
I agree with Bernanke. You can’t dispel his comment simply by saying that there is always enough money, it’s just a question of price. If going to the gold standard would result in a price per ounce of $1 million, then you are talking about massive dislocation of the economy in order to get there.
I once had all my money in gold. It removes all your good logic to have all your money in one thing.
The value of gold is based on the total demand for gold relative to the supply of gold. Period. The specific purpose doesn't matter.
The form of gold does matter. Coins can have a value distinct from the bullion price of gold since coins and bullion have different utilities.
Sure, I agree a commodity-backed currency would slow the rate of printing.
But economics is a very strange thing. There are no experiments. We can now say that the value of what the USA does and has in a month or so is worth more than all the gold in the world, with gold priced at or around its free market commodity-worth value.
The same was not true 70 years ago. So is it not true that the US is much richer in any measurable sense than it was 70 years ago? And all this wealth occured under a managed fiat currency.
I mean maybe it would have been the same under a backed currency, or maybe better, we’ll never know because there are no reruns in economics.
But I think there’s a pretty sound argument to say that backing a currency with a limited commodity could hold back its wealth potential. I’m not sure, but it seems pretty reasonable.
One argument for an inflation-based economy, is that it forces people to put their money in banks so they don’t lose money, so then that money is invested. Again, I’m not entirely comfortable with anything that includes the word “force”, but it seems that a pretty reasonable argument could be made that it’s a working model.
I don’t even understand fractional reserve banking though, I don’t honestly know what the heck is up with that.
In a nutshell, I’m not sure. I know we are richer now than we were. Would we have been this rich anyway? I’m not sure.
Ben Bernanke was not appointed by Obama. Thanks Bush.
“The value of gold is based on the total demand for gold relative to the supply of gold. Period.”
That’s exactly right. And the value of a Fed Note is based on the total demand for a Fed Note relative to the supply of Fed Notes. Period.
If you arbitrarily call either “money”, you have forced up the Demand function D for that item. One is a paper fiat, and one is a shiny yellow fiat.
“you must wish you hadnt”
It was my college fund. It’s very hard to invest money rationally that you really need for your future.
That's the problem though. You can't keep a government, any government, from printing more whenever it wants to. That was the whole point of going off the gold standard to begin with. Baskets of commodities won't work either since there is no way to enforce the standard across borders and there is nothing to keep a government from simply redefining the basket whenever it wants to.
Gold takes the management of the currency's value out of the hands of the government. Only a market chosen commodity, not a government chosen commodity, can do that.
We don't have to play games with dollar to gold value conversions. All we have to do is remove the capital gains tax on gold, repeal the legal tender statutes, and repeal the prohibition on private banknotes. Dollars will continue to circulate for as long as the market needs them, but will eventually be replaced by other private currencies.
That is a tough notion but if the value of the paper and the value of the commodity rise simultaneously with the net wealth, all remains in balance with a net deflation rather than a perpetual inflation. When we were on a species standard, prices did not rise yet wealth grew.
Government interference in health care, warfare, energy use and fiscal growth may just cause an unwarranted imbalance in the market.
Not saying I'm right, just that what we are doing isn't working well and the old way seemed to.
'Demand' for fed paper is prescribed by law. That is the meaning of 'fiat'. Absent the law, there is no demand. Fiat currencies also suffer from what is ultimately an unlimited supply problem. This is why fiat currencies always return to their fundamental value. That of a simple piece of paper. It is simply a matter of how long a government can keep the confidence game running.
"If you arbitrarily call either money, you have forced up the Demand function D for that item. One is a paper fiat, and one is a shiny yellow fiat."
This demonstrates a profound misunderstanding of the term 'fiat'. Physical gold is the antithesis of 'fiat'.
He can understand the logic behind fractional reserve banking but can’t understand a gold standard? That’s whacked.
Bernanke understands a gold standard just fine.
The banksters don’t have all of the shiny they think they can get their hands on yet. Once they do, their understanding of a gold standard will miraculously materialize.
Under a gold standard, deflation is the norm. You do not need a 'return' on your gold savings to increase your wealth. Normal deflation will result in the ounce of gold that you save today being 'worth' much more in terms of goods and services when you retire.
We are under the false impression that denominating the same quantity of assets in ever-increasing numbers of fiat currency means that we are getting 'wealthier'.
If you force US currency to be backed by gold, you add a huge new gold buyer. That would push up the price of gold until it matched the wealth it is being asked to back. That would push the price to $100k+.
It is not worth $100k+ as a commodity, so by prescribing the backing by law, you have simply created another artificial wealth store, which is worth more than it would be as a commodity, without the law.
Without the law, the paper is worth $0.00000000001. With the law, it is worth $1. Likewise without the law, the metal is worth ~$1500, with the law it is worth $100k.
So it is the same as a fiat currency, except they don’t print more dollars, they just push up the value of gold until it matches the wealth it is supposed to back.
“We are under the false impression that denominating the same quantity of assets in ever-increasing numbers of fiat currency means that we are getting ‘wealthier’”
But we are better off now than we were 70 years ago wouldn’t you say?
You cannot *force* anything to be backed by gold. Gold simply is. The price of gold is not 'rising'. The value of fiat is plummeting.
Is materialism your god or are you referring to the fact that we are not currently involved in a world war?
Those who firmly support gold should also back the creation of scrip currencies to maintain the value of their gold. Scrip is a tightly controlled alternative or complementary currency that is not legal tender. As such, value of scrip is fixed, and prices of goods purchased with scrip are fixed, even if the dollar is vacillating wildly.
So, in effect, if the price of a loaf of bread is 1 scrip denomination, even if a dollar hyperinflates so that a loaf of bread costs a billion dollars, it still only costs 1 scrip denomination.
Imagine an ounce of gold in that situation. Say its price is fixed at 1000 scrip denomination. You might need a semi-truck to haul all the 100 million dollar bills to buy an ounce of gold. Or everyone on the scrip system will be able to make change for your ounce of gold, if they have the appropriate fraction of 1000 scrip denomination.
The same exchange rate it was the day before and the day after. It doesn’t matter what the dollar does.
Thus it has a huge stabilizing effect on markets, and maintains the value of both goods and items of value, like gold.
Idiot is not the right term of endearment. Thief is more appropriate. He is a vicious thief.
I think we should go back to the sea shell standard!
“Is materialism your god”
You goldbuggers get so nasty when anyone doesn’t agree with you. It’s usually because all or most of your money is in it, and so you feel economically threatened.
I’ll rise above it. You should diversify your portfolio, then you wouldn’t be so anxious all the time.
You’re overlooking one of it’s prime attractions...
They aren’t making more of it.
Tough to dilute its value. We could use a basket of commodities and equate them to a fixed number of dollars. Any change in that exchange would dilute the value of the associated currency
We shouldn’t mix cause & effect though. Those graphs are predicated on the idea that “gold holds its value not matter what”.
That is true, *except* when a huge country like the US makes a decision about currency backing. As I discussed above, backing artificially raises the price of gold, and likewise, removing the backing drops the price of gold back down.
So those graphs can be interpreted as the drop in gold price, in real terms - how much other of all other commodies an ounce could buy - immediately after 1971, then things getting substantially better.
Then the third part of those graphs is the drop after 2000, which clearly represents the rise in gold price.
In some ways we’re definitely not better off than we were 80 years ago. Now it seems that for many families, both man and wife have to work just to stand still, where previously just the man working was enough. But is that just because of their unneccessary trappings?
I don’t mean to be the anti-goldbug. If I had money to invest a sizeable portion of it would be in metals. But I would like people who have their whole nest egg in gold to step back from gold madness that makes them cheer when the dollar falls and think that $100k gold would be perfectly reasonable.
I don’t think his reply was disingenuous either, I just don’t think he understands how a gold standard works.
You don’t need a large amount of gold for everyone to make it work, the government doesn’t even need to hoard most of the gold. All that needs to happen is for them to open the gold window, and the dollar / gold oz price remains the same as the market determines what the demand for dollars is. As demand for dollars decreases, people go to the gold window to redeem for gold, removing excess dollars, and as demand increases, people redeem dollars for gold, thus keeping the dollar / gold price the same.
I don’t think you know how a gold standard works. It will not happen.
The price of gold soared when it was deemed only a commodity not when it was legal tender.
The entire pile of gold ever mined in history would make an approx 82 foot cube (more than half of that has been mined since about 1950), or 952,763,904 cubic inches, or 7+ humans per cubic inch. That quantity of gold would represent your lifetime earnings. His reply wasn't disingenuous.
Gold can be beaten out to 5millionths of an inch, so 952*106 by 5*106 is 4760*1012 or 33*1012 sq.ft.
The total US coin and paper (which is the only thing that need to be replaced by physical gold) is 800 milliard dollars http://www.pagetutor.com/trillion/calculations.html states that 1000 milliard in Benjimans stacked 7ft high world cover 96768 sq.ft. call it 100,000 to allow for the sides. Even in singles it's only 10 million sq.ft.
The gold available is a million times more than adequate to cover that.
I don’t understand it very well either.
But I’m not the Chairman of the freaking Federal Reserve!
From what I do know, it needs to be explored.
Meant to ping you to post 49 too.