Skip to comments.Gold Standard or Bust (Fixing the dollar before itís too late)
Posted on 07/25/2011 7:38:19 AM PDT by SeekAndFind
As the truth-or-dare battle over raising the debt ceiling moves toward a resolution of some sort, we are witnessing a unique political moment, with attention finally riveted on our nations fiscal future. We are about to learn whether there is such a thing as fiscal responsibility in a democracy where 45 percent of households dont pay income taxes. Or whether any sense of moral obligation still attaches to paying your own way as a citizen. Chronic budget deficits are evidence of endemic political cowardice when it comes to reconciling government revenues with government expenditures. And our elected officials keep choosing the cowards way: They fund excessive spending through borrowing.
Government borrowing is a convenient ploy for putting off financial inevitability for another generationexcept for one huge problem. You cant have sound money if you dont have sound finances. If we fail to get a handle on government expenses under our current dire circumstances, the dollar is doomed.
Now some folks around the world might be happy enough about that. The dollar has been at the core of global finance since the end of World War II, as the preferred global currency for trade and capital transactions. One major benefit: It has enabled America to more easily borrow. Debt obligations issued by the U.S. government offer built-in appeal as the repository for dollars accumulated by foreigners. If you are China, say, and you sell much more to Americans than they buy from you, where better to stow that future purchasing power than in risk-free Treasury bonds issued by the United States? The dollars prominent role in global financial affairs makes it the most vital nonmilitary instrument of American power; it figures in 85 percent of foreign-exchange transactions, and dollar assets account for roughly two-thirds of the reserve assets of industrialized and developing countries. Of course, not everyone appreciates all those perks going to the United Stateseven when they realize that a diminishing dollar hurts the value of their own portfolios.
Still, this much is true for those who hold dollars, both U.S. citizens and central bankers around the world. Whether its the cash distributed to community banks by the Federal Reserve or the trillions in Treasury obligations peddled at home and abroadits all U.S. government IOUs. Everyone who holds dollars is hurt when the U.S. government debases its currency.
People take dollars in the expectation they will be able to use them in the future to obtain something of comparable worth. They place their faith not so much in the credit of the U.S. government as in the eventual capacity of Americas economy to yield productive output. As government-issued claims against our countrys future output accumulate, there is a hollowing-out effect, with financial capital drawn away from the real economy. Real economic growth happens when private investors take their chances on innovative entrepreneursnot when they are induced to purchase safe government securities.
Since the resources needed to pay for current government expenditures are not available, the government is laying claim to future revenues. The notion of money as a claim on tangible assets is thus rendered abstract. Defining the value of money becomes a matter of government dictate. Thats why its called fiat money, from the Latin for Let it be done.
Fear of losing the dollar as a meaningful unit of account has lately forged a curious confluence of interest among unlikely parties. There are those, mostly U.S. citizens, who use the dollar because it is Americas official legal tender; among these people, we hear increased protests against the Federal Reserves abuse of its powers to debase the currency. Then there are those who rely on the dollar as the worlds reserve currency; within this conglomeration of global players there are decidedly mixed feelings about the continued monetary hegemony of the United States.
This makes for an unexpected coalition for monetary reform. The decline of the dollar is linking the economic anxieties of Americanson Main Street and Wall Streetwith profound concern elsewhere in the world over whether America will continue to exercise global leadership. And while these seemingly disparate factions may not readily perceive it, within their mutual monetary angst may also be discovered a shared agenda for saving the dollar.
The connection was made last November when former Alaska governor Sarah Palin called for a stable dollar to put our economy back on the right track. The Feds pump priming addiction has got our small businesses running scared, she noted, and our allies worried. Robert Zoellick, who heads the World Bank, lamented in a Financial Times op-ed that global consternation over the Feds quantitative easing was prompting talk of currency wars. Zoellick proposed that the global monetary regime be reformed to spur economic growthand suggested that any new system should consider employing gold as an international reference point.
Though its odd to think that the objectives of the Tea Party conservatives for whom Palin speaks might coincide with the concerns of the global elite who read the Financial Times, there is a thread that unites them. Its the realization that the world economy cannot take another devastating boom-and-bust cycle.
What gold brings to the monetary table is discipline. If individuals suspect that money is being issued in excess of levels warranted by legitimate economic needs and growth prospects, they can exchange their currency holdings for gold at a pre-established, fixed rate. Gold convertibility ensures that the money supply expands or contracts based on the collective assessment of market participantsas opposed to the less-than-omniscient hunches of central bankers. Gold provides a self-correcting mechanism for irrational exuberance; as credit begins to flow too freely, as equity values or commodity prices appear frothy, the astute observer at the margin cashes out in gold. Monetary central planning gives way to the aggregate wisdom of the free market.
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Doesn’t this episode prove that there’s no gold reserves in Fort Knox?
I mean, if we had any gold, we could sell some of it to pay the social security checks Obama is worried about, right? (Aside from the fact that there is $2.2T coming in in tax cash annually to pay them....)
But nobody in government has even suggested selling the gold, because there isn’t any.
...and 10% foot 66% of the total federal tax receipts. I say, cut the EITC and all the other freebies to people who don't work, cut unemployment benefits to the original 13 weeks and tell people they need to work to survive. If you truly can't work, prevail on your church or other charities for help like you used to do before the 1930's. Enough of the freeloading on the productive members of society.
It’s my understanding that if all the people who have invested in Gold demanded the metal be handed over to them, that there is not near enough to go around.
I do not know if that is true or not, but I have never seen the issue shot down by anyone even the sellers of the gold funds.
It seems it’s almost like the dot com craze, where people were handing over cash to anyone selling shares in companies that did not have a product for sale yet or a place from which to sell it from. Just a fancy brochure or web site.
(and a promise)
But if you do manage to lay your hands on some, you’ve got money that can’t be inflated into oblivion. They’ve got to come and take it from you by force.
It's too late for that.
those who have the gold will set the standard. And that ain't you and me...
It's not, however, too late to head off to the local coin store and pick some gold up. A tenth ounce gold eagle is about $180 which makes within the budget of almost anyone. Silver can be had for as little as about $3 or so, the going price for a 1964-or-prior (90% silver) dime.
I thought you were set up for life.
Gotta admit that buying gold at $300/oz played a role in that. ;)
But I also had some losers and most of gains were more luck than skill.
The lesson learned is to stay as diversified as possible so that you have investments which offset each other in various economic scenarios (e.g.inflation, deflation, bull or bear market,recession, boom time, etc).
Thank you Riodacat!