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To: Don W
It’s paper money is dropping in value that makes inflation possible. Get rid of fiat currency, and inflation could not exist.

Of course it can. Check out the results of Alexander the Great dumping two centuries of accumulated Persian taxation into the market all at once, or the results of the Spanish exploitation of the mines of Mexico and Peru. Both being changes between the relative values of gold and "stuff."

In a gold based currency, the value of a unit of gold is determined by the value of "all the stuff" divided by the number of of units of gold. If the amount of gold in the market grows faster than the amount of "stuff," gold will lose in value, or to put it another way, inflation occurs.

Conversely, if the amount of "stuff" grows faster than the amount of gold, deflation occurs as the gold becomes more valuable per unit.

All going to a gold standard does is take the determination of whether or not inflation (or deflation) occurs out of the hands of bankers and bureaucrats. This may be a very good thing.

Unfortunately, whether inflation occurs or not is then in the hands of miners and scientists. Anybody want to bet the entire world's economy that somebody can't develop a method to cheaply extract gold from seawater or convert lead to gold?

18 posted on 01/04/2011 10:54:40 AM PST by Sherman Logan
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To: Sherman Logan
If the amount of gold in the market grows faster than the amount of "stuff," gold will lose in value, or to put it another way, inflation occurs.

The Weimar experience was really bad. Printing presses going 24/7. But the amount they could print was at least limited by the physical constraints of the printing process itself. Today, a central bank can with one keystroke increase the monetary supply by whatever amount it wishes -- $1 billion, $1 trillion, $1 quadrillion... -- in an instant. The amount of gold will never, ever grow faster than the ability of central banks to "print" fiat money. Even if:

Anybody want to bet the entire world's economy that somebody can't develop a method to cheaply extract gold from seawater or convert lead to gold?

In which case gold would no longer serve as a reliable store of wealth. So people would simply move on to another commodity that would.

29 posted on 01/04/2011 11:22:30 AM PST by kevao
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