Posted on 02/29/2012 6:20:32 AM PST by 1rudeboy
fyi
That would create a new stone age in North America. We'd be rubbing sticks together to make fire.
I agree with you on this. Whatever we do, allowing the Government to declare the value of money by “fiat” is the worst answer. It could not have piled up this mountain of Democrat debt any other way.
A gold standard can be implemented on any quantity of gold. We could, for example, set the dollar equal to 1/1700 oz. of gold. We would continue using dollars for everyday transactions, but if the Fed were printing too many dollars (lowering their purchasing power,) we could go to the bank and exchange 1700 paper dollars for an ounce of gold.
That would lower gold reserves and require the Fed to withdraw dollars from circulation restoring its value.
This is just an explanation of the mechanism; I understand the political unlikeliness of its ever happening. Though, I'd be all in favor of it.
Why?
Sure it could. England piled up a higher debt to GNP ratio while they were on the gold standard. Congress can promise that your children will pay in gold just as easy as they can promise that your children will pay in fiat dollars.
Fiat money is actually the best answer. The dollar has been more stable on a year to year basis than it was under the gold standard. Not only is it more stable, but deflation has almost been eliminated, along with the depressions they cause, which is actually a very good thing.
But those who think the dollar should be a long term store of value (it shouldn't) get really scared when you see a 60 year chart of the cummulative effect of 2% inflation a year.
This is a postulation in absence of contemplation of the deterrence effect. I would suggest that if the consequences were known and obvious, the will to behave improves dramatically.
Something I have learned about people is that they respond very well to negative feedback. The problem with our current system is that we have politically disconnected the negative feedback system that improved stability.
The 24th amendment made it possible for non-taxpayers to vote, and they have no incentive whatsoever to vote for anybody but those who promise them federal dollars. The 26th amendment also made it possible for a new group of non-taxpayers to become attached to the "give away party" before they had much real experience in paying taxes. Both amendments removed an aspect of financial stability from the system, and it is no accident that the worst excesses were subsequent to these two amendments.
People have since been "kicking the can" down the road, content in the belief that by the time the sh*t hits the fan, they will have gotten theirs. It reminds me of John Maynard Kenyes' fallacy. "In the long run we are all dead anyway."
It discounts the notion that the social compact that is our government is not meant to be mortal, and is intended to live beyond the life of any individual. What they have done is created an Achilles heel through which they have been bleeding it to death.
Restore "pain" for behaving financially irresponsible, and you will likely prevent the occurrence of it.
Mainly because the supply of gold in the universe is limited and cannot expand to meet the needs of expanding economies but, in particular, the combination of a gold standard and fractional reserve banking was toxic all during the 1700s and 1800s after the initial infusion of new world gold into Europe petered out. There were cycles of expansion of fractionally gold-backed dollars and then collapse as bankers called everything back with higher rates and what came back was homes, farms, and capital assets; there wasn’t any new gold being produced to come back to pay interest on loans based on any sort of a 10% reserve.
I think that more than one reform is needed to resolve this problem. I mentioned a couple of other causes in the message I posted above. I suspect if money was convertible back and forth, it might cause a little better scrutiny on those who spend it in the public name.
Fiat money is actually the best answer. The dollar has been more stable on a year to year basis than it was under the gold standard. Not only is it more stable, but deflation has almost been eliminated, along with the depressions they cause, which is actually a very good thing.
Gasoline was $0.25 in the 1970s. It is now ~ $3.50. I don't think inflation is under control at all. I am not an economic theoretician, but I suspect the economic bumps of which you speak might be better regulated in a larger economy. I *DO* know something about the effects of positive feedback. (that is what causes oscillations in a system.) The best way to deal with it is to introduce characteristics which promote negative feedback.
Fiat money is how we got 100 trillion in debt. (if you count Social Security commitments as part of the debt, which I do. ) I cannot comprehend how any other system could be worse than this, economic bumps included. I note that Roosevelt made the ownership of Gold illegal. Can you tell me that Roosevelt was right about anything?
But those who think the dollar should be a long term store of value (it shouldn't) get really scared when you see a 60 year chart of the cummulative effect of 2% inflation a year.
You do not need to tell me. Using the dollar as a store of value is a horrible idea right now, unfortunately there are many people who are in positions such that they have no alternative as of yet. It is the distorted economic theories of John Maynard Keynes which has led us to this fast approaching economic meltdown. (I say distorted theories, because not even John Maynard Keynes would have regard such folly as a consequence of his ideas.)
You and me both. I have lately been telling my kids repeatedly, "the Democrats are STEALING our money." They give me weird looks, and I try to explain that because Democrats have been raising government spending, and routing it through their friends, associates and supporters as much as possible, it has a devaluation effect on existing money, meaning money loses value every year this insanity continues. (Overly simple, I know, but they wouldn't understand the more complex aspects of what is occurring. :) )
I have been quite aggravated in looking for alternatives. I see the stock market as a "no mans land" and real property holds no appeal for me. (If we have a financial collapse, your paper deed will not secure your property anyway.) Gold was a good idea several years ago, but buying it now is locking in loses already suffered.
Anyway, I have a few ideas which I am implementing currently, but beyond that I wish there were some way to jettison dollars from my assets. I do not trust that they will be worth much of anything in the near future. As a matter of fact, the notion just occurred to me that we may very well have another meltdown just prior to the election just as we did in 2008, and it is my belief that *THAT* meltdown was intentional and contrived by those seeking to boost Obama into the Presidency. (McCain was leading decisively till this occurred.)
I think if such a thing occurs again, I would not want to be holding very many dollars after the late part of summer.
“But those who think the dollar should be a long term store of value (it shouldn’t) get really scared when you see a 60 year chart of the cummulative effect of 2% inflation a year.”
Then why don’t they put warning labels on Dollar bills they way they do cigrattes.
It is the intention of the Federal Reserve to cause inflation which will dilute the value of this dollar. A 3% inflation rate will reduce the purchasing power of this dollar bill by 1/3 over 20 years. etc.
They only get away with this system because most people don’t have a clue what inflation is or what its effects are. I showed a pretty smart guy at work an inflation calculator. He was shocked at how much value the dollar has lost since 1990.
The FR isn’t going away anytime soon, so maybe the next best answer is to educate people so they can better protect themselves. Take the profit out of the game...
You don't understand. The profit isn't the 2% inflation a year.
The real profit is a stable productive growing economy. A slight amount of inflation facilitates that.
Second, you seem to be under the impression that the government is just printing up and walking away with the 2% each year. It doesn't work like that. Money is created through banks creating loans. The Fed influences the rate of that money creation.
If credit expands faster than the supply of goods, then we get inflation. If credit expands slower than the supply of goods, we get deflation. It's not the government that usually benefits from the 2%, it's the borrowers, because the dollars they pay back with have a lower purchasing value.
To the extent that government is a large borrower, they do benefit, but it's indirect, and certainly not the entire 2%. Government benefits far more from a good economy, than from the inflation effects. So do banks. So do we the people.
And really, the borrowers, don’t benefit, because once the market begins to recognize that we have consistent 2% they price that in to the interest rate.
It's a good thing the Federal Reserve doesn't have the intention of causing deflation, which is much worse for the economy than mild inflation.
A 3% inflation rate will reduce the purchasing power of this dollar bill by 1/3 over 20 years. etc.
Good thing our incomes have exceeded the rate of inflation since we left the gold standard. That's why we own more stuff today than we did back then.
They only get away with this system because most people dont have a clue what inflation is or what its effects are.
The reason they "get away with this system" is because most people don't have a clue what it was like living in an economic environment that delivered 5% inflation one year followed by 5% deflation the next. Those swings put a lot of people (especially farmers) out of business. Most people don't have a clue about deflation so they find themselves defending a gold standard that never delivered stable prices.
So in the end, the market rationalizes the inflation rate, as long as it is stable and neither borrower nor lender profits from it.
A steady inflation rate only affects the cash hoarders who don’t even invest in a savings account to receive interest and thus loose purchasing power. The market as a whole receives the offset from the loss in purchasing power, but that boost is spread out over the entire economy and all goods, so it’s negligible.
The real game, the real profit is keeping the economy performing.
Go back and look at what happened on the gold standard. We had severe swings of inflation and deflation sometimes back to back years of double digit swings.
Avoidance of deflation, which means a small inflation rate, is what businesses need, and it’s what the FED has been able to achieve in most years.
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