steven787 said:
Being a fan of Hazlitt, I can see why you have a very basic understanding of how modern economics work. I am not saying that the gold standard is better or worse (yet), just describing why things have played out the way they have. There are three ways money is valued, the gold standard, economic health, or a combination of both. When commodities go up they pull up the price of gold because gold is seen as the final reserve. When money is tied to precious metals they seem to hold value, but their purchasing power goes down because in the real world gold doesn't buy anything - therefore prices go up any way. So the arbitrary currency value (which is arbitrary whether based on Gold or not, because ultimately the value of gold is arbitrary) going up in value and the real value of commodities going up means you have hidden inflation. Prices in the market go up because things are over valued and that means that decline is sold off in the futures (meaning profit is less likely). When gold is taken out of the equation(in the situation of the modern world economy) and value goes down, commodity prices go up but other prices fall because reduced competition and deficit make for a likely profit. The current situation is odd because China is entering the market as a buyer for the first time and ethanol demand are creating higher prices. But in the US despite the collapse of the value of the dollar, consumers have seen a very small amount of inflation. Now I will talk about Gold Standard. Besides the basic unsound principles of backing paper with rocks (The only reason why the rocks have value is because we imagine they do, just like the only reason paper has value is because we imagine it does). The real value of gold is pretty low, most of the gold that gets mined is stored away. The only reason why it has any value is because it is out of circulation. Gold wires would be extremely cheap if all that gold got sold off. Reserves of gold create a forced shortage. With out the artificial shortage there is no value. (same goes for silver, platinum, diamonds, etc.) Let's say World War III were to start, US vs. Russia or China or EU (doesn't matter). All of them had greater reserves than the US, if we were to go to war and our opponent unloaded a small portion of their gold the value would plummit and that would be the end of the currency. What if it's not WWIII? Let's say China wanted to force US vote on the security council. Or what if EU wanted to start a viable petroEuro? These events could devastate the US Dollar far worse than the current drop if the US dollar were tied to precious metals. The Gold Standard sounds good on paper (just like libertarianism does) but it binds the US$ value to the actions of other countries. But just like any other pure ideology in practice it doesn't work because there are a lot of players who don't play fair or who are just plain evil. |
That's why USD isn't bind to gold anymore. And neither are other currencies. One of the biggest problem is USA:s actions in Middle-East, which push the oil price up, and since oil is traded in USD, it directly affects to it. This wouldn't have effect in similar scale, if USD:s position in the market would be what it was 20 years ago, or even 10. The current system with oil just makes itself happen, when USD goes down, oil price climbs up and when oil climbs up, USD goes down. The thing started with the credit problems as well as USA going to Middle-East starting to pick a fight. Good things for USA, when USD is going down, is their export products gaining advantage in the market. What would help in the current situation, would be to start trading oil with more stable currency, which isn't impossible at all, since basically only USA opposes it in OPEC, which would propably cause USD to plummet, but start rising after a while. Pretty similar thing as setting a currency afloat.
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