It has been suggested many a time that we need to go back to a gold standard. Of course this would create more confidence in our currency, but some are saying it would force us to balance our budget.
An odd offshoot to this story is that Lehman Bros. was speaking and proposing this idea b4 the debacle. It seems this may have had some influence, at least in my mind, on not bailing out Lehman.
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The answer is getting government out of the business of printing and manipulating currencies. Let the free markets decide what constitutes a sound currency and force the greedy politicians to compete for it just like everyone else.
Moving to the gold standard would be a transfer of wealth from debtors to savers, where currently the system is a transfer of wealth from savers to debtors. Using gold as currency would certainly have some advantages and would restore financial integrity. The advantages are also that if we never had a federal reserve, we would probably have 1/3rd of the debt we had right now. But to transform into a gold standard now would be difficult
Going to a gold standard would eventually be deflationary as it would be impossible to maintain the same ponzi scheme that can continue for a long time. we are the #1 debtor nation so transfer of wealth from debtors to savers is not necessarily a good thing for the US.
Having gold as a free market hedge against the dollar is also a big advantage that we have as the US owns more gold reserves than any other nation.
The serious problem would be fiscal responsibility becomes an important issue and if we are not fiscally responsible, like a business too far in debt. If things go wrong, the US could very well go bankrupt and be forced to pay it’s creditors in gold until all the gold reserves are gone, and then what?
I am not against a gold standard entirely, but I don’t see any way it can be done shortly without serious deflation. Ironically, it could very well be that gold trades higher as the government cuts back on spending for fear of default and higher bond yields. This could potentially close the gap and make paying off the debt remotely possibly eventually as the rest of the world also values gold as the same issues arise. The problem is as we pay off the debt there is less actual cash in the system, and we can never really pay it back unless gold prices are drastically higher. Paying back a loan where you only have the principal and not the interest created in the market, makes it virtually impossible without giving up some kind of cash equivalent or trading in something like gold.
I think we have 8000 tonnes of gold, so do the math, it’s probably not enough even if we wanted to.
We don’t print money, we print bonds and we pay interest on that to get money to get loans to borrow more.
Even Ron Paul, the primary force behind the motivation for a gold standard said he couldn’t do it in one term of presidency, nor would he end the fed immediately, but would instead make sure there is a free market so you have competition of other currencies and other central banks.
The government is not in the business of printing money, only bonds which are IOUs in the form of owing more cash than exists.
So if they give the fed $1M in bonds, the fed gives 1M in cash and they promise to pay $1.2M in cash for a simplified example. There isn’t enough cash in the system to pay so they need to issue more bonds and promise to pay more in the future to keep it going. It’s like paying off a credit card with a credit card except they have such good credit they can keep it going, and have to or else many people in debt go broke which generally includes several major companies that pay wages of people that owe more money on their houses than they have.
Someone correct me if I’m misunderstanding, or not explaining this correctly, but to my knowledge that is essentially how it works.
well said derrrr