Hi Dave,

I recently saw some videos on YouTube that argued how the Federal Reserve has constantly eroded the value of Dollar etc. and how the Gold Standard will solve all our problems.

What do you think are the limitations of Gold Standard?

Fine enough, it could control inflation, but will it curtail growth?

don't we need to grow credit to keep pace with the growth in economy? I mean, if there are more goods and services in the economy then then theoretically there should be more credit available to buy them - however, there is only a limited amount of Gold available and the demand might out pace supply thus hindering growth?

thanks for your time Dave

Pj, excellent points, and this is something that sort of grinds on me - so I'm going to weigh in a bit here.

People speak that debt shouldn't fuel growth. On one side of the coin that's true. But I think they should be qualifying their statements: Stupid debt should not fuel growth.

But there's a big difference between stupid debt, and responsible debt. When debt is used to purchase luxuries - then it's pretty stupid debt. When debt is used to fuel things like: infrastructure and productivity - then it's responsible. And it's something that Gold, quite frankly - cannot keep up with. In addition, all of the debt that the U.S. currently has - needs to be paid. We can't just make it disappear because we've switched to a gold standard. And that cannot be done with gold. There just isn't enough of the stuff. It couldn't even be done with Gold and silver. Then there is the entire impact of those areas of manufacturing that rely on gold and silver in their products.

Solutions being touted as to "switching to the Gold standard" are akin to trying to cure the cancer by killing the patient - or in this case - the economy.

Thanks Dave,

for putting things in perspective and hats off to this excellent initiative where it's so easy to get such good quality information.

would you consider creating a list of books that you would recommend people read? not just on trading, but that cover various aspects of the capital markets ...

thanks again

Hi Pjethwani,

Thank you for the comment but that response was from one of our other community members who was kind enough to share his input here which I always appreciate and encourage.

So anyways with that being said, the point you have raised here has always gotten a lot of attention, and especially so with the recent slide in the dollar. To be honest with you, while I would like to learn more about debates such as this, I tend to from a trading standpoint focus on the what is, and not what I think should be. So with this in mind I know a fair amount about the federal reserve and how changes in monetary policy affect the markets as currently this is the monetary situation which controls the market. As we are not currently on a gold standard, I do not place too much focus on it so I would consider myself far from an expert in how a gold standard would affect the economy and markets.

What I do know is that there are two sides to the debate as to whether a fiat currency (one not backed by a commodity such as gold) is better for the economy, than one that is backed by something such as gold.

The first, which Airelon has touched on below, is that a fiat currency is better. People who feel this way normally believe that with a fiat currency the economy can grow at a faster rate than it otherwise would be able to. Secondly they feel that a fiat currency (which gives a central bank like the federal reserve the ability to increase and decrease the money supply) allows a central bank to manage the business cycle. For more on this please see module 8 of my free basics of trading course where I talk about how the Federal Reserve works.

The other side of this debate is that a fiat currency is bad, because of the fact that it allows a central bank instead of market forces to control the value of a currency. They believe that because of this there is a tendency for the central bank to over inflate the money supply, which essentially makes the value of the currency worth less and less each year. They also tend to believe that governments will increase the money supply to pay for government programs, a sort of hidden "tax" on the population that allows them to increase government without having to go to the public and raise taxes.

As far as books on this topic most of my knowledge on the subject has been gained from reading the newspaper and watching youtube videos, so I have not read any. I would however appreciate any recommendations from any community members with knowledge on the subject as to what some good ones would be.

As far as a reading list, I am in the process of putting together a bookstore with reading recomendations from myself and the rest of the community which you can find here.

Hope that helps. This is a very interesting topic so if anyone has any feelings one way or another on this please feel free to share them here.

Best Regards,
Dave

Thanks Dave,

Sorry, I should have noticed that the author of the original reply (the comment still holds Dave)

Thank you both for providing quite an insight into this 'very interesting topic'

best regards

No worries thank you for starting the discussion.

Best Regards,
Dave

Hi,

I posted the above question about the suitability of adoping a 'Gold Standard' on YouTube, in response to a 1983 video about Ron Paul, where he is advocating the Gold standard, as he is doing until this day.

these are the response I got

"I do not think that elasticity as you describe it is 100% necessary for growth. Certainly the economy in the US grew during the years there were a gold standard. If the economy is growing and the currency is static, then the currency's purchasing power will increase as total goods + services increase, right?

In a "controlled" economy based on credit, deflation is scary (see housing bubble). However, if a currency is stable, then downward price fluctuation isn't as big a problem."

-----------

"...as for gold keeping pace with growth, it will become more valuable as we require more for exchange, so it will be more profitable to mine.

But the finite amount of gold available is not a problem. That's why it's so useful in the first place. As it's purchasing power increases, prices will fall and/or people will trade in smaller denominations. As such you can never "run out" of it. It's utility is not lost by greater demand; it just buys more stuff, so you use smaller denominations"


------------

"The gold standard was in place during late 19th century as the video states. During this time was one of the greatest economic periods of the country. That should be evidence enough, but growth is not a result of more money, but more material wealth in the form of goods/services. The more production of these real wealth assets, the more valuable the money in existence becomes so prices will go down and saving your earnings makes sense. With fiat money, the value of your savings/labor goes down"


--------------------------------------------------------------

In response to the argument that Gold standard will have deflationary impact on the economy - I have the following question

How is gold different from oil? Wouldn't adopting the Gold standard, mean that a country, with absolutely no economy, but LOTs of gold, will suddenly become rich! they can just import all the goods and services, like some of the developed middle eastern countries do, based on their oil deposits?


any response or discussion is much appreciated

thank you

There is one comment that jumped right out at me:

"The gold standard was in place during late 19th century as the video states. During this time was one of the greatest economic periods of the country. That should be evidence enough, but growth is not a result of more money, but more material wealth in the form of goods/services."

That's a pretty big distortion. The country overall experienced growth. But the poor, and the middle class has never experienced oppression in the United States, as they did in the 19th century. And part of the mechanism that the "uber" rich used to amass their fortunes on the backs of the poor - was the gold standard. They could hoard, and then freeze entire economies to their benefit and manipulation. Did the infrastructure move forward? Yes. Did the country move forward? Yes. Did technology explode? Yes. Did all of these benefits 'trickle down' to the little guy?

Not for at least 5 or 6 decades.

Here's a thought: Instead of doing something so drastic as moving to the gold standard? Why not just .... spend less. It's almost as if Ron Paul is saying: We can't control ourselves, so let's perform a radical move on the economy to make ourselves spend less.

I see the majority of the problem as self-control. The currency being used is just a side note. The out-of-hand spending is the symptom of the larger problem. The lack of self-control with spending.

proponents of the gold standard favor it because it helps limit the ability of the central bank to print money and artificially inflate the money supply. without a gold standard, government can become big without issuing a direct tax, but rather by printing more money to finance government spending. this is known as debt monetization. of course, increasing hte money supply devalues the currency, and causes inflation -- like what we're seeing now. this is essentially a transfer of wealth from taxpayers to those receiving government subsidies, and hence has been dubbed by ron paul and other austrian economists as an "inflation tax."

here is a nice article on debt monetization. the article notes how bernanke acknowledges the problem, and how historically fiat currencies have resulted in hyperinflation.

interestingly, alan greenspan, whom many -- including myself -- blame for being guilty of overexpanding the money supply and resulting in bubbles and inflation we are seeing in the USA, wrote a paper in 1967 in which he argued that the gold standard is necessary to a free society. here is greenspan's paper. when confronted on how his policies conflicted with the ideas he presented in this paper, greenspan said he changed his mind and that he was wrong in this paper, so he has somewhat disowned it. at least that is my understanding of the scenario.

personally, i don't think going back to a gold standard is the answer, although i do think it is important to have a mechanism that limits the central bank from excessively expanding the money supply and creating poverty via inflation.

hi folks,

very interesting discussion + many nice thoughts :-))

in my opinion, if we allow goverments + their central banks to print as much money as they want to, they will. the history shows that they allways did ;o). therefore we need some mechanism/laws that limits them as simon detailed described in his posting bellow ...

how could such mechanism look like? well, there have been many different currencies, commodities or products used as 'money' over the time. but just gold + silver outlived all of them and was for thousands of years considered as money. maybe thanks to the current financial (subprime) crisis in the usa is gold + silver considered as money again. i believe that gold + silver is money by market's chioce and i also believe, that we do not need any central bank or goverment which would control the money supply. why? we still have gold + silver :-)))

greetings from munich/germany,
j.