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snousleLiving as I do in tinfoil-hat country, every now and then I run into someone that's a gold-standard crank. They usually start up with the shocking, shocking revelation that American currency is merely fiat money (though they often don't even know there's a term for it) and that it could in theory be devalued at the drop of a hat.
Although I have read a whole lot about the hazards of a gold standard, it's not until recently that I could muster up a simple way of explaining it, so I usually just smiled gently and changed the subject. But in fact, I think one can create an emotionally compelling counterargument thusly: You don't want money to be valuable, otherwise people will hoard it and strangle the economy. If cash has an uncertain future, the only sensible thing to do is to spend it as soon as you can, and turn it into something of real value. This uncertainty is actually what keeps the economy going.
The ability to print money prevents the death spiral of falling prices and cash hoarding that can happen in a situation where the value of money is guaranteed. (I think it was Bernake? who once said "we have a printing press and we know how to use it") The printing of money is like a tax on money itself; for every dollar you hold, the government can siphon off a few cents of its value without having to actually take it from you directly.
I suspect that the result of the financial crisis will be that the US will see double-digit inflation for the better part of a decade, probably starting within a few years, and this inflation will be used to shrink the effective size of the national debt. I think this is going to be traumatic for people who see the dollar as somehow sacred, instead of being just another uncertain investment, and the gold bugs are probably going to get real noisy. It will be interesting to see how this affects people with lots of debt - smart people might see huge debts magically inflated away, others might not be so lucky.
Although I have read a whole lot about the hazards of a gold standard, it's not until recently that I could muster up a simple way of explaining it, so I usually just smiled gently and changed the subject. But in fact, I think one can create an emotionally compelling counterargument thusly: You don't want money to be valuable, otherwise people will hoard it and strangle the economy. If cash has an uncertain future, the only sensible thing to do is to spend it as soon as you can, and turn it into something of real value. This uncertainty is actually what keeps the economy going.
The ability to print money prevents the death spiral of falling prices and cash hoarding that can happen in a situation where the value of money is guaranteed. (I think it was Bernake? who once said "we have a printing press and we know how to use it") The printing of money is like a tax on money itself; for every dollar you hold, the government can siphon off a few cents of its value without having to actually take it from you directly.
I suspect that the result of the financial crisis will be that the US will see double-digit inflation for the better part of a decade, probably starting within a few years, and this inflation will be used to shrink the effective size of the national debt. I think this is going to be traumatic for people who see the dollar as somehow sacred, instead of being just another uncertain investment, and the gold bugs are probably going to get real noisy. It will be interesting to see how this affects people with lots of debt - smart people might see huge debts magically inflated away, others might not be so lucky.
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no subject
Date: 2009-03-12 07:15 pm (UTC)no subject
Date: 2009-03-13 01:00 am (UTC)I don't think about these things nearly enough. (Bad Economist! Bad!)
But I enjoy when other people do and can outline a good argument or thought.
no subject
Date: 2009-03-13 01:58 am (UTC)I think you are right, inflation will come and likely not that far off. People will need to protect their money and in something that inflates with the inflation rate. Everything goes in cycles.
Simplify, simplify
Date: 2009-03-13 04:10 am (UTC)Why arbitrarily tie the growth of your economy to an unknown yet fixed quantity of some arbitrarily chosen metal, like gold?
21 words. I could get it shorter in a pinch, perhaps.
Printing money is not necessarily a tax, hidden or otherwise - not sure I follow that.
Last, I don't believe in a great, upcoming inflation, at least based on what the Feds are doing so far...
Re: Simplify, simplify
Date: 2009-03-13 04:12 am (UTC)no subject
Date: 2009-03-13 04:38 am (UTC)And indeed the American public did spend as fast as they could take it outta their house ... but now I'm not sure they have anything of value.
no subject
Date: 2009-03-14 07:31 am (UTC)US good [sic] become cheaper for export
Date: 2009-03-14 09:28 pm (UTC)Chuck