How Does Fixing the Gold Price Create Inflation

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stuper1
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How Does Fixing the Gold Price Create Inflation

Post by stuper1 » Sat Apr 18, 2020 11:47 am

I was just listening to the Triggernometry podcast. It's a good show with good guests and thoughtful discussions.

They had Jim Rickards on. He was saying that the US government will probably want to create inflation in order to fritter away its huge debt. He said that money printing alone can't create inflation. He said they could do it in 15 minutes just by pegging the price of gold at say $5,000 an ounce. People could freely sell gold to, or buy gold from, the government at that pegged price.

That is way over my head. Can somebody explain it to me like a 5 year old, which is truly my level of understanding on this stuff, how pegging the price of gold at a high level would create inflation?
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Re: How Does Fixing the Gold Price Create Inflation

Post by vnatale » Sat Apr 18, 2020 11:59 am

stuper1 wrote:
Sat Apr 18, 2020 11:47 am
I was just listening to the Triggernometry podcast. It's a good show with good guests and thoughtful discussions.

They had Jim Rickards on. He was saying that the US government will probably want to create inflation in order to fritter away its huge debt. He said that money printing alone can't create inflation. He said they could do it in 15 minutes just by pegging the price of gold at say $5,000 an ounce. People could freely sell gold to, or buy gold from, the government at that pegged price.

I assume that this is what you were listening to?


https://www.youtube.com/watch?v=xu4gd_r1tsY

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Mark Leavy
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Re: How Does Fixing the Gold Price Create Inflation

Post by Mark Leavy » Sat Apr 18, 2020 12:19 pm

stuper1 wrote:
Sat Apr 18, 2020 11:47 am
Can somebody explain it to me like a 5 year old, which is truly my level of understanding on this stuff, how pegging the price of gold at a high level would create inflation?
If you think of gold as an international currency, the current exchange rate is about 1700 US dollars to 1 troy ounce of gold money.

If you change the exchange rate to 5000 US dollars to 1 gold, then the dollar is devalued. It doesn't change the value of the gold (much). Thus, inflation.

You could get the same result by pegging the dollar to some other (fairly stable) currency. If the US were to declare that every euro is now worth 3 dollars - forever and ever, it would devalue the dollar and raise the value of the euro. Inflation for us, deflation for europe.

[edit] I had the euro/dollar ratio inverted.
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Re: How Does Fixing the Gold Price Create Inflation

Post by stuper1 » Sat Apr 18, 2020 3:59 pm

That sort of makes sense to me in a very high-level, conceptual way, but not in any real-world, practical way.

Just because the government is willing to pay $5,000 per ounce to anyone who wants to sell them their gold, how does that change what I pay for a loaf of bread at the grocery store? After all, the baker and the grocer don't price the bread in grams of gold equivalent, do they?

Rickards explicitly said that just giving out more stimulus money isn't necessarily going to cause inflation. The way I see it, if they price gold at $5,000, the effect of that is going to be that some people who own gold are going to sell some of their gold to the government at that high price, effectively putting more greenbacks into the economy. So, why does that cause inflation, but just giving out stimulus checks doesn't cause inflation?

I'm not arguing that what he says isn't true. I'm guessing he knows a lot more about it than I do. I'm just trying to figure out why and how it is true.
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Re: How Does Fixing the Gold Price Create Inflation

Post by pmward » Sat Apr 18, 2020 4:15 pm

stuper1 wrote:
Sat Apr 18, 2020 3:59 pm
That sort of makes sense to me in a very high-level, conceptual way, but not in any real-world, practical way.

Just because the government is willing to pay $5,000 per ounce to anyone who wants to sell them their gold, how does that change what I pay for a loaf of bread at the grocery store? After all, the baker and the grocer don't price the bread in grams of gold equivalent, do they?

Rickards explicitly said that just giving out more stimulus money isn't necessarily going to cause inflation. The way I see it, if they price gold at $5,000, the effect of that is going to be that some people who own gold are going to sell some of their gold to the government at that high price, effectively putting more greenbacks into the economy. So, why does that cause inflation, but just giving out stimulus checks doesn't cause inflation?

I'm not arguing that what he says isn't true. I'm guessing he knows a lot more about it than I do. I'm just trying to figure out why and how it is true.
The value of the dollar is always relative. At any given day and time it's going up vs something and down vs something else. What is gold? Gold these days is primarily used as a collateral instrument. This is why in the post gold standard times gold is more correlated with negative real yields than inflation, as during times of negative real yields it's better to hold gold as collateral vs losing money holding treasuries. So what happens if the government tomorrow says gold is $5000/ounce? How does the value of the dollar change vs other currencies? How does that effect trade, when the dollar's collateral value has been cut in half? How does that effect the demand for dollars? How does that effect the demand for U.S. goods? How does that effect the demand for foreign goods? Who winds up winning? Who winds up paying the difference? What are the knock on effects?
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Re: How Does Fixing the Gold Price Create Inflation

Post by Mark Leavy » Sat Apr 18, 2020 4:42 pm

stuper1 wrote:
Sat Apr 18, 2020 3:59 pm
That sort of makes sense to me in a very high-level, conceptual way, but not in any real-world, practical way.

Just because the government is willing to pay $5,000 per ounce to anyone who wants to sell them their gold, how does that change what I pay for a loaf of bread at the grocery store? After all, the baker and the grocer don't price the bread in grams of gold equivalent, do they?

Rickards explicitly said that just giving out more stimulus money isn't necessarily going to cause inflation. The way I see it, if they price gold at $5,000, the effect of that is going to be that some people who own gold are going to sell some of their gold to the government at that high price, effectively putting more greenbacks into the economy. So, why does that cause inflation, but just giving out stimulus checks doesn't cause inflation?

I'm not arguing that what he says isn't true. I'm guessing he knows a lot more about it than I do. I'm just trying to figure out why and how it is true.
Let's say that today you can buy a loaf of high quality bread from the baker for $5.00. That same baker (a Harry Browne protegé) would likewise sell you that same loaf for 0.1 grams of gold.

Then the feds peg the dollar at $5000 per ounce. The baker will still sell you the bread for a 1/10th of a gram of gold (no price change), but do you think he will give you the bread for $5? No, he'll want $15 or $20 for the loaf because dollars just aren't worth as much anymore in relation to physical commodities like wheat and gold. The feds have directly told you that you need more dollars to buy gold. It follows that you're also going to need more dollars to buy wheat. And more dollars to buy things that you make from wheat. And... on and on.
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Re: How Does Fixing the Gold Price Create Inflation

Post by Mark Leavy » Sat Apr 18, 2020 4:55 pm

And one more example from our Baker (who is secretly a financial genius).

Let's say that when the Feds peg the dollar at 5,000 to an ounce, they also pass a law that no-one is allowed to raise prices. Bread is legally required to be sold at $5 a loaf.

So... Our intrepid baker sells his bread to the europeans instead of the americans and gets 5 euros for it - just like before. He saves his euros and buys an ounce of gold for 1700 euros. Then he smuggles the gold back to the US and sells his ounce to the feds for $5,000. Beats the heck out of selling bread for dollars.

So how long before the price of bread in the US creeps up to $15 or $20 dollars? Or how long before the exchange rate between the euro and the dollar is 3 to 1?
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Re: How Does Fixing the Gold Price Create Inflation

Post by technovelist » Sat Apr 18, 2020 8:49 pm

This has actually been tried before, by FDR.
It didn't work.
It won't work now either.
Another nod to the most beautiful equation: e + 1 = 0
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Re: How Does Fixing the Gold Price Create Inflation

Post by stuper1 » Sat Apr 18, 2020 9:13 pm

I'm just trying to understand Rickards' position. What is it about pegging the gold price at a high dollar amount that would cause inflation, at least in his mind? I still don't get it. I must be dumb. I don't think bakers value their materials and labor in grams of gold. Maybe I have to buy one of Rickards' books.
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Re: How Does Fixing the Gold Price Create Inflation

Post by technovelist » Sat Apr 18, 2020 11:39 pm

stuper1 wrote:
Sat Apr 18, 2020 9:13 pm
I'm just trying to understand Rickards' position. What is it about pegging the gold price at a high dollar amount that would cause inflation, at least in his mind? I still don't get it. I must be dumb. I don't think bakers value their materials and labor in grams of gold. Maybe I have to buy one of Rickards' books.
You're not dumb. It makes no sense.
Another nod to the most beautiful equation: e + 1 = 0
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Re: How Does Fixing the Gold Price Create Inflation

Post by Hal » Sun Apr 19, 2020 2:06 am

oops! double post
Last edited by Hal on Sun Apr 19, 2020 2:18 am, edited 1 time in total.
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Re: How Does Fixing the Gold Price Create Inflation

Post by Hal » Sun Apr 19, 2020 2:15 am

Hal wrote:
Sun Apr 19, 2020 2:06 am
technovelist wrote:
Sat Apr 18, 2020 11:39 pm
stuper1 wrote:
Sat Apr 18, 2020 9:13 pm
I'm just trying to understand Rickards' position. What is it about pegging the gold price at a high dollar amount that would cause inflation, at least in his mind? I still don't get it. I must be dumb. I don't think bakers value their materials and labor in grams of gold. Maybe I have to buy one of Rickards' books.
You're not dumb. It makes no sense.
Think his reasoning is along the lines of

1. Current USD loses value as people lose faith in "The trust and credit" of the USA

2. New 40% gold backed USD issued

3. Relative to the new Gold USD, the Fed USD will continue to inflate (less purchasing power) until its converted to the new USD.

At least that's my take on it :o
ps: Vaguely remember something similar happened in 1871 when the US changed to backing of the dollar from silver to gold.
If you were holding silver dollars you experienced price rises as it progressively purchased less than gold.
http://pricedingold.com/silver/
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