If we were to go back on the gold standard
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If we were to go back on the gold standard
How would you restructure your portfolio? 33/33/33 , stocks/cash/bonds?
Re: If we were to go back on the gold standard
I'd still keep the cash at least partially in gold. As easily as you can go on the gold standard, apparently it's easier to go off it.
Re: If we were to go back on the gold standard
I'd probably diversify my bonds into Japan and other fiat safe havens.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: If we were to go back on the gold standard
Well if cash and gold are equivalent then the 4x25 PP becomes
25% stock
25% long term bond
50% cash/gold
If it were me I'd simplify to
1/3 stock
2/3 intermediate treasury bond
Interestingly that is very similar to the conventional lazy-portfolio advice for conservative investors. Bogle, Vanguard, Malkiel, etc. all suggest something like 30% total stock market, 70% total bond market. I think their world view is that monetary policy just works and so it's rational to build portfolios without any hedging against currency problems. The PP is almost the exact same portfolio, except it has currency hedges built in.
Even if cash is convertible to gold, I think it'd still be a good idea to have some physical gold around, as a failsafe. Maybe 1-5 ounces. This is analogous to how it's a good idea to have a stack of paper cash at your house, in case of something like a natural disaster where plastic might stop working for a couple days.
25% stock
25% long term bond
50% cash/gold
If it were me I'd simplify to
1/3 stock
2/3 intermediate treasury bond
Interestingly that is very similar to the conventional lazy-portfolio advice for conservative investors. Bogle, Vanguard, Malkiel, etc. all suggest something like 30% total stock market, 70% total bond market. I think their world view is that monetary policy just works and so it's rational to build portfolios without any hedging against currency problems. The PP is almost the exact same portfolio, except it has currency hedges built in.
Even if cash is convertible to gold, I think it'd still be a good idea to have some physical gold around, as a failsafe. Maybe 1-5 ounces. This is analogous to how it's a good idea to have a stack of paper cash at your house, in case of something like a natural disaster where plastic might stop working for a couple days.
Re: If we were to go back on the gold standard
What exactly do we mean when we say "return to the gold standard"?
Does it mean gold coins in circulation?
Does it mean full convertibility of currency into gold for anyone?
Does it mean all international currencies are pegged to gold, or just some of them (or maybe just one of them)?
What kind of bank reserve requirements would be in place to check the growth in the money supply?
When you begin working through all of the issues that would be involved and how much power politicians and central bankers would be giving up, I think it begins to look more and more like a non-starter.
Does it mean gold coins in circulation?
Does it mean full convertibility of currency into gold for anyone?
Does it mean all international currencies are pegged to gold, or just some of them (or maybe just one of them)?
What kind of bank reserve requirements would be in place to check the growth in the money supply?
When you begin working through all of the issues that would be involved and how much power politicians and central bankers would be giving up, I think it begins to look more and more like a non-starter.
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Re: If we were to go back on the gold standard
I don't think debt is compatible with a gold standard world. I think a non-expanding currency requires strict anti-usery laws. The inevitable cycle of indebtedness and default causes much aggrevation. It used to be a driving force for war-mongering.
What would be the point of holding bonds in a gold standard PP? The volatility of gold price would not be softened by holding bonds whether short or long term if those were pegged to gold. Treasuries would have an overwhelming default risk not to mention the risk of plummenting devaluation once the peg to gold was abandoned. To my mind the best option would be to emulate the fat tail minimization allocation of 25%stocks:75% risk free money. Under a gold standard, gold would be the only risk free money so it would be 25%stocks:75%gold.
What would be the point of holding bonds in a gold standard PP? The volatility of gold price would not be softened by holding bonds whether short or long term if those were pegged to gold. Treasuries would have an overwhelming default risk not to mention the risk of plummenting devaluation once the peg to gold was abandoned. To my mind the best option would be to emulate the fat tail minimization allocation of 25%stocks:75% risk free money. Under a gold standard, gold would be the only risk free money so it would be 25%stocks:75%gold.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: If we were to go back on the gold standard
Self-liquidating debt should be fine in a gold standard world. If I can take capital I borrow at 8% and put it to use in my business earning 12%, I don't see how that would be incompatible with a gold standard.stone wrote: I don't think debt is compatible with a gold standard world. I think a non-expanding currency requires strict anti-usery laws. The inevitable cycle of indebtedness and default causes much aggrevation. It used to be a driving force for war-mongering.
What would be the point of holding bonds in a gold standard PP? The volatility of gold price would not be softened by holding bonds whether short or long term if those were pegged to gold. Treasuries would have an overwhelming default risk not to mention the risk of plummenting devaluation once the peg to gold was abandoned. To my mind the best option would be to emulate the fat tail minimization allocation of 25%stocks:75% risk free money. Under a gold standard, gold would be the only risk free money so it would be 25%stocks:75%gold.
It is debt that is used for consumption that seems problematic.
It also seems like there will always be a market for very short term debt, as it is virtually impossible for many businesses to operate without access to 30-90 day lines of credit.
Q: “Do you have funny shaped balloons?”
A: “Not unless round is funny.”
A: “Not unless round is funny.”
Re: If we were to go back on the gold standard
Medium Tex, fixed interest finance is fine so long as no hiccup is encountered. The problem is that once a hiccup is encountered, then a viscous cycle bites in. Apple and Berkshire Hathaway are debt free aren't they? I think in Japan corporations sitting on mountains of cash is standard. Its not obvious to me why equity finance couldn't do everything. In the UK we have venture capital trusts that provide equity finance to small companies. It is on a tiny scale in comparison to fixed interest lending to such companies but I don't see why such venture capital trusts could not provide all the financing needs currently provided by banks. I don't see why the corporate bond market could not be entirely avoided if all companies were run in the way that Apple is with cash reserves.
With a gold standard things would be glass hard and glass brittle. A whiff of deflation could convert what was a self liquidating debt into an inescapable death spiral. Imagine a company takes out a loan to pay back at 8%. Then the prices it sells its products for fall by 5% per year.
Self reinforcing debt deflation feedback loop scenarios are what causes gold standards to be abandoned I guess.
With a gold standard things would be glass hard and glass brittle. A whiff of deflation could convert what was a self liquidating debt into an inescapable death spiral. Imagine a company takes out a loan to pay back at 8%. Then the prices it sells its products for fall by 5% per year.
Self reinforcing debt deflation feedback loop scenarios are what causes gold standards to be abandoned I guess.
Last edited by stone on Wed Nov 23, 2011 12:47 pm, edited 1 time in total.
"Good judgment comes from experience. Experience comes from bad judgment." - Mulla Nasrudin
Re: If we were to go back on the gold standard
Assuming we've mined the vast majority of the gold out there, how does the following work out:
If deflation will result when production growth exceeds the growth of the money supply, it's reasonable to assume that once no more gold can be mined, if the economy is to grow, we will experience deflation, or in other words, real appreciation of money (gold) not even loaned out at interest. Unlike the 1800's, this won't be able to drive a gold-boom of jobs in the west because as we said it's already almost all been mined.
It seems to me that this will hamper the very growth to begin with. If people are able to earn a reliable, stable real return by simply sitting on their money, it would seem to me that this would create a ceiling, induced not by fundamental economics but simply a lack of a decent form of money outside of gold, to our world's economic output potential. I'm not saying that a lack of economic output is in-and-of-itself a bad thing, but when people are unemployed and suffering due to a lack of growth, it's easier to see that this might be problematic.
I guess it comes down to whether or not the need for a medium of exchange is something more infrastructural in nature, being aided by the ability for goverment to expand it as the economy deems necessary. Much like roads could be run by the private sector, but the efficiency gained by having one cohesive system is greater than what's lost by having it run by government monopoly.
It seems to me that maybe the best way to view the need for a medium of exchange is simply an failure of the marketplace that for centuries was best addressed by a wonderful metal. Now, with our economy having far outgrown the ability of the total value of that metal to act as a medium of exchange, we either have to resort to bartaring or having government grow the money supply for us.
If deflation will result when production growth exceeds the growth of the money supply, it's reasonable to assume that once no more gold can be mined, if the economy is to grow, we will experience deflation, or in other words, real appreciation of money (gold) not even loaned out at interest. Unlike the 1800's, this won't be able to drive a gold-boom of jobs in the west because as we said it's already almost all been mined.
It seems to me that this will hamper the very growth to begin with. If people are able to earn a reliable, stable real return by simply sitting on their money, it would seem to me that this would create a ceiling, induced not by fundamental economics but simply a lack of a decent form of money outside of gold, to our world's economic output potential. I'm not saying that a lack of economic output is in-and-of-itself a bad thing, but when people are unemployed and suffering due to a lack of growth, it's easier to see that this might be problematic.
I guess it comes down to whether or not the need for a medium of exchange is something more infrastructural in nature, being aided by the ability for goverment to expand it as the economy deems necessary. Much like roads could be run by the private sector, but the efficiency gained by having one cohesive system is greater than what's lost by having it run by government monopoly.
It seems to me that maybe the best way to view the need for a medium of exchange is simply an failure of the marketplace that for centuries was best addressed by a wonderful metal. Now, with our economy having far outgrown the ability of the total value of that metal to act as a medium of exchange, we either have to resort to bartaring or having government grow the money supply for us.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
-
Ad Orientem
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Re: If we were to go back on the gold standard
While the topic of this thread makes for an interesting theoretical exercise, I seriously doubt that we could return to a true gold standard even if we wanted to. A 'gold standard" that did not at some level offer convertibility would be meaningless. And given the available stocks of bullion worldwide I don't see it happening. Consider how vastly the worlds population has increased and how the number of national currencies has exploded since the 1930's which was when the last true gold standard effectively died. Even back in the days of the gold standard there was an often chronic shortage of money. Remember the controversy over bimetallism in the late 19th century? That was a product of the non-viability of the gold standard as evidenced by the shortage of money. And the global supply of bullion has not moved that much since then. The idea of trying to get all or even most of the world's countries to agree on some kind of gold backed currency reminds me of the old saw about herding cats. Things were different when the only countries that really mattered were Britain, France, Germany, the US and sometimes Russia.
If (I can't overemphasize that word), there was some desire to go back to a hard money system, my guess is that it would involve either a basket of precious metals or commodities, or possibly a silver standard as opposed to gold. There may be enough silver bullion to make it workable. But a global gold standard? Logistically I don't think it's possible. Politically I would be stunned if something like that even got to the point of being seriously discussed at an international conference between major countries. It would take years to implement. It would reek havoc on financial markets because of the uncertainty it would generate. It would create an explosion in precious metals prices from speculation. And even hinting at something like that could cause a catastrophic collapse in confidence in fiat currency.
And to be perfectly honest, I think a rigid gold standard is a really crappy idea. There is nothing sacred about the gold standard. Nations as far back as the Roman's routinely cheated when they needed more money or simply abandoned the GS altogether. A gold standard also robs governments of monetary flexibility to react to crisis. To be clear, I am NOT a fan of unrestrained money printing. But there are times when some government intervention in a crisis is needed. I am not an economic anarchist. Could the FED have acted to prevent a financial meltdown in 2008-09 the way it did had we been on a gold standard? I doubt it. Of course some might argue that there would have been no crisis because the loose money that fueled the bubble would not have been there. Maybe, and maybe not. But the gold standard never stopped bubbles as evidenced by the various financial panics and stock market crashes in the 19th century up to the Great Depression.
I like gold where it is. Gold is far better off acting as an extra-national reserve currency that is not tied to or under the control of any government. In it's present role gold serves as a far more effective check on central bankers and irresponsible governments then it ever did in the days of the gold standard. If you are comfortable with your country's paper money then you hold dollars. If you think the FED is getting a bit too hinky with the printing press than you can trade your dollars for gold as a form of protest and a "vote of no confidence" in the FED's policies (not to mention insurance). Anyone who thinks central bankers don't keep an eye on the price of gold, I have bridge I will sell you real cheap.
Sorry, I think the days of the gold standard are over. And good riddance.
If (I can't overemphasize that word), there was some desire to go back to a hard money system, my guess is that it would involve either a basket of precious metals or commodities, or possibly a silver standard as opposed to gold. There may be enough silver bullion to make it workable. But a global gold standard? Logistically I don't think it's possible. Politically I would be stunned if something like that even got to the point of being seriously discussed at an international conference between major countries. It would take years to implement. It would reek havoc on financial markets because of the uncertainty it would generate. It would create an explosion in precious metals prices from speculation. And even hinting at something like that could cause a catastrophic collapse in confidence in fiat currency.
And to be perfectly honest, I think a rigid gold standard is a really crappy idea. There is nothing sacred about the gold standard. Nations as far back as the Roman's routinely cheated when they needed more money or simply abandoned the GS altogether. A gold standard also robs governments of monetary flexibility to react to crisis. To be clear, I am NOT a fan of unrestrained money printing. But there are times when some government intervention in a crisis is needed. I am not an economic anarchist. Could the FED have acted to prevent a financial meltdown in 2008-09 the way it did had we been on a gold standard? I doubt it. Of course some might argue that there would have been no crisis because the loose money that fueled the bubble would not have been there. Maybe, and maybe not. But the gold standard never stopped bubbles as evidenced by the various financial panics and stock market crashes in the 19th century up to the Great Depression.
I like gold where it is. Gold is far better off acting as an extra-national reserve currency that is not tied to or under the control of any government. In it's present role gold serves as a far more effective check on central bankers and irresponsible governments then it ever did in the days of the gold standard. If you are comfortable with your country's paper money then you hold dollars. If you think the FED is getting a bit too hinky with the printing press than you can trade your dollars for gold as a form of protest and a "vote of no confidence" in the FED's policies (not to mention insurance). Anyone who thinks central bankers don't keep an eye on the price of gold, I have bridge I will sell you real cheap.
Sorry, I think the days of the gold standard are over. And good riddance.
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Re: If we were to go back on the gold standard
Simply, perfect. I totally agree. I am MUCH more comfortable with my government existing without default risk, and not trying to make conversion promises I know it may not keep, and holding as much gold in my portfolio as I deem necessary.Ad Orientem wrote: I like gold where it is. Gold is far better off acting as an extra-national reserve currency that is not tied to or under the control of any government. In it's present role gold serves as a far more effective check on central bankers and irresponsible governments then it ever did in the days of the gold standard. If you are comfortable with your country's paper money then you hold dollars. If you think the FED is getting a bit too hinky with the printing press than you can trade your dollars for gold as a form of protest and a "vote of no confidence" in the FED's policies (not to mention insurance).
I don't even mind the central banks owning some gold to hold on to enough clout to keep our currency (and, therefore, society) from collapsing, assuming that it acts as such.
The problem I think many have with printing money isn't so much the inflation it causes (that can be invested for accordingly), but the redistribution they feel is being achieved by printing & spending. But keep in mind, confiscation and genocide existed in droves in societies with gold standards.... gold doesn't fix stupid and/or evil!
Last edited by moda0306 on Wed Nov 23, 2011 12:59 pm, edited 1 time in total.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."
- Thomas Paine
- Thomas Paine
Re: If we were to go back on the gold standard
If we were in a gold standard world, then gold *must* appreciate in value, unlike in current times where it's said gold retains it's value but has zero inflation-adjusted return.
The reason I believe this is because if the monetary supply of the world was fixed (because the amount of gold is relatively fixed), but people continue to generate more value in the world (building more buildings, creating new technology, etc), then the Gold-per-unit-of-value would increase over time and the spending power of gold would increase over time too.
In this case, I'd probably be 25% stocks, 25% bonds, 40% gold coins, 10% cash.
Technically this would be 50% gold, which is equivalent (in a gold standard world) to 25% cash 25% gold.
The reason I'd go 40% gold coins and 10% cash is because even though they are fungible in a gold standard world, the risk exists that the governments would go off the gold standard, causing the value of cash to plummet relative to gold.
While remaining in the gold standard world, I have no downside in keeping 40% gold, 10% cash. I'd go full gold but the cash would make rebalancing between the stocks and bonds easier.
The reason I believe this is because if the monetary supply of the world was fixed (because the amount of gold is relatively fixed), but people continue to generate more value in the world (building more buildings, creating new technology, etc), then the Gold-per-unit-of-value would increase over time and the spending power of gold would increase over time too.
In this case, I'd probably be 25% stocks, 25% bonds, 40% gold coins, 10% cash.
Technically this would be 50% gold, which is equivalent (in a gold standard world) to 25% cash 25% gold.
The reason I'd go 40% gold coins and 10% cash is because even though they are fungible in a gold standard world, the risk exists that the governments would go off the gold standard, causing the value of cash to plummet relative to gold.
While remaining in the gold standard world, I have no downside in keeping 40% gold, 10% cash. I'd go full gold but the cash would make rebalancing between the stocks and bonds easier.