Gold as Actual Money - Sucks

[Kbg]

This might be fun...rebuttals encouraged.

Quoting Cullen Roche: We tried the classical gold standard from 1880-1914. We had TEN recessions and FOUR financial panics. During SIX of those recessions GDP fell over 20%.

And we were basically on the gold standard until 1932-33 and we can add one to each tally.

Inflating our money slowly away isn’t great either but assets and wages generally keep pace.

[drumminj]

Are recessions inherently bad? Panics, perhaps, but recessions keep the economy more..honest, and flush misallocation of capital. These seem like good things over the long term, no?

[shekels]

This might be fun...rebuttals encouraged.


Inflating our money slowly away isn’t great either but assets and wages generally keep pace.

If you are on fixed income, Inflation is a killer. (I am thinking of the elderly and the poor in this situation)
Inflation numbers are aligned with whomever is in political office, also Minimum wage does not increase every year.

We could do much more before resorting to Gold as Money first although
Gold backed currency might stop uncontrolled Government debt.

Switching from a Debt Based money system with Fractional Reserve lending
also ridding ourselves of the Fed Reserve Note Fraud would be a start.

[dualstow]

Your tungsten bars are not welcome here

[Kbg]

Agree on fixed income for the elderly (and hence why pretty much all that stuff is inflation indexed now if it is from the govt)

Gold backed currency might stop uncontrolled Government debt.

On the above...categorically no unless you can talk the entire world into it. Read up on why Bretton Woods blew up during the Nixon years.

[Smith1776]

Gold can indeed absolutely suck as a form of money.

The fact that it's fairly cumbersome means that it's too tempting, it's too convenient, to start using money substitutes. It becomes too easy to entrust your gold with a "reliable" third party.

That's where the trouble comes.

Honestly, I'm not on any crusade when it comes to going back on the gold standard. All I care about is that it's legal for me to own gold personally. I'm on my own personal gold standard. Let the politicians print as they might.

I'll fondle my gold and silver coins in private and watch as the fiat world might burn. If I need to spend? I'll just liquidate a few. Easy peasy.

[shekels]

Agree on fixed income for the elderly (and hence why pretty much all that stuff is inflation indexed now if it is from the govt)

Gold backed currency might stop uncontrolled Government debt.

On the above...categorically no unless you can talk the entire world into it. Read up on why Bretton Woods blew up during the Nixon years.

I think it was over 70 years the gold standard was in effect, until NIxon closed the gold window. Because other countries wanted Gold. So the Dollar may lose World reserve status, but Reserve status is slowly going Bye Bye anyway. We are essentially doing it again. where China is using Dollars to buy Gold.

[ochotona]

Luke Gromen pointed out on a podcast recently something really though provoking... the entity which is most short the US Dollar is the US Government itself. So much winning

[jhogue]

Is there something wrong with China (and many other countries) being long on the US dollar?

[Smith1776]

I personally don't think that countries like China are really long the U.S. Dollar. They've got a whole bunch of gold holdings that effectively act as a hedge. So, maybe they've got a long-short position that is relatively small on a net basis.

[jhogue]

Uhh, well, China really is long on the US dollar. At the moment, it has no choice:

China's central bank currently holds about $2 trillion foreign exchange reserves denominated in US Treasurys. It is the largest holding outside the US. The precise amount of US Treasurys held by the PBOC is an official state secret in China, as is its holding of gold bullion.

https://en.wikipedia.org/wiki/Foreign-e ... s_of_China

China has massive holdings in US Treasurys because of the size of its trade with the USA, as well as its reliance on Middle Eastern oil (which is priced in US dollars).

China's expansive gold buying program, on the other hand, is probably directed toward a future day in which China hopes to replace the US dollar as the global reserve currency of choice. No reason to be alarmed (not yet, anyway) but it is one more solid reason to hold gold as part of a diversified portfolio.

[boglerdude]

> China hopes to replace the US dollar as the global reserve currency of choice

Maybe. Yuan devaluation keeps real wages low, so you can employ more people. $15 minimum/mcdonalds wages in the US means the guy building US rail demands 30/hour, so infrastructure in the US is overpriced and therefore some of it just never gets done.

[Kbg]

We are the default currency due to free market economics and strength of institutions. Currently we are the largest economy in the world and generally believed to have the rule of law to resolve commercial disputes. Current projections indicate the first will flip to China in the future and the second is ours to lose. No country gets to "decide" that it will be the world's reserve currency or they will replace another country as the reserve currency, it's something they create by who they are economically and what they do.

[Ugly_Bird]

Inflation numbers are aligned with whomever is in political office, also Minimum wage does not increase every year.

Even with inflation related compensations it doesn't work. Goods and services costs increase in time more than inflation. There are some goods which doubled in price over a few years, most of the salaries didn't...

[Ad Orientem]

I am big fan of holding gold as an insurance policy against the stupidity (or depredations) of politicians and central bankers. But the much hyped safety of the gold standard has always been a pious myth. The main drawback to so called hard money, where paper currency was just a promissory note for the real thing, is that you could not adjust the money supply in times of urgent need. That need might be a massive depression or a war threatening the survival of your country. And here is the great weakness of hard money regimes. No country has ever committed suicide in the name of preserving its reputation for sound money. Point in fact, this country has on multiple occasions suspended redemption of paper money for specie. We did so during several banking crisis in the first half of the 19th century. We printed paper money during the rebellion of 1861-65. The first casualty of the Great War was not some soldier on the Belgian border. It was the classical gold standard and the world's first globalized economy. And the last nail in the coffin was the Great Depression.

Those clamoring for metal based money tend to make me scratch my head. Consider the history of our government's involvement with gold/money just in the years 1933 and '34. In 1933 the US Government basically told everyone who had foolishly lent it money (i.e. gold) "thank you for your loan, but we are keeping the gold. However we will give you these colorful pieces of paper with numbers on them as a consolation prize." Then they turned to the folks who had wisely not lent the government their gold and said "oh by the way, we are taking yours too." But they gave these folks $22.67 in colored pieces of paper with numbers on them for every ounce. And then... after collecting all the gold, the Feds revalued it at $35.00 oz (in colored pieces of paper with numbers on them).

Yep. These are the folks I want in charge of setting the value of gold and creating a new currency.

[Mark Leavy]

I don't put too much stock in stories.

Gold does this or that because of ...

Gold will respond to this or that economic condition because of this or that ...

Really?

How much do we know? All of our investments are based on stories of what someone believes.

History is such a story. So I mix a little gold in with my bonds and equities and fungibles. It has worked in the past. An ounce for a cow. An ounce for a mason's monthly wages. An ounce for a plot of land. What are you gonna do?

Hold a bit of gold with your equities and bonds. Hope for the best.

[Kbg]

I don't put too much stock in stories.

Gold does this or that because of ...

Gold will respond to this or that economic condition because of this or that ...

Really?

How much do we know? All of our investments are based on stories of what someone believes.

Yup. My main reason for holding gold is it isn't correlated with stocks and bonds.

[boglerdude]

Most gold mines are outside the US. So as an American, no thanks. We could just stop printing dollars.

"If we just froze the monetary base tomorrow then inflation would way undershoot expectations, we'd almost certainly get falling aggregate demand and the price level would subsequently fall. A whole bunch of debt contracts that were made with particular inflation expectations in mind would default, likely triggering a recession, and a lot of the Fed's monetary policy tools that depend on being able to manipulate the monetary base wouldn't be available (since the base is frozen), so the recession would likely descend into a depression.
In other words, the classic debt deflation spiral.
If the change was communicated a long time ahead of time and the transition was done extremely gradually (lowering the inflation target YoY over the course of a decade or two, adjusting the monetary base growth rate as appropriate) until the M0 growth rate hit zero....might not be too terrible. It's still an extreme change in monetary policy regime and it's difficult to impossible to really predict accurately what the economy would look like on the other side, but it might be pretty OK.
A frozen fiat monetary base sometimes gets called a synthetic commodity money, so it might generate most of the positives of a gold standard (predictable long term price level, productivity based price deflation, stable NGDP growth rate [ie. ~0%], etc) without the downsides (money supply shocks related to changes in the supply of gold, artificially hiking the price of industrial gold, the monetary apocalypse that is one day being able to sustainability mine the unfathomable amounts of gold in the asteroid belt, etc).
The problem you're going to really run into is that it's really uncharted territory. There was no clear understanding of monetary economics and macro-economic management in the 19th and early 20th centuries when relatively-fixed monetary bases (ie. the gold standard) were more common. What understanding there was was often actively harmful (real-bills doctrine, for example). Macroeconomic management, economic stability policy, and all those things that keep the economy afloat today are based on assumptions of mildly inflationary economic environments where control of the monetary base is the primary start of any transmission path for monetary policy. If you take that away, it's harder to see how central banks and other authorities could respond to recessions in an effective way.
So yeah, it's definitely possible it could be OK, but it's also possible it could go terribly, terribly wrong and we would be hamstringing out ability to respond in the case it did."
via https://old.reddit.com/r/Economics/comm ... ?context=3

[Kbg]

Nice post, seriously.

You nailed it in a very concise manner. There was a TON of academic study post war years on this whole issue. Sometimes there is good reason behind "conventional wisdom."

Side note, the more I study gold the more I'm confident Harry was wrong about it. I believe he was overly influenced by the times he lived in (as we all are). Having noted this, its current correlation stats over a very long period of time still suggest it is a good diversifier in a portfolio. Reasonable people can differ on the allocation size. For a young person I would categorically advise less is better.

I kinda wish I had 50 more years in me...I'd love to be reading what scholars came up with as to what/why we are seeing now and what Japan has been seeing since the early 90s. (consistently low and negative interest rates in the face of unprecedented monetary expansion). I'm thinking it may be related to a slowdown in population growth or maybe at some point the money multiplier becomes the stronger factor once you get to "X" in term of quantity of money. From the data (for those who actually use the data) it is crystal clear that just because your print it doesn't mean it is going to be used/circulate.