How Different Would the U.S. Be Without the Fed

Discussion in 'Finance, Investing & Economy' started by Pathogen, Feb 6, 2008.

  1. Pathogen

    Pathogen Member

    Jul 19, 2004
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    In practical terms, that is. What would change if the U.S. went back to the gold standard? I'm especially curious because I have a coworker of mine that is a huge Ron Paul support and this happens to be part of his platform. Let's suspend reality for a moment, because I don't think for a second this is a possibility. But I'd like to hear from those of that are smarter than me, pretty much all of you, what kind of impact going back to the gold standard would have.
     
  2. vulkan02

    vulkan02 New Member

    Jul 14, 2006
    Very different. U.S. has been the world empire for 30+ years largely because of its dollar hegemony on the world. Going back to gold would mean that America can no longer print new dollars (in this case the Fed) and have the world eagerly accept it in exchange for products shipped here. Needless to say, if this were to change anytime soon then the whole American economic and political system would have to change as well to bring about a completely "new" nation .
     
  3. prk166

    prk166 BigSoccer Supporter

    Aug 8, 2000
    Med City
    I fail to see how the gold standard would prevent that., vulcan.
     
  4. spejic

    spejic Cautionary example

    Mar 1, 1999
    San Rafael, CA
    Club:
    San Jose Earthquakes
    Two ways. First, the amount of money you can have is limited to the amount of gold people dig up. That means there won't be enough dollars around to support a quickly growing economy, let alone be spread around the world for use as petroleum currency. Second, if the dollar is equivalent to gold, then they don't need to use dollars - they can just use gold themselves or another gold-equivalent.

    It would certainly mean that our standard of living would be way less. With fiat money, people will sell you stuff as long as they trust you and all you give them is green paper. With gold, you can only import goods until Fort Knox is empty, and then you are stuck.
     
  5. saosebastiao

    saosebastiao New Member

    May 22, 2005
    The gold standard is Ron Paul's least defensible ideas. Basically, the gold standard does nothing except forbid the government to toy with the money supply. This is both good and bad...but more bad than good IMO because it is highly irreversible.

    All currency is fiat currency, regardless of what people tell you. Sure, gold has a demand in electronics and jewelry that affects its value, but so does copper...and we don't seem to use copper as a common currency. The most redeeming quality about gold as a currency is the fact that it is very difficult to manipulate its supply. You can't just double the supply of gold in one day like you can with dollars.

    But is it a good thing or bad thing to be able to manipulate the money supply? Both. Governments can use the money supply to either stimulate or slow the economy in the short term, but using it too much in the long term can cause major problems with inflation and deflation, which in turn cause even more complex problems when other currencies seem more stable.

    So what is wrong with having an extremely stable money supply? The fact that our economies are almost constantly growing. When production outpaces the money supply, we get deflation. The problem with deflation is that it makes our debts more burdensome, because it takes more production to pay off less money. When deflation shows its face, people stop paying their debts...not because they can't...but because it is cheaper to go into bankruptcy and get new cheaper debts with lower money values.

    Overall, a slight tiny bit of inflation is a good thing, as it mitigates the problems of big inflation, deflation, and stagflation to the least objectionable degree.

    Blah blah blah...I'm sorry if this is boring, but basically...the gold standard stops the fed from being irresponsible with the money supply... but it also stops the fed from being responsible as well. It is a show of distrust in the fed and their politics...which seems appropriate right now, but is entirely inappropriate when the fed does their job well.
     
  6. vulkan02

    vulkan02 New Member

    Jul 14, 2006
    Spejic gives a good explanation but it basically boils down that when the dollar is pegged to gold, financial transactions are much more transparent and the currency cannot be hijacked by authorities to back up political means.

    The dollar is a floating currency because it isn't backed by gold, its value depends only in the credibility of the institution that prints it - The Federal reserve. Of course the Federal Reserve has much much less gold reserves than the current fantastic quantities of dollars traversing global financial institutions and once the world starts rejecting dollars somethings going to happen that puts America in a much more diminished position.

    My advice is to buy as much precious metals as you can, its the investment of our lifetime.
     
  7. spejic

    spejic Cautionary example

    Mar 1, 1999
    San Rafael, CA
    Club:
    San Jose Earthquakes
    Yeah, but it is still possible to manipulate it some. Lots of mind tricks are played in the futures market of the worlds biggest commodity - oil. And you can always do something like the Goldfinger gambit. It was silly back then, but modern terrorists might figure something out.

    Personally, I think there is a lot to be said for pegging the dollar to oil. There is pretty much a direct correspondence between oil use and the level of the economy, so that would be a good way to automatically size the money supply to the economy.
    There are some very, very good reasons for doing this. But don't forget that the government can always screw you by making precious metal trade highly regulated or even illegal, and they government would have good reasons to do this in cases where the value of money drops a lot.

    Just as an aside, if you are thinking of investing in expensive shiny things, never every get diamonds for this purpose.
     
  8. vulkan02

    vulkan02 New Member

    Jul 14, 2006
    Well yes after all they don't call it the black gold for nothing, as an investment for the future oil stocks are also very safe bets today. But gold has been around as the currency of choice since the beginning of civilization - plenty of other forms of currecy have been tried and failed from wheat to stone disks. Oil might be around for a century or more but what happens when the world starts running out of it or developing other technologies like they are doing today?

    You are right about government controlling the gold trade. If I remember correctly in the early 1920's they made it illegal to keep gold in your home as to increase the value of the dollar. But then again that administration seems to have understood more about money than the current clique of morons running this country today. Just about everything that they are doing will result in highter inflation thus higher gold value. Feds cutting interest rates, foreing wars, the "Stimulus package" etc.
    Supply and demand also entices gold to hit higher, many gold mining companies today are reporting minimal production rates as they have done in the past.

    Now what is your problem with diamonds? :p
     
  9. saosebastiao

    saosebastiao New Member

    May 22, 2005
    While it makes sense to buy precious metals, at least in our political condition, it would be foolish to make a blanket statement about it being the best investment for anybody.

    Gold values tend to go up during times of political instability and war. That means it also comes down during times of stability and peace. This trend isn't perfect though because it follows the psychological perception of stability rather than the stability itself.

    Gold hit a record peak in 1980, and in 1981, it lost about 25% of that price, and then in 1982 it dropped another 25%.

    By 2000, the economy was booming and we were not at war, and the price of gold was about 25% the price it was in 1980. But all of a sudden 9/11, and the subsequent war on terror and devaluation of our currency in the aftermath of the housing boom and bust, and right now you see gold booming to new record levels.

    The reason gold follows this pattern is that it is an alternative currency. When our currency is shot to hell, people find a better store of value. For most people that don't have ties to other countries and their respective currencies, gold is the option because it is still usable here.

    If and when our economy improves and the wars subside, you will see massive drops in the price of gold. History has proven it so. Precious metals might be the investment to buy right now, but saying that it always will be would be foolish. It will always be fairly stable as a currency...that much can be said. But there is a reason why it is not an investment.
     
  10. saosebastiao

    saosebastiao New Member

    May 22, 2005
    It is certainly an interesting idea...but the fact that oil is a consumable raises some questions. Gold works as a currency backer because we don't use it beyond a tiny percentage for electronics and jewelry. If we used it as much as oil, there would never really be any guarantee that you had that oil backing your currency. It could easily be long gone before you even knew it.
     
  11. vulkan02

    vulkan02 New Member

    Jul 14, 2006
    The 1980 issue was a very different scenario from what we have today because the credibility of the dollar as world currency was much higher then as it is now. Our currency has been printed during the 80's and especially the 90's by the Fed to fantastic levels to give the illusion of prosperous times and support political agendas - one of the dreaded mistakes of the Fed and its crown prince Alan Greenspan.
    The current administration and the people supporting it understand nothing of the gold standard after all it all worked very well for the US for over 30 years why would they want America's power reduced and go back to gold?! Ron Paul was its only advocate and how many votes did he get? It was almost sad watching the republican debates how they laughed in his face every time he mentioned going back to the gold standard. Well honestly thats all he ever said but its also indicative that none of the others had a clue about the gold standard.

    Regardless of what happens I can almost guarantee to you that gold will continue to climb to higher values due to:
    1. The world overflowing with dollars
    2. The criminal incompetence of this administration and most probably the next.
    There is already talks amongst many future speculators that gold might hit 10,000 an ounce, as crazy as that sounds, because there is nothing in place today that will even slow down this trend.

    Besides if you ever see it going the other way, you can always sell it back. :)
     
  12. saosebastiao

    saosebastiao New Member

    May 22, 2005
    I fully agree with you that gold prices will continue to climb. What you need to understand is that both of those conditions you mention are reversible. Its not likely in the near future, but it is very likely in the future. Americans simply will not sit and watch their country be destroyed.
     
  13. spejic

    spejic Cautionary example

    Mar 1, 1999
    San Rafael, CA
    Club:
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    When oil starts to run out (and it will be here way sooner than a "century or more") our economy has to shrink. A good way to handle that is to shrink the money supply in unison. You see how it all works out?
    There may be reason to think we have hit "peak gold" - that is, we have gotten most of the gold and production will go down every year from now on. If that is the case, then there is even better reason to get gold.

    Another reason why gold is expensive now is because the Middle East and India are both getting wealthier, and those people love bling.
    It's market is totally defined by DeBeers propaganda. They are not really that rare, and the secondary market is almost non-existent outside of eBay. If you go for investment diamonds (and there was some effort to do this in the 1970's in the last inflationary period), you will take a bath.
     
  14. vulkan02

    vulkan02 New Member

    Jul 14, 2006
    I fully agree with you as well; it might get so bad as to even induce a revolution here. But for the moment the vast majority of Americans can't pinpoint the source of the problems that we are facing now. Honestly it is too much to expect when not even the administration itself understands this. Maybe I confused you when I said gold is the investment of the lifetime. I don't mean gold will make you rich but its sure enough to beat the ensuing inflation and why not(if you have a lot of money to being with) make a profit as well. Sure safer than betting on stocks....
     
  15. vulkan02

    vulkan02 New Member

    Jul 14, 2006
    Its scary when you think how dependent on oil we Americans are. Don't something like 90%+ of Americans drive to work? When the supply of oil falls as its falling now due to past peak production but also political means (Venezuela won't sell to us) the price will go up because the demand remains the same if not higher. I don't see the economy shrinking if oil runs out... I see a total disaster - anarchy, if we don't develop something else soon...
    Saying the problem will be rectified by shrinking money supply (even I dont know how that will work) are you assuming that in the future oil will continue to be pegged to the dollar??

    Also on the diamonds I think there are major scientific breakthroughs today that allow the manufacturing of stones pretty close to properties of diamonds. Definitely not a good investment there.

    Now do yourself a favor and go pick up a couple of ounces...:eek:
     
  16. spejic

    spejic Cautionary example

    Mar 1, 1999
    San Rafael, CA
    Club:
    San Jose Earthquakes
    It's a real possibility.
    It's not about the petrodollar. When you have less stuff, there are two ways this can be represented in the economy: inflation (you have the same amount of green paper, but it buys less stuff) or deflation (green paper buys the same stuff, but everyone has less of it). The are both horrible, but inflation rewards people that spend now and I don't think that is the right response to diminishing resources.
    Actually, the best are so good that the only way to tell is to look for imperfections that only natural diamonds have. I wish that DeBeers wasn't sitting on stockpiles of diamonds and artificial diamond tech - they have some really cool industrial and consumer applications.
    I'm a lone wolf.
     
  17. vulkan02

    vulkan02 New Member

    Jul 14, 2006
    Maybe they will diversify. I assume the difference between a real diamond and a fake one is probably quite a lot and that alone might greatly reduce demand for natural ones. But then again maybe not. After all why is gold so damn expensive today when in its natural form it has few industrial uses expect electronics and jewelry? It is just ingrained in the human psyche for time immemorial as the last reliable currency.
     
  18. saosebastiao

    saosebastiao New Member

    May 22, 2005
    There are supply and demand curves for currencies just as much as there are for products. Gold is expensive because people are demanding it as a currency right now. Once the dollar stabilizes, that demand will subside.
     
  19. spejic

    spejic Cautionary example

    Mar 1, 1999
    San Rafael, CA
    Club:
    San Jose Earthquakes
    Modern synthetics are very, very hard to tell apart from the natural ones, except that colored diamonds (orange/yellow usually) are the easiest to manufacture and are very rare in nature. But some, like Apollo Diamonds, make clear ones. Try this article:
    http://www.wired.com/wired/archive/11.09/diamond.html
    Mostly its continued rarity. Outside of Spain's discovery of the Americas, the amount of gold available to civilization tends to increase slowly and steadily unlike many other materials which have had large finds and shortages.
     
  20. spejic

    spejic Cautionary example

    Mar 1, 1999
    San Rafael, CA
    Club:
    San Jose Earthquakes
    Sure, but do you realize how wildly tilted the dollar is currently? Foreign nations have trillions upon trillions of the stuff. To equalize, the dollar has to be worth far less than what it is worth now, or those nations have to convert the dollars into massive amounts American property or companies by going on a spending spree.

    There is, however, a third way. We could make some sort of asset inflation bubble and get lots of deadbeats to borrow money to buy into those assets. Then we could package up those loans in such a way that they don't seem to be backed by deadbeats, and sell them to foreign nations as a solid investment for all those warehouses full of green paper they have. Then the asset bubble deflates, the loans all go bad, and the dollars the foreign nations invested just disappear into the either. It's a neat trick. We did something like that during the 1980's to get the Japanese to buy into super-inflated companies. I wonder if we will try something like that now. :)
     
  21. saosebastiao

    saosebastiao New Member

    May 22, 2005
    Holt mother! If I ever need to run a scam, I know who to call!
     
  22. vulkan02

    vulkan02 New Member

    Jul 14, 2006
    They are already doing that through the so called sovereignty funds in the Middle East. Gathering U.S. debt is not very wise financially but with the money they can get political control by buying stakes in companies such as Merryl Lynch if I remember correctly.
     
  23. FCGrunn

    FCGrunn Member

    Oct 30, 2007
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    Ever read Karl Polanyi's Great Transformation?

    I don't know who this Ron Paul person is, but he should read this book.
     
  24. FCGrunn

    FCGrunn Member

    Oct 30, 2007
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    I believe that is exactly what is going on right now?

    UK gov refinancing Northern Rock because the latter bought into US deadbeat debts????
     
  25. Pathogen

    Pathogen Member

    Jul 19, 2004
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    No I haven't. If I get time I'll take a look at it. Thanks.
     

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