Gold and fiat currencies - Henry C K Liu

[don]

Stability of gold

While gold is fungible and indestructible, its real stability as a monetary metal lays in the fact that it cannot be created by government fiat. This fact denies gold the elasticity required for a responsive monetary system of the modern financial economy.

However, gold leasing by central banks has provided a way for governments to create a synthetic supply of gold to give this monetary metal a measure of elasticity, albeit a cumbersome one.

Thus gold as currency robs government of an important authority and function: the provision of a properly elastic monetary system to serve economic growth and security. Yet with an adequately elastic and responsive money supply, the gold market turns gold into a fiat currency substitute by using gold synthetically, detached from actual inventory, as a notional value in derivative structured finance. The need for gold as a monetary substitute for fiat currency increases only with the decline in market confidence in fiat currency issued by government. Yet gold derivatives undermine the safe haven characteristics of gold itself.

Further, gold possesses only limited palliative power against loss of market confidence in a diseased fiat currency. On the contrary, it makes a diseased fiat currency tolerable by providing market participants with an economically inert or even counterproductive hedge against fiat currency debasement.

Henry is worth reading in full on gold and fiat currencies.

http://www.atimes.com/atimes/Global_.../MB11Dj02.html

[Thailandnotes]

Re: Gold and fiat currencies - Henry C K Liu

"gold....an economically inert or even counterproductive hedge against fiat currency debasement."

so if it weren't for it, we could get this over with a lot sooner?

[LorenS]

Re: Gold and fiat currencies - Henry C K Liu

I still don't buy into the elasticity argument.

We live on a finite planet, I fail to see how an infinite money supply is required. If we can make do with a fixed amount of land, water, air and other necessary resources I don't see a huge problem with living with a fixed money supply.

My guess is that people just can't imagine life without compound interest and incessant inflation.

I'm of the opinion that we actually have a very good scenario right now. We have an official currency (of dubious value perhaps) but we also have the freedom to find alternatives if we choose, including gold. I'm not hoping for a return to the gold standard, though I would like to see our currency managed better.

What people are asking their currency to do is what only a divine being could provide. Maybe that's why we've put "In God we trust." on our money. In any case no money is going to eliminate the failings of mankind. Gold can be money, but no money can provide peace prosperity and happiness. That's asking too much and yet it seems that every proponent of their favorite "money solution" promises almost exactly that. If we just adopted the right money with the right "policy" Utopia will be achieved.

It's just another form of snake oil. Money is no better than the character of those using it and human nature has been stubbornly consistent over the ages.