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pacomartin
pacomartin
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June 23rd, 2011 at 12:41:58 AM permalink
BACKGROUND
I think most people are familiar with the concept of fiat money since most money now is fiat money. Fiat in Latin means let it be done and refers to the fact that most banknotes and coins are of little to no intrinsic value and are only of useful value because people believe them to be so. One by one we've seen countries adopt fiat currency. Some of us are old enough to remember when some dollars were "silver certificates" and at least theoretically could be exchanged for a dollar's worth of silver.

The ultimate new fiat currency is bit coins which are frankly nothing, except their quantities are controlled by algorithms and peer to peer networks instead of by governments. People are buying them, and the federal government has expressed their concern that drug dealers could use this new currency to launder money.

Digital Gold, the oldest of which is e-gold is based on a more familiar concept of gold backed representative money the value of which is controlled by a commodity market, although there are no certificates anymore.

There seems to be a nearly endless list of items to worry about. (1) The nearly 7 billion $100 notes in circulation which even at today's record gold prices could not be backed up by the stockpile of gold, (2) calls by many nations for a new world standard of currency, (3) electronic money which will allow the government to even further increase the money supply which can be zapped around by our mobile phones, (4) exchange rates that seem to resemble roulette outcomes at time, (5) garden variety counterfeiting and so called supernotes which seem to be circulating in small numbers but could be released by the truckload, (6) an unstable economy backing the money, and (7) the printing of a hundred billion dollars in so called $100 Kodachrome bills which have the brightest colors yet to appear on American currency and with the most anti-counterfeiting devices but are so full of defects that they have been sitting in a warehouse for as many as 16 months.

A MODEST PROPOSAL
The gold stockpiled in Fort Knox and Manhattan nominally adds to the wealth of the USA, but does not specifically back the currency in circulation. In theory if the price of gold on the open market rises to $2500 an ounce, then there should be enough gold to back the present supply of $100 bills. But that would simply be a coincidence, as the government is unlikely to agree to a link since they would have to remove $100 bills if the price goes down, and conversely could not print more unless the price goes up. And while gold probably won't go that high, it is very unlikley to go high enough to cover all the bills in circulation.

The modest proposal would be for the US government to issue a new set of purely electronic currency with one unit of currency per one ounce of gold in Fort Knox. I specifically say Fort Knox, because there is more gold in Manhattan, and I would not want to commit the entire nation's gold horde to this new currency. It would take some of the burden off the present money supply, and people would have a chance to buy into a currency that is not fiat money. Law enforcement would have some access to records so that it could not be used for illicit activity. Criminals would be forced to use garden variety physical currency.

If they ever get the problem fixed with printing the $100 Kodochrome note, we won'e need quite as many of them.
odiousgambit
odiousgambit
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June 23rd, 2011 at 3:10:25 AM permalink
well, you've shown me something new with this e-money. I sort of get it, I mean with my own credit card use and money in banks I only see get transferred around electronically for payments and movement, I get the feel my own money is not real and is just out there in cyberspace. There's something odd about not writing a real check even. But this new thing, not sure how that really differs.

One thing though, if I was determined to do it, I could convert it all and get a big pile of paper money out of all my assets. Sounds like you can't do this with e-money.

As for your proposal, I am against tying US currency to *any* commodity, since a commodity is subject to speculation. This can wreck havoc IMO. How does it take the "burden" off the money to do what you propose? Sounds to me like instigating a burden.

IMO If you want the security of gold and you think it is a good bet, buy gold, or stocks in gold mines. There's even an ETF for that now.
the next time Dame Fortune toys with your heart, your soul and your wallet, raise your glass and praise her thus: “Thanks for nothing, you cold-hearted, evil, damnable, nefarious, low-life, malicious monster from Hell!” She is, after all, stone deaf. ... Arnold Snyder
FleaStiff
FleaStiff
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June 23rd, 2011 at 4:13:27 AM permalink
The problem is that Bit Coin recently took a nose dive for some arcane reason unrelated to any economic events or gold supply issues.

I recall that young woman in NYC who advertised the availability of her body for some World of Warcraft gold. The gold didn't exist and ofcourse it was usuable only within the narrow sphere of a multi-player online game. Real prostitution for fake gold with limited uses.

Value?

Its like that guy in Washington DC who could write checks in restaurants and have them accepted. He wrote out a check and asked the waiter to bring him a recently issued twenty dollar bill. He simply pointed to his signature on the bill and his signature on the check and the waiter figured he might as well accept a check from the treasurer of the United States. We accept stores of value because it is convenient for us to do so.

When the USA finally renounces its foreign debt, then maybe BitCoin gold is all there will be.
s2dbaker
s2dbaker
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June 23rd, 2011 at 4:20:54 AM permalink
Why would anyone want to tie the value of a currency to gold? Gold itself is fiat currency since it really has no industrial value. It's just kind of shiney. I don't have any, care to collect any or desire gold. In case of catastrophy, I can't eat gold. It has no value for me. Someone is going to have to do a little more work convincing me that gold is less fiat currency than US Dollars.
Someday, joor goin' to see the name of Googie Gomez in lights and joor goin' to say to joorself, "Was that her?" and then joor goin' to answer to joorself, "That was her!" But you know somethin' mister? I was always her yuss nobody knows it! - Googie Gomez
pacomartin
pacomartin
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June 23rd, 2011 at 4:28:36 AM permalink
Quote: odiousgambit

This can wreck havoc IMO. How does it take the "burden" off the money to do what you propose? Sounds to me like instigating a burden.



Normally, when you print money, people say "That new $20 bill with the color looks newer", but they don't tell people they won't accept the old "uncolored" ones. The federal reserve gradually collects the old money and destroys it as it wears out, until the only old ones left are in collections.

As a policy the USA never says that once was money is no longer money. You can legally go out and spend a $10,000 bill tomorrow at face value. However, as a collector item it can be worth 5 to 16 times face value. So people don't go out and spend century old money. But it is the principal. In the UK, old money is no longer good for transactions after 2 years. But you can still turn it in at banks.

But the $100 bill is different. When it radically changed in 1996 there were roughly 2.4 billion hundred dollar notes circulating, most of them overseas. People immediately wanted the new bills with the big head because businesses stopped accepting the old notes. It was further complicated by the fact that people with large amounts of cash are often not doing something illegal. Or simply that they are in another country, which uses its own currency. They can't go to a bank and exchange American money. But the federal reserve was able to accomplish the switch by printing 1.2 billion big headed notes that year, and then slowly switching them out over a few years. By now (15 years later) it is virtually impossible to find a banknote with a small head.

Now you have the same problem but it is considerably worse. There are rumors of super counterfeit notes out there. You are now circulating 7 billion hundred dollar notes, and almost 5 billion are overseas. If you introduce a new Kodachrome bill, with elaborate anti-counterfeiting devices built in, people are not going to want to wait for several years to change out their old notes. I would call it a bank rush, but since people are hoarding them overseas, they will want to go to consulates, or any center where they can exchange notes. The situation is further complicated by the production issues. No one knows for sure if the billion or so notes already printed will ever be used. It might be more difficult to sort the good ones from the bad ones then to start over.

It doesn't help that we have presidential candidates calling for an audit of the gold in Fort Knox. It also doesn't help that the dollar is weak in exchange rate, and is being attacked constantly by Iranian and Chinese government official. If the rumors of counterfeits get very intense, people will start trying to turn in their American hundreds for Euro bills.

But many people (not I said "many" and not all) would be happy to turn in paper money for "electronic gold" backed by the US government, and the gold in Fort Knox. The gold in Fort Knox is worth over $200 billion at today's rates which would take care of some of the transactions.

A possible problem is that now the US government would not "own" the gold in Fort Knox, even if it is still physically there. If gold shoots up to $4K an ounce, then the new owners of the gold will reap the profit. Canada, for instance, sold almost all of their gold and replaced with a basked of dollars, yen, and euros. They sold it all when it was much lower priced than it is today. They were convinced that holding gold reserves was a stupid investment.
FleaStiff
FleaStiff
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June 23rd, 2011 at 5:12:50 AM permalink
Quote: s2dbaker

Gold itself is fiat currency since it really has no industrial value. It's just kind of shiney.

True but men toil for that kind of shiney stuff and often die trying to find it. Often die after having found it too since men kill for gold. Even the Devil dances for gold. Men left Australia and China to make their way to the Klondike. Thousands trudging up snow covered trails. All for some of that shiney stuff.
s2dbaker
s2dbaker
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June 23rd, 2011 at 6:15:28 AM permalink
Quote: FleaStiff

True but men toil for that kind of shiney stuff and often die trying to find it. Often die after having found it too since men kill for gold. Even the Devil dances for gold. Men left Australia and China to make their way to the Klondike. Thousands trudging up snow covered trails. All for some of that shiney stuff.

..which I totally don't get.
Someday, joor goin' to see the name of Googie Gomez in lights and joor goin' to say to joorself, "Was that her?" and then joor goin' to answer to joorself, "That was her!" But you know somethin' mister? I was always her yuss nobody knows it! - Googie Gomez
pacomartin
pacomartin
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June 23rd, 2011 at 6:24:15 AM permalink
Quote: s2dbaker

Why would anyone want to tie the value of a currency to gold? Gold itself is fiat currency since it really has no industrial value. It's just kind of shiney. I don't have any, care to collect any or desire gold. In case of catastrophy, I can't eat gold. It has no value for me. Someone is going to have to do a little more work convincing me that gold is less fiat currency than US Dollars.



All the gold mined in human history still amounts to 3/4 of ounce per human being alive today. The scarcity makes it perceived as precious to billions of people. Although it has many practical uses, it's symbolic value far overshadows it's industrial use.

Not everyone would be interested in buying an electronic chit tied to an ounce of gold in Fort Knox. But many people would. I am just saying we could run a secondary currency (electronic gold) that is backed by the gold in Fort Knox. It would be an alternative currency.

It is very unlikely that the government will go back to trying to back it's primary currency with any substance. Like I said, Switzerland was the last country to back it's currency with gold. The only reason they just changed ten years ago, was they had to pass a constitutional amendment to change the relationship. People around the world are very conservative with constitutional amendments.

In any case, this problem of replacing 7 billion banknotes worth $100 is a big one.

Because the Euro has much higher value notes, there problem is less daunting. Personally, I think that is a bad trade-off because of the criminal activity.
FleaStiff
FleaStiff
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June 23rd, 2011 at 6:59:30 AM permalink
Worldwide the primary currency has been the US Dollar. The secondary currency? US cigarettes? Young women?

Turkey and Greece have been currency problems in Europe for generations. The Euro is now popular as a currency. I don't know if anything else is.

Gold is heavy and hard to take with you if you are forced to flee out the back door of the palace as mobs are breaking down the front door. The US dollar is the currency generally favored. I doubt Latin American narco-terrorists do business in Euros.
ZPP
ZPP
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June 23rd, 2011 at 8:17:46 AM permalink
Quote: FleaStiff

Gold is heavy and hard to take with you if you are forced to flee out the back door of the palace as mobs are breaking down the front door.


Gold is currently worth about $50 per gram, while 100 dollar bills are worth about $100 per gram, so US currency does not have a huge advantage there. However, 500 Euro notes are worth about $700 per gram, which is significantly better.

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