Monday, July 03, 2006

The gold bugs are back...

...and they still cling on to their precious cherub. A friend emailed me a recent "argument" from a gold bug. Its interesting to note that these arguments of monetary Ragnarok have not changed much since 1973...and if one followed the advice to stay away from the U.S. Dollar (and assets denominated therein), one would have to at least privately fulminate on the massive opportunity cost lost.

Anyway, my response:

Its amusing to see this type of thinking, so ingrained in economic thought. Causalities are NOT transitive nor are they so simplistic. First off, this guy does not understand the dynamics of fiat money, and the fact that the U.S.$$ is the reserve currency of the universe. Foreign goods "financing" us? Rubbish. The opposite of the current account is the capital account, which the world needs to be positive as the U.S. $ denominated assets are the world's chief source of collateral, in addition to serving as the denominating currency of all important commodities.

Furthermore, If one defines inflation as "too much money chasing too few goods, imagine what the inflationary pressures would be like had China, India, et al. NOT provided us with the goods they have over the last decade. The challenge is to match the "real" assets with the growth in currency. If the world switched to gold for its currency, there would be massive deflation. Gold limits human ingeuity, it is indeed a "barbarous relic" as Keynes said - it worked in Agrarian times when humans had limited factors of production, but now, would anyone stil maintain that growth is limited by physical property and/or rents from land???

As Alan Greenspan once said:

"Well, I wouldn't say that the pay-as-you-go benefits are insecure, in the sense that there's nothing to prevent the federal government from creating as much money as it wants and paying it to
somebody. The question is, how do you set up a system which assures that the real assets are created which those benefits are employed to purchase."

That is the whole ballgame.

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