Okay, charts.
Charts with links are going to take a while because the vast majority of what I am drawing from (including memory in some cases) is dead-tree format books, papers and newsletters from 5, 10 or even 15 years ago. Give me a bit to see what I can find. In the worst case I can always reactivate my charts.com account or sift the archives at mises.org. Who knows, you may even get photos taken with a digital camera and posted to a photobucket account.
While I am doing this, I would like to throw a bit of a challenge back:
Every fiat (unbacked) currency in history has ultimately failed. This is empirical fact. Furthermore, the current experiment with fiat currency that started in 1913 with establishment of the FRB and then went all the way by dropping the gold standard in the 1970s has resulted in inflation and a loss in value of well over 90%. In particular, the balance of payments has turned negative and both the current account deficit and overall levels of indebtedness have skyrocketed since the decoupling in the 70s. None of these trends show any signs of stopping.
So I have to ask: What proof is there that a fiat currency can survive? Is some form of backing required or not? Given basic human nature I think backing is required, but if not, why not? If so, what can and should be used as backing?
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And to touch on various points:
Thinman wrote:
I have no idea what you mean by quote-purchasing-power-unquote. Inflation-adjusted US Dollars? Tons of wheat per gram of gold?
Only as far as inflation is reported correctly. Purchasing power is more accurately be described as how much of a representative basket of goods (i.e. basics such as food, clothing and shelter) can be purchased per unit currency. Also commodity and other costs fluctuate depending on short-term surpluses and shortages, so an average would have to be used.
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And how does this square with the rule of thumb that western standards of living double every fifty years?
What is your basis for this, and how are "standards of living" defined? (lifespan? living space? diet? leisure time?) Just curious on this, especially since there has been little or no real economic growth since the 70s.
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Finally, ever heard of a little group called OPEC? They operate in an inelastic market similar to the "gold" based economy we're talking about where demand does not fall off as the price goes up. Because of this fact, OPEC has a disproportionate effect on the global economy.
So yes, markets can be gamed if you have enough time and capital and the stakes are high enough. (As in international trade ...) Hence my argument that reliance on a single product is silly.
Comparing OPEC and the gold market is like comparing apples and oranges because unlike gold (and similar base elements), oil is consumed and thus lost/depleted. This is why oil might be used to collateralize debt, but cannot be used as stable backing for a currency. And as I have said, it does not have to be just gold; other items could also be used. However, the backing items must meet certain requirements which rule out most commodities (consumables) as well as "intangibles" such as future labor units, etc. (Something to keep in mind when answering the "What can be used as backing?" question above)
As for gaming markets, I don't see how that is different from the currency games that are played now. If anything the gaming and fluctuations would be reduced because of the limiting nature of the backing, that is to say the inability to play with printing presses and electronic credits.
Vass wrote:
Yet inflation continued throughout the period, thus leaving gold undervalued (even if nominally) by the time that the gold standard was abolished. If USD = X amount of precious metal all the time, you better make sure that there is absolutely no inflation or deflation in the economy.
The inflation was the fault of the government bureaucrats and not the gold backing. Furthermore, it can be easily prevented by making the currency fully convertible (redeemable for the backing item) and requiring annual accounting of backing stocks in the same manner that the BIS currently requires accounting of foreign currency and precious metal reserves.
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amount of gold produced has historically increased at an average rate of 2-3% of the total above-ground gold.
Again, got link? This time purely for curiosity. It's kind of irrelevant if a mix of precious metals get used , but any currency backing will likely require more flexibility than that and I sincerely doubt there is enough gold reserve available to back the global economy.
http://www.gold-eagle.com/gold_digest/guru329.htmlSorry for the sales pitch for investing in gold, but this was the quickest link I could google, and correlates with data from gold producers associations (e.g. "From 1900 to 2004 the average annual increase in gold supply was 1.73%." [www.kitco.com]). Ignore the hype and just look at the figures.
Main points:
- Nearly 100% of all the gold mined in history forms part of today's above-ground gold stock which currently totals around 120,000 tonnes and is an available source of supply at any time.
- Above-ground gold stock increases at a fairly constant rate of around 1.7% per annum (during the last 50 years the largest annual increase was 2.1% whilst the smallest was 1.4%).
In order to back the global economy, gold would obviously have to be revalued (more accurately, currencies would have to be realigned with gold), and other backing might also be used, but it is possible.
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But we're cocking everything up in a new and excitingly different way, which is better than repeating past errors.
Actually, most of what is being done today has already been tried in one form or other in the past and failed. The only difference is the electronic (computer) factor, which if anything should just increase the speed of events. History doesn't repeat; it rhymes.