Frightening Economics

[AmeritecTech]

One of my biggest complaints about government is the switch to fiat currency when the US was taken off the gold standard. This meant that money was no longer backed by gold (or "actual" value) and was only backed by the word of the US government. It also allowed the government to print as much money as they wanted with inflation as the only rein slowing them down.

Now I'm reading USA Today and an economist from a very large school says something that really frightens me.

Economist James Galbraith of the University of Texas in Austin is a rare optimist in this debate. "I'm not at all concerned about Medicare or Social Security," Galbraith says. "Unless the government goes broke, Medicare isn't going to go broke, and the U.S. government isn't going to go broke because it can print money."
http://www.usatoday.com/money/economy/2004-10-03-debt-cover_x.htm

!!!

Talk about a scare! The fact that he's an ECONOMIST at a major university makes it all the more scary.

[Steve]

The value of the dollar resides in the size and stability of our economy, actually, which is a much better standard than gold.

[Fiona]

The value of the dollar resides in the size and stability of our economy, actually, which is a much better standard than gold. explain how please?

[AmeritecTech]

The value of the dollar resides in the size and stability of our economy, actually, which is a much better standard than gold.
So "just print more money" sounds like good fiscal policy to you? The Gold Standard comment was an aside, not the topic.

[Steve]

No, "print more money" is an idiotic policy, didn't mean to go off-track.

But to answer Fi's question: gold is more valuable today as an industrial material than as a monetary standard. In simpler terms, though, consider that the GDP of the United States in 1993 is estimated to have been $10.99 trillion dollars.

Gold closed today at $414/troy ounce. That equates to somewhat more than 26.5 billion troy ounces of gold. According to the Gold Institute (http://www.goldinstitute.org/supply/prodworld.html), total worldwide production of gold is estimated to have been somewhat more than 4.5 billion troy ounces through 2000.

Thus, if all of the world's gold (including teeth, jewelry, etc.) was owned by the United States, its value would still be approximately 1/5 the annual gross domestic product of the United States (at today's gold prices).

Gold, as a monetary standard, has been antiquated since, oh, about the time the U.S went off of the gold standard.

[Kangaroo]

I too was a 'gold' man until I learned more about modern economies.

Steve's explaination is a good one. I would like to expound upon it.

If you have a metal-backed currency, you severely limit the amount of capital available for investment. And it is especially bad when your paper currency is fixed to a certain amount of metal.

Example. US Dollars were fixed to gold at $35.00 to the Troy ounce. The US held 245,262,897 Troy ounces of gold. This equals $8,584,201,395. Not very much money in circulation, is it? And silver reserves were 3% of this quantity.

You ask "Why don't we adjust the number of dollars per ounce of gold, then?" Well, then you inflation. Plus foreign interests have the ability to really pound on our currency, or take all of our gold.

No. The best way is to let all the things of intrisic value we produce back our currency, our currency is much more stable and robust. And the government can 'print' and release to circulation more money as we produce more things.

[Fiona]

Thank you both. Makes sense. It's on my list of things to learn more about. :) I've been studying more these past months than I did in college ;)

[Steve]

It's a fascinating subject, Fi! Check out this thread (http://www.globalaffairs.org/forum/showthread.php?t=27527), also. The type of growth in our economy seen since about the time the gold standard was ended certainly would not have happened with the capital limitations Kangaroo points. Not to mention that Europe and Asia would still be mired in 19th century economies.

Printing more money to stimulate spending is, indeed, irresponsible unless it can be shown that the stimulus resulting from that spending will increase the size of the economy to match the now-increased monetary supply. But there's nothing wrong with increasing the monetary supply to match the economy's growth as it occurs.

In fact, did you know that a key impediment to greater expansion of the American economy in the early 19th century was simply a lack of money? There was plenty of gold in the banks, but the citizenry didn't have enough small change and small denominations to conduct everyday business very efficiently.