Extacy of Gold
by joelado, Sun Nov 20, 2011 at 11:30:04 AM EST
Gold doesn’t have the capacity to do anything that the Federal Reserve Bank can do to regulate inflation or deflation. Gold doesn't allow money supply to keep up with money creation, which is what happens in a sound economy. Gold is a limited supply commodity that is finite. It won't reach to cover the United States economy and there ain’t a prayer that it can cover the world's economy. Deflation has economic problems that can be just as bad as inflation. If we tried to use it as our currency, we would have massive deflation. Massive deflation leads to money hording rather than investing and banks can’t lend because the value of things are going down. Deflation is mostly associated with depressions.
Let me explain. Remember when real estate was the only sure bet investment? It had real… estate value. You could pass it down to your children. You could live on it, or in it. It had physical size and was tangible. However, its value went up and up and up, far beyond its real affordability. Why? How?
Why? How? Because the banking game had changed and people who were not bankers were throwing money at unsophisticated ordinary citizens and telling them they could afford these homes and the extra demand pushed the price of houses up. When the houses became more expensive they just increased the amount of money they could loan people of a certain income. Prices went even higher and these non-traditional bankers started making loans to people without checking their credit worthiness or doing a check on anything. Volume was the watchword for these brokers. With every loan they made they collected a fee, and they experienced none of the consequences if the loan went bad after. Then they turned around and sold these mortgages in pieces of paper, telling the purchasers that the value of their paper was guaranteed because, even though these were risky investments, they were backed by something of real value, actual houses, which at the time was an unmistakably safe investment. Real estate had only gone down in value once in the United State’s history and that was during the Great Depression. Even though they were doing the very same things that lead to the Great Depression, in their eyes, the United States was an endless ocean of prosperity, it was like the atmosphere, their illegal activity couldn’t possibly pollute it, at least not to the extent that it would create any real damage to our economy. For them there wasn’t any danger of the United States going into anything that remotely looked like a Great Depression. That was ancient history. Things are different now. We have smart phones and super fast computers; we drive sophisticated cars that run on gasoline. Besides, real estate is real estate and will not go down in value. Unfortunately we know now that that type of thinking is ludicrous. So use that critical thinking to think about what people are telling you about our money and gold?
The true value of gold is what others are willing to give up or do to get it from you. Gold, just like real estate, only has value when conditions are right to support that value. The value of gold is relative to the value of its importance to what you buy given a particular set of circumstances. Let me give you an example. If I am starving and I will die soon if I don’t get food and I have gold in my pocket, I will want to exchange that gold for food real fast. Gold has no value for me in comparison to food. However, if the food supply is limited and the person who has food also needs it to survive, my gold is worthless. It is worthless to both him and I because you can’t eat it and survive. The decision of to whether you will get food at all depends on either the goodness of the food holder’s charity or the timing when the food holder thinks there will be more food. Chances are the food holder will only give you at most a portion of his food for gold, and more likely then not, they will want all your gold for an amount of food that will most likely not sustain you. You can substitute anything that has a myth of value for the word gold here, such as jewels, platinum, stocks, bonds, money and even mansions. Let me explain. During the Bataan Death march wealthy people signed over mansions for food only to die anyway. Suddenly faced with dying their mansions weren’t that valuable anymore. Back to my point, things only have value relative to their worth during a given circumstance. It is an illusion to thing otherwise. So I am going to ask you, why do you think gold is any different than paper money? Remember real estate?
Paper money is the truest form of exchange under trading goods themselves for goods, or at least it should be. It truly has no value on its own. The value of paper money is in the exchange of goods. For example, socks are worth a buck a pair let's say, and shoes are worth 10 bucks. You can also say shoes are worth 10 pairs of socks. Money is just a medium of exchange. If you put gold into the equation things get more complicated. Let's say that you purchase wool and knitting needles with 2 bit of gold and you make ten socks. You go to buy shoes but the person isn't willing to sell you his shoes for your 10 socks. He wants gold. He says you have to have ten bits of gold first. So you have to go to someone who has gold to buy gold but the only gold in this economy is the gold you first used to purchase socks and it is with the person who sold you your wool and needles. You go to him and he wants three pairs of socks for the one bit of gold, because he wants to rent the shoes from the guy with the shoes when he goes outside and renting shoes only costs one bit of gold. Now, think of this simple example on a Macro level. Why is gold valuable? One reason is that it is not a commonly found metal, found in abundant quantity. It is scarce compared to the demand for it. Just imagine how valuable gold would be if it was the medium of exchange for the world’s economy. Very few people would be capable of possessing it. All the gold in the world would not equal all of the active money being handed over for goods in a single day in the current size of our world’s economy. It doesn’t take a genius to realize that gold simply doesn't work in a modern economy as it didn’t work in my example.
There is another factor, perhaps an even more important one about how money works in our economy that makes using gold not beneficial to the ordinary citizen, which is how ordinary people and businesses create added value goods and the value of services. Money is created in an economy by adding value. For example, clay has little value alone. You or I, if we know where to look for it, can probably get clay for free. However, you take that clay, shape it, glaze it and fire it and it becomes a useable bowl. This is something that has value to a lot of people, especially people who specialize in making spoons, or soup or something else. Let's say you have made more bowls than you need and you want to explore the idea of not using your hands to eat your food. You are willing to exchange a bowl that you made to a person who has made spoons in excess of what they need. You come to an agreement that the bowl is worth four spoons. The value of the clay, plus your know-how and labor now has a measurable value in spoons. For a period of time spoons became the de facto currency since compared to other goods spoons have a traded value in the bowl standard. Substitute spoons for currency and now the bowl has an added value over clay of some figure of money. You, the lowly bowl maker has just created money in an economy over clay. This happens almost every time goods or services are exchanged in our economy. I know it is hard to believe, but you can replace the word “profit” quite comfortably with the words “value added” without messing up the meaning too badly. You purchase bowls in bulk that are priced at a value added over clay, and you sell the bowls in smaller quantities in a nice display at your retail establishment at an added value over bowls purchased in bulk. Every step of the way creates money. In order to deal with the ever-expanding value of raw materials being turned into value added goods you need something that will grow with it, and gold can't do that. In order for gold to keep up with this enormous engine of economies creating money, mining of gold would have to be on a level comparable to how we mine for coal or drill for oil. Gold, like oil and coal is a finite commodity. We probably in a year or two after switching to a gold standard would begin talking about peak gold. Currency, however, doesn’t have these problems. It is just a medium of exchange. The value of goods and services are not based on the currency, but the value of your goods or services against all goods and services. What makes the value of money go up or down isn’t a factor of the money itself, but its supply in the economy. In order for money to not go up or down in value is how close the government agency hits the mark of how much money was created during a particular period. In the United States that agency is the Federal Reserve.
Our reserve bank tries to keep the amount of money in our economy at the level of the economies creation of money. This is a bit of guesswork and is not an exact science. If they project to low then the value of currency will increase and you have deflation, if they put too much money into the economy the value of currency will decrease and you have inflation. The Federal Reserve adds or detracts money from the economy by printing money and lending it to the banks that circulate it into our economy in the form of loans. If interest rates are high, fewer people get loans and the money supply in the economy drops, if interest rates are low, loans are more affordable and many more people barrow money and increase the money supply.
The Federal Reserve is not a private institution, it is, however, an independent institution wholly owned by the Federal Government and the therefore owned by the citizens of this country. It is independent to free it from politics, so that it may act in the best interest of the citizenry.
The Federal Reserve System fulfills its public mission as an independent entity within government. It is not "owned" by anyone and is not a private, profit-making institution.
As the nation's central bank, the Federal Reserve derives its authority from the Congress of the United States. It is considered an independent central bank because its monetary policy decisions do not have to be approved by the President or anyone else in the executive or legislative branches of government, it does not receive funding appropriated by the Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.
However, the Federal Reserve is subject to oversight by the Congress, which often reviews the Federal Reserve's activities and can alter its responsibilities by statute. Therefore, the Federal Reserve can be more accurately described as "independent within the government" rather than "independent of government."
The 12 regional Federal Reserve Banks, which were established by the Congress as the operating arms of the nation's central banking system, are organized similarly to private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year. ~ Federal Reserve website
The 12 regional Federal Reserve Banks are the functioning portion of the system that carry out the requirements put upon them by the Federal Reserve Board. The Federal Reserve Board or the Fed has two mandates, the first is to keep inflation under control and the second is to keep unemployment low.
The Federal Reserve is necessary because we industrious Americans keep taking things that are worth nothing or of little value and making them more valuable, (i.e. making clay into bowls). We create money in our economy and so the money supply has to increase with that. The Federal Reserve controls interest rates at the bank level by the interest rates it is willing to lend to banks. (Oh, so that is why they report the Federal Reserves interest rates so much on the news.) The interest rates asked for by the Fed are directly linked to two things, the cost of borrowing and the rate of inflation; however, inflation has other factors affecting it as well. Remember that when interest rates are high people and businesses tend to barrow less. This dampens economic growth, but maybe necessary to slow down inflation. If it makes interest rates low then businesses and people tend to barrow more and grow their businesses and employ more people. However, more money flowing to people and businesses tends to increase demand and that causes inflation. One example of this was the low interest mortgage loans that were too easy to get by nearly everyone, caused housing prices to go up and up, in other words, caused there to be inflation in the housing market.
Gold doesn’t have the capacity to do anything that the Federal Reserve can do to regulate inflation or deflation. Gold doesn't allow money supply to keep up with money creation, which is what happens in a sound economy. Gold is a limited supply commodity that is finite. It won't reach to cover the United States economy and there ain’t a prayer that it can cover the worlds economy. Deflation has economic problems that can be just as bad as inflation. If we tried to use it as our currency, we would have massive deflation. Massive deflation leads to money hording rather than investing and banks can’t lend because the value of things are going down. Deflation is mostly associated with depressions.
Just like what happened in the housing market and the supposed incorruptibility of the value of real estate, we have been manipulated in believing the value of certain things such as gold don’t go down only to have them change in value dramatically typically at great cost to ordinary citizens. If you can’t remember back 12 or 13 years ago to the end of the 1990s let me remind you, gold had gone down in value to a 22 year low. That means that those who had purchased gold close to their retirement as a sure bet for the intervening 22 years of their life would have seen their savings drop by nearly 70%. If someone had saved 100 thousand dollars to retire on, then at the end of the 22 years, provided that they hadn’t touched it for living expenses, they would have had only 30 thousand left. Compare that to what would have happened if they had put their money in a bank and kept it as cash, they would have been far a head even at a 3% interest rate. I am sure with every drop in the price of gold during that period investors were told that gold had enduring value. The reality was that gold went from a high of over $800 per ounce around 1976 to a low of somewhere around $250 in 1998 and it stayed around that price until 2001. That drop in value would have given us an average inflation rate of over 14% a year for 22 years. The truth is that most of that drop occurred within the first 5 years. Most average citizens would have experienced an inflation rate of 50% or more per year for that period of time. Gold would have been devastating to our economy if it had been our currency for that time period.
One last thing to think about. If we truly are thinking of social and economic justice then remember this. Forty percent of the wealth of the United States is controlled by 1% of the population. Murphy's golden rule: whoever has the gold makes the rules. The 99% aren't the people who have the gold.
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