Explain to an idiot the benefits of going back to the Gold standard

[PLOlover]

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You're still ignoring the immediate real world impact on consumer spending. What are these "good businesses" in a deflationary economy with no consumers spending any money?

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what's the difference between people "investing" their money in stocks, etc, to keep their savings from being eroded by inflation, and people saving hard currency like gold under their mattresses because it will keep it's value,

other than who is in control of the asset?

I mean, in either case, the consumer is not "spending" it.

[adanthar]

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what's the difference between people "investing" their money in stocks, etc, to keep their savings from being eroded by inflation, and people saving hard currency like gold under their mattresses because it will keep it's value,

other than who is in control of the asset?

I mean, in either case, the consumer is not "spending" it.

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I'm sorry, but if you don't get the difference between someone putting their money into the stock market and therefore keeping it circulating in the economy as a whole vs. keeping it in their mattress, you're not competent enough to talk about economic theory.

This question is like someone wandering into HSNL and asking what the benefits of raising preflop are.

[PLOlover]

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I'm sorry, but if you don't get the difference between someone putting their money into the stock market and therefore keeping it circulating

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a) well if you buy 1 share of stock and hold it versus buying one gold coin and keeping it, how is the share of stock "circulated".

b) if it's so simple, just explain it.

c) my main point of course is that both activities are "investment", not "spending".

I mean, even today one can invest in stocks or invest in stuff like gold coins, are you saying the guy who invests in stocks is more likely to spend extravagently?

[adanthar]

Oh okay, you meant buying gold. My bad, I misread your answer. That said,

1)while there's nothing "wrong" with someone hoarding bullion*, our economy/all developed economies are built on people not hoarding *anything* and maintaining spending patterns;

2)The main point of buying gold is for its perceived stability vs. a weak currency (hence why it's going up these days.) A deflationary economy, especially, say, one based on gold, would first necessitate a devaluation of the metal. Therefore, anyone hoarding gold prior to a major deflationary event (such as a return to the gold standard) would very probably lose their shirt.


*there is an exception in that, since the US is kinda short on gold mines at the moment, an investment in specifically bullion results in a trade imbalance. This matters a lot more in a deflationary economy than a regular one.

[PLOlover]

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You're still ignoring the immediate real world impact on consumer spending. What are these "good businesses" in a deflationary economy with no consumers spending any money?

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this is what i mean.

[PLOlover]

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2)The main point of buying gold is for its perceived stability vs. a weak currency (hence why it's going up these days.) A deflationary economy, especially, say, one based on gold, would first necessitate a devaluation of the metal. Therefore, anyone hoarding gold prior to a major deflationary event (such as a return to the gold standard) would very probably lose their shirt.

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well the point of a gold standard is constant value of the money, although I see your point in a growing economy the money(gold) may be worth slightly more in the future than it is in the present, which is what you mean by deflation. That is to say, *prices* deflate.

in inflation, the money is becoming worth less, in deflation, the money is becoming worth more. (in reality I don't think this would occur as mining gold would free market be more appealing and thus keep the balance).

maybe you are talking about the switch, but just to clarify,
on the gold standard, if over time there is a slight deflationary effect, the money(gold) would be worth slightly more in the future than it would in the present. as I said though, free market forces (gold mines) would work to correct that and keep the money value constant.

[tolbiny]

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When future value > present value, interest rates, which are a measure of rewarding the risky behavior of loaning out money, stop functioning, because there is now no reason to loan it out at all; you can just sit on it.

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What? As long as a person can gain more by lending than by simply holding money then they have an incentive to lend/invest.

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You're still ignoring the immediate real world impact on consumer spending. What are these "good businesses" in a deflationary economy with no consumers spending any money?

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This totally ignores reality, since if no one was spending money then prices would drop so low that anyone who had money saved (everyone) would start buying since their purchasing power had hit the point that they were waiting for it to hit. Since individuals have different thresholds for when spending > consuming, and the fact that current consumptions is preferred to future consumption, your hypothetical non consumption economy never comes about. Every lowering of prices due to deflationary pressure adds another group of people who now meet their requirements for spending.
To your point about investing in businesses in the future having a population with large amounts of savings built up means that there is a large incentive to produce newer and better products sine there is a huge market to tap into. Target consumers for businesses are the ones with the most to spend, the more is saved the more can be spent.

[adanthar]

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in inflation, the money is becoming worth less, in deflation, the money is becoming worth more. (in reality I don't think this would occur as mining gold would free market be more appealing and thus keep the balance).

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O rly?

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One of the main disadvantages of the gold standard is that it artificially inflates the value of gold. The total amount of gold that has ever been mined is estimated at ~125,000 tonnes.[1] At the current gold price of around USD $640 per Troy ounce, or around $20,000 per kilogram, the value of this entire planetary stock would be USD $2.5 trillion, which is less than the value of currency circulating.

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It's gonna take a whole lot of extra gold mining to get there from here.

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This totally ignores reality, since if no one was spending money then prices would drop so low that anyone who had money saved (everyone) would start buying since their purchasing power had hit the point that they were waiting for it to hit. Since individuals have different thresholds for when spending > consuming, and the fact that current consumptions is preferred to future consumption, your hypothetical non consumption economy never comes about. Every lowering of prices due to deflationary pressure adds another group of people who now meet their requirements for spending.
To your point about investing in businesses in the future having a population with large amounts of savings built up means that there is a large incentive to produce newer and better products sine there is a huge market to tap into. Target consumers for businesses are the ones with the most to spend, the more is saved the more can be spent.

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This is all well and good, but that's not at all what happened in Japan (edit: and, I should say, every other deflationary economy ever, although Japan is the only really recent one).

[PLOlover]

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Quote:
in inflation, the money is becoming worth less, in deflation, the money is becoming worth more. (in reality I don't think this would occur as mining gold would free market be more appealing and thus keep the balance).



O rly?

Quote:
One of the main disadvantages of the gold standard is that it artificially inflates the value of gold. The total amount of gold that has ever been mined is estimated at ~125,000 tonnes.[1] At the current gold price of around USD $640 per Troy ounce, or around $20,000 per kilogram, the value of this entire planetary stock would be USD $2.5 trillion, which is less than the value of currency circulating.



It's gonna take a whole lot of extra gold mining to get there from here.

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you could just as easily say that fiat money depresses the price of gold. but anyway, to talk about switching from a fiat to a commodity backed money is a different scenario than being on a precious metal money standard and what will happen to the money over time.

gee I hope I don't get insulted again, but let's agree that inflation results in money worth less in the future, and deflation results in money being worth more in the future. agree or no?

[adanthar]

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gee I hope I don't get insulted again, but let's agree that inflation results in money worth less in the future, and deflation results in money being worth more in the future. agree or no?

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Absolutely.

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but anyway, to talk about switching from a fiat to a commodity backed money is a different scenario than being on a precious metal money standard and what will happen to the money over time.

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All I'm saying is that if you plan to switch from fiat to gold, you're either going to need a staggering amount more gold than has been mined in the history of mankind/possibly more than exists on the planet, or you're going to have to drastically devalue gold (which has its own issues because gold is now useful industrially.)