The dollar, gold and the world
**part of the Global Economy 101 series**
by: Tim Williamson
18 Nov 2010
Until now the dollar has been the gauge against which other currencies and economies are assessed and valued, but that situation is not tenable nor even desirable over the long-term. As other economies grow and mature, the strength and sustainability of other currencies matches, and in some cases exceeds, the metrics that define the overall palatability of the dollar as a hedge of stability, trade and finance for the rest of the world. It is only natural that as other economies mature, they would and should take their place as equal partners in sharing responsibility for protecting, promoting and insuring measured global economic growth and global governance. Either the dollar, and those who manage it, must accept this new multi-currency equality paradigm on the world stage, and the world continue to suffer wildly erratic economic cycles with multiple disjointed currencies, with their own separate fiscal and monetary policies, or we, as in the whole world, must pursue a new way to achieve sustainable, long-term, measured, and thus less volatile, global economic growth as a team through concerted and realistic global governance. Which will it be?
Tying a currency to a commodity is also not wise. All commodities are subject to price manipulation, bubbles, investor fears, supply, demand, institutional and personal avarice, state control of production, and so on, ad infinitum. These influences upon the commodity, no matter which commodity or basket of commodities is being discussed, are not manageable by any reasonable or rational system in the way that a single currency, and the amount of that currency in circulation, would be controllable. Why is control and manageability a requirement? The short answer is that we must manage inflation and deflation, and we must control the rate of growth, locally and globally, so that the economy does not burn up or melt down. Commodities, on the other hand, being subject to the fickle nature of the markets, and to the supply and demand of those commodities, will go up and down, and any currency tied to the commodities would likewise experience the same volatility. Whereas the volume of a single currency can be independently managed to give better and more efficient control of growth for the long-term. A commodity based currency is a proven invitation for chaotic economic volatility.
Gold is a commodity like any other. The only difference is that people unreasonably feel a need to possess gold in tough times. When people experience those tough times for extended periods beyond what they expect, then people rush to buy gold - like their fathers before them. This drives the price up, which in turn feeds more fear and 'onlooker' purchases, driving the price up again and again. This is the definition of a bubble - an unreasonable run-up in price. Gold is in a bubble now. We may not be at the peak yet. But it will fall and destroy lots of investors along the way when it crests the peak. It is a commodity. And thus subject to the whims of the market. By that very definition, gold is not even the best commodity to use to underpin a currency - its volatility is worse than using a less precious commodity. Which again strengthens the claim that commodities should not be used to 'back' a currency. Unless of course the entire world were willing to take that commodity out of all markets, restrict its supply, stop all prospecting, mining, and or production of that commodity, and give it a globally determined value between all states on the earth. Only then would it really work as a basis for defining the value of currency. But wait. If that is the case, then the commodity is not needed is it? Just a managed global currency would do the same without having to restrict a commodity or tie the currency to that commodity.
So the real solution is for the world to skip all the ancillary and intermediary explorations into ways that obviously will not resolve long-term economic issues and then create a strong global central bank and a single global currency for use by all peoples, states, businesses, and institutions worldwide. Some people, locally and globally, will not see long-term sustainable economic growth, nor a restoration of good jobs for themselves or their children, because apparently, by their actions or inaction, states would rather have their people continue to suffer, as they try to unilaterally adjust a complex and antiquated system that is not working, rather than give up a little of their supposed sovereignty on this issue for the sake of themselves and everyone else.
What steps should we pursue to encourage states to think outside their normal myopic self-interests when clearly a new way is demanded? While the real world grows smaller and smaller for all its people, the states and some people seem to be determined to turn inward in the face of facts. We either work together to form a better more unified and successful world or we will become squabbling isolated cavemen existing in insignificant tribes. Which do you prefer?
**part of the Global Economy 101 series**
by: Tim Williamson
18 Nov 2010
Until now the dollar has been the gauge against which other currencies and economies are assessed and valued, but that situation is not tenable nor even desirable over the long-term. As other economies grow and mature, the strength and sustainability of other currencies matches, and in some cases exceeds, the metrics that define the overall palatability of the dollar as a hedge of stability, trade and finance for the rest of the world. It is only natural that as other economies mature, they would and should take their place as equal partners in sharing responsibility for protecting, promoting and insuring measured global economic growth and global governance. Either the dollar, and those who manage it, must accept this new multi-currency equality paradigm on the world stage, and the world continue to suffer wildly erratic economic cycles with multiple disjointed currencies, with their own separate fiscal and monetary policies, or we, as in the whole world, must pursue a new way to achieve sustainable, long-term, measured, and thus less volatile, global economic growth as a team through concerted and realistic global governance. Which will it be?
Tying a currency to a commodity is also not wise. All commodities are subject to price manipulation, bubbles, investor fears, supply, demand, institutional and personal avarice, state control of production, and so on, ad infinitum. These influences upon the commodity, no matter which commodity or basket of commodities is being discussed, are not manageable by any reasonable or rational system in the way that a single currency, and the amount of that currency in circulation, would be controllable. Why is control and manageability a requirement? The short answer is that we must manage inflation and deflation, and we must control the rate of growth, locally and globally, so that the economy does not burn up or melt down. Commodities, on the other hand, being subject to the fickle nature of the markets, and to the supply and demand of those commodities, will go up and down, and any currency tied to the commodities would likewise experience the same volatility. Whereas the volume of a single currency can be independently managed to give better and more efficient control of growth for the long-term. A commodity based currency is a proven invitation for chaotic economic volatility.
Gold is a commodity like any other. The only difference is that people unreasonably feel a need to possess gold in tough times. When people experience those tough times for extended periods beyond what they expect, then people rush to buy gold - like their fathers before them. This drives the price up, which in turn feeds more fear and 'onlooker' purchases, driving the price up again and again. This is the definition of a bubble - an unreasonable run-up in price. Gold is in a bubble now. We may not be at the peak yet. But it will fall and destroy lots of investors along the way when it crests the peak. It is a commodity. And thus subject to the whims of the market. By that very definition, gold is not even the best commodity to use to underpin a currency - its volatility is worse than using a less precious commodity. Which again strengthens the claim that commodities should not be used to 'back' a currency. Unless of course the entire world were willing to take that commodity out of all markets, restrict its supply, stop all prospecting, mining, and or production of that commodity, and give it a globally determined value between all states on the earth. Only then would it really work as a basis for defining the value of currency. But wait. If that is the case, then the commodity is not needed is it? Just a managed global currency would do the same without having to restrict a commodity or tie the currency to that commodity.
So the real solution is for the world to skip all the ancillary and intermediary explorations into ways that obviously will not resolve long-term economic issues and then create a strong global central bank and a single global currency for use by all peoples, states, businesses, and institutions worldwide. Some people, locally and globally, will not see long-term sustainable economic growth, nor a restoration of good jobs for themselves or their children, because apparently, by their actions or inaction, states would rather have their people continue to suffer, as they try to unilaterally adjust a complex and antiquated system that is not working, rather than give up a little of their supposed sovereignty on this issue for the sake of themselves and everyone else.
What steps should we pursue to encourage states to think outside their normal myopic self-interests when clearly a new way is demanded? While the real world grows smaller and smaller for all its people, the states and some people seem to be determined to turn inward in the face of facts. We either work together to form a better more unified and successful world or we will become squabbling isolated cavemen existing in insignificant tribes. Which do you prefer?
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