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Gold Vs Fiat Currency

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In a recent thread (http://www.housepricecrash.co.uk/forum/index.php?showtopic=29591&st=0) there was some interesting discussion of the relation of gold-based and fiat currencies.

I went away and read a bit more about it and found the very interesting quote below (link at bottom). I've tended to argue (contra goldbugs) that the "gold is real money" argument is flawed, and that gold is just a commodity like any other, prone to rises and falls. Against this various people have argued that paper currency is being debased by excessive lending, and that fiat money is essentially a scam. I do agree with the worry that we are in a phase of excessive lending and debasement of the currency to some degree, though whether we are on the brink of meltdown or not remains to be seen.

The interesting thing about the quote below is that it kind of squares the circle. It did make me realise that being too complacent about fiat currencies collapsing could be dangerous, as it happens periodically throughout history (although still fairly rarely). It describes gold as the currency of choice when token currencies do fail, but then as a weak currency in phases of industrial expansion and growth, when the greater flexibility of fiat is more useful. Thus it sees the rotation between the two as a long term cycle.

The question then of course is how close are we to a real currency collapse - a few years, 20 years, 75 years? Is Helicopter Bernanke the last straw or do we have a way to go? Sooner or later there will be one, and then gold will probably be back in its historic role as a store of wealth, although in between these times it can have many speculative rises and falls. So fiat or gold can work for you at different times - it comes back to the old chestnut of buying and selling at the right times, but of course you only really know the right times in retrospect.

Any thoughts?

"At these relatively rare junction points (ie when fiat currencies collapse), as the wheel of optimal monetary solutions turns through its phases, ownership of gold is what empowers a bold and contrarian few to take control of large amounts of capital. Even as gold comes back into vogue, so the seeds of the new representative fiat currency system which will subsequently replace it will start to germinate, for the simple reason that there is never enough gold to finance the opportunities for growth in a potentially successful economic state.

When the economic conditions are right for productive work and useful business development gold is an inferior form of money. Given two neighbouring currency systems, one gold based and one fiat, and with a decent variety of opportunities with underlying demand, the fiat system will comfortably outperform the gold system. Braver businessmen will back 2, 3 or 4 ventures at once, rather than the single project which gold allows, and they will usually win the race to the top of the economic pile.

So at least half the art is to appreciate that there is no permanent answer, and that ultimate success depends on being flexible enough to profit from a return to a token based monetary system."

http://www.galmarley.com/FAQs_pages/moneta...istory_faqs.htm

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"At these relatively rare junction points (ie when fiat currencies collapse), as the wheel of optimal monetary solutions turns through its phases, ownership of gold is what empowers a bold and contrarian few to take control of large amounts of capital.

I am one of the bold and contrarian fews.

Protect yourselves.

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I am one of the bold and contrarian fews.

Protect yourselves.

I already used this joke recently, but this again reminds me of the Larson cartoon about talking to dogs:

I say "the "gold is real money" argument is flawed...gold is prone to rises and falls....a weak currency in phases of industrial expansion and growth...buying and selling at the right times...you only really know the right times in retrospect. "

Goldbugs hear "blah blah blah bold and contrarian few blah blah blah buy gold"

But being more serious, isn't the moral of the quote that gold, rather than being "real money" is "last resort money" or "emergency money". So how convinced you are of its virtues at this stage is probably a reflection of how serious you think the coming crisis is going to be.

And if we're heading for meltdown, might it not also make sense to be holding property (ideally up a mountain like Durch, admittedly)? I guess it depends how Mad Max you think things are going to get.

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Gold is a commodity and we don't trade in Gold on the high street (not yet anyway).

A fundamental for Gold is that it has a limited supply that is difficult to increase by any significant percentage over relatively long time periods... therefore there is an HONESTY and an ACCURACY to wealth storage in gold. Gold is suitably limited in supply as to be a conveniently dense measure of wealth - for example, I can probably, just about, fit my entire net worth measured in historically average gold value terms in the pockets of my coat - I can carry my "life" in money around with me. Try carrying the same amount in paper - even in 50s.

I agree that, being a commodity essentially, it is prone to rise and fall.. Gold is good during inflationary times when fiat currencies may be considered to be devaluing, but a poor investment during deflationary times when everyone wants the currency of food, drink, clothing, energy... i.e. FIAT.

I'm still coming to terms with wealth storage in gold. Actually, I think wealth storage in any undervalued asset class is acceptable - but life then becomes a whole series of unknowns and your worth is at the mercy of a coin toss on the stock exchange. That's why we need something "official" - i.e. FIAT. I think if we returned to the gold standard, or at least if we were TOLD about the practise of money printing - things would be better. Afterall, holders of stock in a failing company are polled on whether they would prefer more to be created to be sold for debt clearance (preventing a total collapse of the value) or not. Either way, it's a risk - but at least it's slightly more honest than more being printed without consent.

AF.

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Good thread. Maybe if we chopped down government and prevented it inflating currency through issuing of long dated debt and spending more than it takes in revenue that would be a start. Maybe like the judicary and the head of state are seperated from government, economics should be fully independent and given strict guidlines on what money is available to spend, price stability and money sustainability. How the hell is the US government going to maintain is huge spend on the military without major reforms or devaluation?

Ive only got a 5k deposit so deflation hyper inflation wont drastically effect me for life so I watch the gold rally with interest, I dont believe I know enough about the facts to start buying gold regardless of the price(stick to fundamentals) I certainly dont buy the gold buy argument about gold backed currency the only option though, just something a little too extreme and inflexible about it.

Maybe like mentioned above we will move to a gold system in the event of massive fallout, that might give the option of seperation of economic and monetary policy from short term political chancers pursuing their populist agendas. Kind of disrupts democracy in a way, with an elite making decisions for a country unelected but one could argue why is it that the prime minister cant try who he likes in whatever way the latest sun opinion polls are heading? Because we need independent experts with well defined rules to apply it correctly, I cant see it impossible for such an idea to be applied to economics etc. Political success would be based on the most efficient use of a set amount of money etc.

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http://www.libertydollar.org/

and swiss francs are interesting to me at the moment because they are backed by something you can hold and feel gold and silver, paper after all is just what it is paper.

I dont think we would go to a gold system per se as to carry gold around, but possibly reform back to the two mentioned above.

I do think if Iran gets its Oil Bourse then the dollar will fall, hense my interest in currency and protecting my purchasing power.

just food for thought from me at the moment.

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Name a fiat currency that hasn't lost its value and has been here just as long as gold.....?

What is this mastermind!? Are there any successful economies that have a gold back currency at present for a bonus 5 points?

I think this misses the point about what is a currency and what value people have in it, as long as people have faith that a currency maintains its relative buying power and is quickly and readily transferable then that is all most people care about. Being able to trade in your paper for some nuggest of gold doesnt really solve too much in the long run, it will just lead to less flexiblitly in where you spend how each person spends and where you invest, all holding back real economic innovation etc and putting such descisions in the hands of those who hold all the purse strings i.e.the gold.

In say 50 years time when some innovative process can create gold cheaply what kind of argument will be talking of then. Im assuming we will have to find some new inanimate resource that people might covet. I think there must be a system that can have the flexibility of FIAT but the strength to prevent abuse and inflation, of course the question why have economists/financiers not worked this out yet means maybe its amatuer thinking on my part

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I think there must be a system that can have the flexibility of FIAT but the strength to prevent abuse and inflation, of course the question why have economists/financiers not worked this out yet means maybe its amatuer thinking on my part

Exactly. The whole point is it goes in cycles. When central banks fail to protect fiat currencies they do have a tendency to fall apart and at those times gold comes back in as a kind of emergency currency. But it woulnd't necessarily be a good way to back a currency in between times. Gold has been around a long time, but for much of that time hasn't been a great investment. It is (historically) an excellent investment when currencies collapse though. Maybe that's where we are, or maybe not.

Fiat works pretty well a lot of the time and money that isn't "real" is behind a lot of industrial development and expansion. Both have their applications, but the fallout between the two has been historically difficult. No one really knows where we are going next, but the view that gold is good and fiat is bad is far too simplistic.

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Fiat works pretty well a lot of the time and money that isn't "real" is behind a lot of industrial development and expansion.

Creating money and debt out of thin air thus inflating the value of assets (or devaluing the currency) has resulted in many on here being unable to afford a roof over their heads, despite an abundance of land and resources, would you define that as "works pretty well"?

Edited by BuyingBear

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Creating money and debt out of thin air thus inflating the value of assets (or devaluing the currency) has resulted in many on here being unable to afford a roof over their heads, despite an abundance of land and resources, would you define that as "works pretty well"?

No I think there has been a collective failure by central banks to get to grips with an over-expansion of the money supply, and I think it is a dangerous and potentially destabilising period of economic history.

Fiat has the potential for allowing these problems - it is the responsibility of banks and governments to try and curb such excesses. But fiat currencies work reasonably well for extended stretches of history. When gold is the only currency there are different problems, in particular the highly restricted money supply can severely curtail capital investment and economic development. What I'm saying is that there's no perfect solution. Fiat currencies are imperfect but often function reasonably well - gold takes over when fiat fails, but sooner or later it becomes necessary to go back to fiat of one sort or another.

I think that it is a misunderstanding to simply decide that fiat is bad and gold is good. And tempting though the idea is that all money created out of thin air isn't "real" and is therefore the source of the problem, I don't think it holds water. This country's industrial development only came about because of the issuing of stocks, bonds, and loans made at interest - all "unreal" money - that allowed the building of the railways and canals, the draining of the fens etc. This economic development also led to various bubbles and problems - some thrived, some suffered as a result. All along there were people screaming blue murder about the danger of "unreal money". So it's not all good, or all bad.

I also tend to think there is no such thing as "real money". All money (gold or otherwise) is a token of exchange. It is worth what someone will give you for it. Whatever your currency is, there are ways that it can be devalued or destabilised or otherwise create problems. The important thing is management of the economy to minimise these problems. In this respect the central banks and governments are making a bit of a hash of it at the minute.

Creating money and debt out of thin air thus inflating the value of assets (or devaluing the currency) has resulted in many on here being unable to afford a roof over their heads, despite an abundance of land and resources, would you define that as "works pretty well"?

And also (just to ramble on a bit more...) I think that there is an argument made by goldbugs and others which seems persuasive on the face of it...

Basically it is to say "look at all this cheap debt and excess liquidity, isn't it terrible" (yes, it's a problem)

"And you know where it all stems from, the government printing more and more money" (an element of truth there)

"And the reason that is so terrible is because it's not real money, it's just created out of thin air!" (er...)

It sounds good, but I'm not convinced. Monetary systems throughout history (gold and otherwise) have been plagued by all sorts of problems. Sometimes they cope, sometimes they collapse. But for me, money isn't "real" or "unreal". Because whatever your money is, it is a token, a symbol, a promise to pay. It can be well managed or badly managed, and that is what makes it succeed or fail in my opinion.

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Gold is a commodity.

It is of value because people like to use it for jewellery and other fanciful things like decorating churches, mosques, temples and pagodas and for making other showy items like bathroom taps and wristwatches.

People use it in these ways to show off their wealth to others. The reason that it works as a showing-off trick is because of the deep cultural association that almost all human cultures have between gold and wealth.

The reason for this cultural association is the fact that gold was money for thousands of years.

Gold will remain valuable as long as the cultural association between it and wealth remains in place.

frugalista

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What is this mastermind!? Are there any successful economies that have a gold back currency at present for a bonus 5 points?

I think this misses the point about what is a currency and what value people have in it, as long as people have faith that a currency maintains its relative buying power and is quickly and readily transferable then that is all most people care about. Being able to trade in your paper for some nuggest of gold doesnt really solve too much in the long run, it will just lead to less flexiblitly in where you spend how each person spends and where you invest, all holding back real economic innovation etc and putting such descisions in the hands of those who hold all the purse strings i.e.the gold.

In say 50 years time when some innovative process can create gold cheaply what kind of argument will be talking of then. Im assuming we will have to find some new inanimate resource that people might covet. I think there must be a system that can have the flexibility of FIAT but the strength to prevent abuse and inflation, of course the question why have economists/financiers not worked this out yet means maybe its amatuer thinking on my part

a fiat currency has always led to mass inflation. until 1971 when the gold standard was removed, there wasn't rampant inflation like we have seen in the 70's and now. i think its best to magnify out from where we are now and look at the last 1000 years or more. this period is just a blip on the real deal. gold is not just a commodity, it is the main medium of exchange for global use. fiat currency is only worth what its printed on, yes you can buy things, but due to inflation, next year it dosn't buy as much. its a con, the governments and politicians love printing more cash just to get through the bad times and also to transfer wealth, they cant help it. we need the gold standard back to stop this confiscation of wealth.

it will interesting to see what happens when the Islamic Gold Dinar comes in. this would bing back a currency for trading that is backed by gold, in might be even made of gold. not sure.

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so when needed they just print money and as such they creating cash from nothing?

if thats the case why does the government borrow money if they could just print it? granted it would take a while to print a few billion pounds.

I am very confused here.

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so when needed they just print money and as such they creating cash from nothing?

if thats the case why does the government borrow money if they could just print it? granted it would take a while to print a few billion pounds.

I am very confused here.

Honestly the "printing money" thing is a bit of a red herring, or perhaps best seen as a simile.

In past times, a government printing more money than it could back often led to problems. These days we have such a complex economic system, that printing money is the least of it. It's much more about easy, unregulated credit, loans, bonds, etc. Money from nothing is a problem, but only when it is expanding the money supply at an unreasonable rate.

The constant recurrence of the idea that the govt printing money is a major issue shows what an old argument this is. People were making much the same arguments about currencies hundreds of years ago.

a fiat currency has always led to mass inflation

fiat currency is only worth what its printed on

Read the original article I linked to - there are plenty of cases of fiat currencies being stable for extended periods, even though in the end there is often instability (often connected to the breakdown of the whole civilisation...)

Fiat currency isn't worth what it's printe don. Like gold (or any other asset) it is worth "what you can exchange it for". As long as public faith is maintained in the currency by the central bank that exchange value shouldn't devalue too fast. But sometimes that faith is stretched to breaking point and that's when currencies collapse.

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On a related note, I went to the Fitzwilliam museum in Cambridge yesterday and they have an excellent display of historic gold coins and associated items (such as minature scales for testing weights etc) from around the world.

Take a look if you can - whatever your viewpoint, it looked like 'real money' to me! You can't forge or print a gold coin.

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hmm still confused.

the bank of england lends commercial banks money, which leads me to 2 questions.

1 - why do commercial banks need to borrow money when they making billions of profit annually?

2 - does the bank of england have a balance a limit so to speak or does this come out of thin air?

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