Haim, I do not know how to solve the problem of "trust" in governments. One thing is however clear, gold as a store of value on which currencies are pegged will lead to permanent inflation and waste of resources. Look at the numbers. Assume that your gold reserve against currency is let sat 20% (it was much higher, and I believe the lowest it has been during "pegging times" was 15%). You must assume that currency in circulation has to grow at the same rate as the world economy (if it grows slower, you will have deflation, and if faster inflation, right so far?). Therefore, the existing store of gold in CB's vaults (currently at 20,000 tonnes) must grow at the same rate as the world economy. Of course, we will have to go through a massive devaluation of all currencies just to get these 20,000 tonnes to cover the world's currency in circulation (what is it, about the equivalent of $5 tillion? the current value of these stores is about $200 Billion?).If the world economy is to grow at lets say, 3% year (really a "straight jacket" for much of the world's developing countries), each year, .6% of the world GDP will have to be in the form of gold set in those vaults. That is a waste. But because the existing reserves of gold mineable at a given price (you fix that price) are limited, each year, to provide that supply, gold that is more expensive to mine will have to be mined, thus, inflation. You can make an argument that gold prices can be raised to $15,000 an ounce (that will bring the current 20,000 tonnes to about $5 Trillion), and at this price, there is ample gold to be mined. Maybe, but then you will transfer huge amount of wealth to S-A, Russia, the US and possibly Indonesia, where gold extraction costs are in the $150 to $250 per ounce.
If that solved the problem (and you could make the transition over a period of 50 years to avoid economic dislocations, but if everyone knew gold will be priced at $15,000 an ounce in 50 years, you can bet that gold will rise somewhere to the middle of the gap), you will still be left with a system in which availability of one commodity (a lot of it being concentrated in politically unstable countries) determines the growth rate of the world economy, any shortages of that commodity will cause inflation and any over supplies, deflation.
I would rather rely on a system of checks and balances between the various printing presses, free flow of capital, which by itself instill some degree of CB discipline and free decisions on allocation of capital.
The golden calf, and Roman gold coins are not exactly my idea of a stable financial system.
Zeev |
