It is not so much about monetary policy now. You can’t raise rates beyond a point. You can take that the rates are going to be low forever for all practical purposes. 0.5% or 1% - it hardly matters.
What matters is the discipline of not growing debt larger than in proportion to GDP growth.
Let me ask you a question.
You imagine a setup where you can deposit gold at a bank, and the bank will pay you interest on that deposit.
Why would the bank do this? The only reason banks pay interest on deposits is because they can take those deposits and invest them. In a bank’s case, the investment is loaning out the money and collecting interest from the loans. They charge more interest on loans than they pay on deposits, and so make money on the difference.
Does that mean you are in favor of fractional reserve banking? That is, if you take a gold bar to the bank, does the bank have to keep the gold bar in the vault? Or can they take your gold and replace it with an IOU, and lend the gold bar to someone else?
See, if we allow this then the banks can create money out of thin air. They don’t have to keep your gold in a vault, they can do whatever they want with it, as long as they’re able to pay you some other gold when you stop by and ask for your gold back. They create money by taking your money and writing “IOU some money” on their ledger, and giving money to someone else. Twice as much money is on the accounts than actually exists.
It doesn’t matter whether the money deposited is gold or fiat dollars. If the bank can lend out deposits, they can create money.
So I imagine you don’t want banks to be able to lend out your gold. OK, but now how does a bank pay you interest on your deposit? They can’t lend it out, so it’s not actually helping them make money. They’d have to charge you for the privilege of depositing money. In other words, the bank becomes a safety deposit box company. Put your gold in their vault, they keep it safe, you pay them a modest fee.
If you want them to pay YOU for putting your gold in their vault there has to be something in it for them. That is, they have to be able to loan your money to third parties.
pegging the value of money to anything suffers from the same problems as gold. Calling for smaller government spending is another debate. Trying to stop high government spending by preventing inflation of the currency has no teeth because the government can simply go off of that standard, revalue the currency in relation to that standard, or do any of the above.
Until the next recession, except this one caused by an increase or decrease in the supply of whatever we have pegged the currency to. Economic downturns have not been nearly as severe since going to fiat currency.
If gold prices “rise” relative to the currency, then what you are proposing is no standard at all. If we say that the dollar is pegged to gold at $100 trillion per ounce, we can print all of the money we want
Nice post Ultrawires, I had made a couple of posts on previous page. Copy-pasting one of them below:
USD being the reserve currency, America can do whatever it wants. Although people should think the ethics.
Debt growing disproportionately larger than the GDP obviously means that system is unsustainable in the long run.
I am saying let other countries, who have many more poor people than USA and who are net importers, also have the ability to spend on the poor. Let’s work on common currency in the world and let’s have spending on the poor (like food stamps etc) untied to ‘public debt’ all over the world.
Brilliant discussion between Harry Dent and Peter Schiff:
Everyone should watch.