First, by way of preliminaries, you should read the comments beginning here.
Then, to continue, Jimbo is in quotes followed by my responses:
I’m pretty sure that $1400 would lose its purchasing power in all commodities if it would suddenly buy only 1/20th the gold it currently does.
You could be right. I don’t think so, though. And “pretty sure” isn’t much to go on. Clearly, of course, $1400 (you’re using this figure as roughly the current dollar-gold price, right?) will buy a lot less gold, by definition. But trade in everything else will have to go on. Let us at least hope so. In that case you will have similar amounts of other goods for sale, a more or less fixed and greatly reduced number of “dollars” to buy them with, and perhaps most importantly no political mechanism by which the number of dollars can be increased at will, such as we have now. The increase in the number of dollars in prospect will be very limited – basically, that is, limited by how much additional gold is produced. System wide, there will be an exponentially greater reluctance to spend them because their quantity will be so relatively limited.
It’s an entirely different monetary world, and I think the error you are making is in carrying over aspects of the current system into the new one when those aspects will effectively not apply anymore.
The oil/gold chart was an example of this – just price things in gold and see what would happen to currencies pegged to gold. There would be the same number of dollars, the same amount of gold and the same number of Euros as before. But if the dollars could buy the same amount of oil but only 1/20th the amount of gold then what would happen to people buying gold and oil in Euros?
Who the hell would want a fiat “Euro” in preference to a gold backed currency that was naturally limited in quantity and for that reason alone, very dear? Once again, as the orientals say: Mu.
I think if the dollar went gold then the Euro and everyone else would probably have to follow suit. And they would be confronting the same problem: a lot of debt that can’t be paid. They will have to devalue their currencies dramatically relative to gold, and that will put everyone on a level playing field once again with respect to other commodities.
And if they don’t follow suit, they’ll find that no one will take their “money”.
There would be a huge gain to be made from arbitrage and prices would all settle to a new equilibrium – probably with gold, oil and euros all worth roughly what they are today and the dollar being worth far less.
As to the first part, sure, there will be arbitrage opportunities and people will exploit them. And this is a dramatic departure from the current state of affairs how, exactly?
As to the second part, again – of course the dollar will be worth far less with respect to gold. Euros, well, they either continue as a fiat currency in which case no one will want them; or they will go to a gold standard, too. In which case they will be as devalued relative to gold as the dollar is, or maybe even more so.
What will the producers of oil do? Stop selling oil because no one has the “money” to buy it? I don’t think so. How will they make a living or profit then?
Anyway, if the dollar didn’t lose any purchasing power then the problem would not be fixed! The problem is that the dollar is overvalued.
I disagree. The problem is that the dollar is not valued at all. It floats. It is nothing. Just like the Euro.
If the daily output of someone working in a US factory (whether they make shoes, watches, cars or whatever) can be swapped for a barrel of oil then his income would be the value of a barrel of oil – about $100. But if his debt repayments and essential living costs are $30 and $80 per day then he will not be able to repay the debt.
Are you forgetting that there will also be a 100% debt cancellation at the same time? There won’t be any debt repayments because there won’t be any debt.
His bank has liabilities which it balances against this debt so it tries to maintain that the value of the debt is the same as it always was, whilst hoping that the worker will benefit from government stimulus and the low interest rate policy and eventually be able to produce enough to cover his debt and his living costs.
Again, the only liabilities his bank will have is to its depositors, and these liabilities will be covered by gold. There will be no need for the bank to maintain the value of any debt, and indeed it will be impossible to do so anyway, since the debt will all have been canceled by law.
If the dollar is devalued but oil remains at $100 then the situation does not change. If the dollar is devalued by 50% and oil commensurately rises by 100%, so that a barrel now costs $200, then the situation is resolved: the worker’s production is now worth $200/day and his debt is still $30. His living costs may also double to $160 but his income now covers his costs. There is no need to cancel his debt – only to revalue the dollar.
What makes you think that oil would or could remain at $100? I have no idea what oil would cost in dollar terms in the new monetary world. The sellers could price it only in gold, that’s true. But there’s only so much gold, and you wind up with the same problem: are they just going to stop selling because there isn’t enough gold to meet some dollar price they’re looking for?
And what does “revalue the dollar” mean in this context? The dollar will be valued in gold, and that’s all. It will be limited in quantity exactly as gold is limited in quantity. It is everything else that will have to adjust. Will commerce come to a screeching halt because no one knows what to do? That is a danger, I think. Is it a manageable one? I think so. It’s far more manageable than millions of homeless children.
That is an “all things being equal” example of course. As you’re aware, there would be a great shock to the economy as it works out where the wealth is following what would amount to an enormous transfer of wealth (eg. exporters would benefit before the service industry does, whilst importers would suffer most).
That’s the thing. All things will not be equal. Things will have dramatically shifted. The biggest wealth transfer will be from creditors to debtors. But be fair: this is going to happen anyway. The debt levels are unsustainable and unpayable.
One problem I think we are having is that I am a lawyer and see the law as holding the key to this problem. You are an investor or a banker or an economist and see the problems in those terms.
But the law trumps economics. If it doesn’t, we don’t have the rule of law.