George Matyjewicz wrote:
Why not return to the gold standard? One of the major issues with this premise is the fact that there simply isn't enough gold in existence to back all currencies with gold. At the end of 2001, it is estimated that all the gold ever mined amounts to about 145,000 metric tons . As of 31 December, 2001 the price of gold was $278.10 a troy ounce. Hence, the total value of gold ever mined and in use is $1,296,462,780,007 ($1.3 trillion). This means the value of gold has to increase to match the backing of currency.It looks like in December 2001 the US Adjusted Monetary Base was about $650 billion. So at that time the Fed would need to store about half the gold in the world to redeem all those dollars on demand at the prevailing market price.
http://research.stlouisfed.org/publications/usfd/page2.pdf
Since we have figures for Dec 2001, I'll stick with them.
There's no way the Fed is going to get hold of 72,500 metric tons of gold, park it in a vault somewhere, and say "Come and get it -- for every $278.10 face value green paper you give us, we'll give you 1 troy ounce of gold for it on demand, guaranteed, no questions asked." It ain't gonna happen because they can't get that much gold.
Maybe the best they could do is scrounge up about 8,000 metric tons -- the Fed might have that much on its balance sheet in the form of certificates and drawing rights. Right now it's probably all listed as equity of the Fed shareholders. The Fed would have to reclassify the entire amount as a liability to all people holding dollars. That won't make the shareholders too happy. So this ain't gonna happen either.
But anyway, in this hypothetical scenario they'd have 8,000 metric tons backing $650 billion. So here's their redemption offer for the new gold standard:
"Come and get it -- for every $2500 face value green paper you give us, we'll give you 1 troy ounce of gold for it on demand, guaranteed, no questions asked."
So there's another reason why it ain't gonna happen. You're not going to pay $2500 for an ounce of gold at the Fed window when you can get it from a dealer for $350. For now, anyway.
But if the price of gold hits $2500 and the adjusted monetary base is still $650 billion, then maybe the Fed can consider a gold standard. All they have to do is take the lid off the gold market, stop increasing the money supply for a while, and become honest human beings with integrity ... but as I said, it ain't gonna happen. :-)
-- Patrick
http://fexl.com
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