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Falling Dollar? No, A Gold Standard Will Solve Nothing.

The All Might Dorrah

With the popularity of presidential candidate Ron Paul on the rise, his ideas of isolation and monetary policy have also acclaimed a certain fashion that just last year would have been the equivalent of wearing grandpa’s plaid pants. Unfortunately his ideas revolve around the most complicated features of government which the general population (particularly young people) does not understand: foreign policy and monetary policy. For reasons unknown to me, certain people think that their opinions on these policies are fact and are the only proper route to good. I call these people extremists regardless of their stance.

Things like foreign policy and monetary policy are global. The way nations and economies interact have thousands of causes, effects, and consequences. Only a true student of globalization can understand the sophistication of these cultural interactions. People need to take a step back; stop looking at the trees and look at the entire ecology of the forest. Problems aren’t quite as they often appear; at times they aren’t even problems. Numerous solutions may exist creating even more consequences of positive and negative effects.

I’m not an economic Nobel laureate but I have learned enough to know that monetary policy requires a lifetime of learning to understand only specialized portions. I’d like to show you a few intricacies of the US Dollar and it’s relation to other currencies. To do this, we should start with our basic money system and its advantages and disadvantages.

Ron Paul proposes that the USA goes back to the gold standard where one paper dollar is equivalent to its value in gold. Let’s go back a little further and see when and why modern currencies were transformed to a fiat money system. England converted to some sort of fiat money system first in WWI to finance its war efforts because there was not enough time to build its gold reserve. America came quite a bit later in 1975 when the USD was no longer convertible to gold coin. In any hard currency standard, in order to print money, the mint must maintain a reserve equivalent to anything of hard value. Most commonly this is gold or silver; primarily gold because of its density, malleability, and universally recognized desire for beauty. We could maintain a reserve of steel if we wanted to however the reserve would be probably the size of Texas because of steel’s low value per ounce compared to gold.

The primary benefit and arguably only benefit of a gold standard is psychological. The paper you carry in your wallet only holds the value of its recipient’s perception of its value. However worthless the paper may be, gold will always be worth something (as said above - because of its universally recognized desire for beauty). The gold standard brings stability to the value of the currency it backs. Stability and a sense of ownership is what increases overall wealth of an individual within a society. If people don’t have property rights, the wealth of those people will not rise. A perfect example of this would be intellectual property rights in China. Foreign entities are apprehensive about bringing their technologies and designs into China knowing that the Chinese government is unable to uphold their intellectual property rights. Thus on a macro scale, Chinese people are slowed to gain wealth. Further, if there isn’t stability then people save, creating a downward cycle of spending and investing into new industries - once again a loss in new wealth.

There is one fundamental problem with a gold standard. Gold maintains its high value because of its rarity (as opposed to iron needed to make steel for example). How do you increase wealth if you do not increase the supply of gold? That is the fundamental question. Previous to the 20^th century, the wealth of nations never surpassed the supply of gold on such a dramatic scale. The most obvious answer to this question is that you need to mine more gold – how simple! But the rarity of this gold is what allows for it to maintain its high value. A immediate rise in the supply of gold would cause inflation in a gold standard (the lowering of the value of the dollar) because the dollar value is tied to the lower value of this increased supply gold.

However, the situation described above will never happen. Increasing the mining of gold is not such a simple task and the markets are already working at maximum capacity to increase the supply of gold because of the prices noted below. Look at what is affecting the supply of gold. Previously 100% of gold demand was ornamental. As said above, gold is valued for its universally recognized beauty so the most common place for gold is jewelry. Since the 1970s, there has been a titanic affect on the price of gold that has nothing to do with its universally recognized beauty. The extremely high density and malleability of gold which makes it such a great reserve also makes gold one of the best natural electrical conductors. The semi conductors used in our computers, cars, and cell phones now create at least 25% of the demand for gold, something which had never happened before the 1970s.

Can you imagine if cell phone production had a direct effect on the value of the dollar? If the production of cell phones slows one year, the entire dollar value drops? What if global economies come to a recession? For example - oil prices hit $150 a barrel tomorrow after Iran attacks Israel. We would be spending all of our money on paying for increased transportation costs and the prices of all of our goods would skyrocket so much that you would wait an extra year before buying a new car, cell phone, and/or computer. Manufacturers would stop ordering semi-conductors, the supply of gold would skyrocket, and the value would plummet. This would have a disastrous effect, we would stoop into a global depression. Traditionally, this is opposite of what would happen in our Fiat money system. When the value of the dollar goes down American manufacturing rises because it becomes cheaper for foreigners to buy American goods (I’ll explain more later).

If we were tied to a gold standard, when manufacturing would slow, the dollar would also plummet instead of being brought up by an increased demand. The reason there would not be an increased demand is because modern currencies carry their reserves in a combination of the USD and gold. When the USD drops, gold value rises thus the balance maintains the foreign countries’ current currency value and raising its overall value in relation to the USD. If both the USD and gold are dropping at the same time (because they are tied to one another in a gold standard) that balance no longer exists and the values of foreign currencies drop at the same rate of the USD. Inflation can exist with a gold standard just the same as it can exist in a fiat money system only it would be more exaggerated globally.

Now let’s look at something worse than inflation – deflation. Deflation is the lowering of prices on consumer goods creating a situation in which the underlying currency is gaining in value or exactly backwards when an underlying currency raises in value forcing prices of consumer goods to drop. Contrary to popular belief, America is still the world’s factory. No longer are we the world’s factory in basic goods such as toys or shoes. However we are the world’s factory in high tech goods and services. Arab countries employ the services of American oil companies to maximize the efficiency of their oil wells. AMD and Intel design and produce the world’s computer chips in America. Boeing, Lockheed Martin, and other’s are the leading manufacturers of aviation technology. What I’m getting at is this: exporting is an enormous portion of the American economy.

What would happen to American exports if large scale deflation occurred? Let’s say for example the Euro and USD trading 1:1 in a certain year and 3 years later the USD traded 1.1:9. Now you are an Asian airline company executive looking to buy additional jets to your fleet. Your two options are American Boeing and European Airbus. To buy from either manufacturer you must covert to that company’s trading currency. But look, the USD is 19% more expensive than the Euro. For Boeing to stay competitive, they have to reduce their prices by 19% cutting out most of their profits. If 19% is unsustainable then Boeing is no longer competitive and loses those contracts. Inflation enlarges manufacturing capacity and growth (very important to an exporting country). This scenario is exactly what has played out over the last 4 years between Boeing and Airbus only Boeing had the price advantage this time. Another great example of this is New York City’s real estate market. Manhattan flats which were far too pricey for foreigners in the 1990s are now within reach of foreigners converting the lowered dollar value. This has created a building boom with over $83 billion of construction (a record amount) in New York City over the next 3 years.

Deflation ultimately affects the blue collar workers. Those who are rich in dollar supply can go overseas and buy all the Gucci they want. However those factory workers at Boeing who have no planes to produce will be unemployed. I just showed you how uncompetitive a company can be with a 19% influx in currency prices. The price of gold per ounce has gone from $317 per troy ounce to $835.20 over the last 5 years. That means had America been on a gold standard 5 years ago, the price of the dollar would have skyrocketed 263%. This probably would not be the true deflationary affect on the dollar as other currencies would rise as well but the proportion would be well over 19%.

This is just a negative effect of deflation much how inflation also has long term negative effects. What makes deflation worse than inflation? Deflation in a gold standard is uncontrollable whereas in deflation in a Fiat money system is controllable. If faced with the dilemma of deflation like the US did in the late 90s, the US Treasury can simply turn on the printing presses to match the demand for the USD nearly overnight. In a gold standard this is impossible; you can only increase the production of the dollar if you increase your gold reserve. Increasing the gold reserve would take several years. A large buyout of the global gold supply by the US government would spike gold prices only further perpetuating deflation. This would also have several paradoxical effects such as a huge rise in the prices of computer chips forcing inflation in certain sectors of the economy during a deflationary period. Who knows how the markets would react to such strange forces? The unknown is extremely destabilizing which as I earlier noted, stabilization is one of the key forces in creating wealth. Investors and consumers won’t know what to do, so they’ll just temporarily stop spending and investing until the dust settles.

Suppose you disagree with my theories of monetary policy (after all, they are just theories), I hope you can at least agree that the natural human instinct during destabilization is to stop spending. If you disagree, I think you need to read up a little bit more on economic history (i.e. America after WWII spending boom).

Let’s tie this discussion back into Ron Paul’s idea of changing the USD back to the gold standard. In 2005 there was $760 billion USD in circulation. In 2006, America’s gold reserve was worth $146 billion weighing in at 8,135 metric tons. This is the largest gold reserve in the world. If we were to go back to a gold standard, we have the option of either multiplying our gold reserve by about 6 times. Or we have the option of reducing the amount of USD circulation by about 6 times. I don’t know how either of these tasks is achievable but what I do know is that either one or combination of either would be extremely destabilizing. Whatever economic benefits you may think can come from converting to a gold standard (I can’t think of any convincing ones), ask yourself if they outperform the detriments of the destabilization that would ensue and echo in the global markets for at least a decade.

In 2006 during St. Patricks, I was watching the news and saw some new legislation that would deport illegal Irish immigrants. My immediate reaction was, why the hell would you want to do that, they're already here, let them work in America.

That was probably the first time I've shocked myself. I thought I hate illegal immigration when talking about Mexico, why the hell did I have such a subservient view thought in regards to Illegal Mexicans but not the Illegal Irish? I thought about it for a minute and came to a conclusion. I'm not against illegal immigration, I'm against illegal Mexicans.

Law is law and all Americans should respect the law, but really who the hell cares who came here from where and what they do now? As long as they pay taxes like everyone else, put food on the table, and somehow contribute to society, then bravo to America. If you're thinking breaking the law is wrong, yada yada yada, let me ask you this: are you offended when you see someone speeding on the highway? Well they did just break the law and you sure as hell didnt care.

However, this isnt the case with our illigal mexican immigrants. Sure some of them work like animals, but as everything in life, there are pros and cons to this. Them working in this country comes at a large expense and I'm not talking about jobs either. I'm all for free economies and making white guys like me rich.

I'm talking about not paying taxes while recieving benefits such as public schooling, subsidized health care, and welfare programs. Not only does this take away from the American citizens who actually need these programs, it's putting a huge stress on the government. Check out this fun fact:

"A study made by the U.S.-Mexico Border Counties Coalition, an American lobbying group, found that U.S. hospitals in border states provide at least $200 million a year in uncompensated emergency care to illegal aliens. In the four border states, 77 hospitals now face a medical emergency. Uncompensated care to illegal aliens in Arizona cost the Cochise County Health Department 30% of its annual budget, the Copper Queen Hospital in Bisbee $200,000 out of a net operating income of $300,000"

Some immigrants think that because they live in America they are citzens, but thats just not true. You are only a citizen when you assimilate into a society. It's like when you go to a new school, you cant really call yourself as a student there until you become a classmate You have to become a part of the student body as a whole.

Why are Mexicans coming to America to recieve all the benefits of an American but bring with them all of the bad traits which made Mexico bad enough to leave? It's just silly. How many times have you heard of an illegal Irish immigrant kill a cop? Now compare this with Latino gang violence in California. These little gangs are the same groups that rally up more illegals for cash and carry with them large sums of drugs into America.

How many Irish immigrants have been caught by border agents with little bags of heroin rolled up their assholes?

And when these heroin assholed Mexicans get caught, they get put in prison which costs me and you even more money. Take a look at these incarceration rates as of 2004:

Whites: 393 per 100,000
Latinos: 957 per 100,000
Blacks: 2,531 per 100,000
I know this doesnt say anything about illegal immigrants, but why is America's newest major ethnic group the second most incarcerated? They arent black, they dont have the whole slavery card to pull. I can tell you that its not because they have the good ol' American dream most other immigrants have.