[jyl]

We will always have boom and bust cycles in the financial system, just as we do in the rest of the economy. There is nothing wrong with that. The point is to limit the severity of the booms and the busts.

As for exchanging currency for gold, here's a reality check. There is $2 trillion of US currency and equivalents in circulation. http://www.fms.treas.gov/bulletin/b2008-3uscc.doc There is 4600 tons of gold in Fort Knox. So requiring all $2 trillion to be exchanged for Fort Knox's gold implies gold price goes to USD $13,700 per ounce. But that's only currency in circulation - logically, all cash-equivalents like bank deposits then must be backed by gold too - unless you want to make all the money in your bank account as well as your monthly payroll check worthless. Bank deposits alone are another $7 trillion, implying gold at $61,200/oz. Up some 7,600% from today's appx $800/oz.

This would create all kinds of insane and disruptive results. I can't even start to think of them all.

But the most colorful is that war breaks out all over the world. Think about who has and who mines the gold. Who really has a lot of gold is the Indian public with 13,000 tons in jewelry form. So now the Indian public will have USD $25 trillion in wealth - almost 25X more than that country's entire GDP. We'd better invade that country before the Russians and Chinese do. South Africa mines about 270 tons/yr, that will be $530BN/yr. Indonesia will be $340BN/yr, Peru $340BN/yr. Pick the two that are easiest to invade.

And perhaps the most severe is that economic growth and inflation/deflation are now hostage to the growth in gold supply. If supply of new gold (i.e. mining) doesn't keep pace with economy's need for growth in capital, then either economy is forced to grow less, or we get gold price inflation. If economic growth slows and needed capital growth falls below new gold supply, or if new gold supply grows due to more intensive mining or more reclamation from industrial/other uses, we get gold price deflation. In other words, now we'd have an additional constraint on economic growth, without gaining any stability in the new gold-based currency.

Originally Posted by competentone

Then you can continue to expect to have "boom and bust" business cycles created by artificial credit expansions and contractions caused by the double-entry bookkeeping (which would be considered as fraud in any other business) practiced by bankers.

People buy 30-year government bonds, why do you think people wouldn't buy 30-year CDs?



Nonsense. You can use any amount of gold to back all the outstanding fiat currencies -- it is all just a matter of what ratio of gold-to-fiat currency you use.

When something like gold backs a currency, and banks are prohibited from issuing more notes than they have gold deposited, you do not have price inflation in the economy, nor the boom-bust cycles created by inflation of the money supply.

With a non-inflating currency, savers and thrifty are rewarded, as the currency would be appreciating in value as the economy grows.

Those who live irresponsibly, consuming large amounts of assets before they have produced an equal amount of wealth to trade for their consumption -- using the easy credit offered by the banking system -- would be penalized with an appreciating currency.

(Let me guess, you're living with large amounts of debt? Which would explain your objections to the forced fiscal responsibility a precious metals backed currency would require.)