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THE Currency Thread (merged)

Discussions about the economic and financial ramifications of PEAK OIL

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THE Currency Thread (merged)

Unread postby frankthetank » Fri 05 Nov 2004, 13:35:07

Backed by gold??? Just wondering if there were any out there...
Last edited by Ferretlover on Sat 19 Sep 2009, 18:12:58, edited 1 time in total.
Reason: Merge thread.
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Re: IS any currency....

Unread postby Freud » Fri 05 Nov 2004, 16:57:45

frankthetank wrote:Backed by gold??? Just wondering if there were any out there...

they're all pretty much backed by their reserves whom have a percentage in gold and the rest in various currencies though mostly the greenback.. half and half seems to be the ongoing feeling I get when I catch the odd glance in the newspaper.
somebody correct me if I'm wrong though
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What is so great about gold, anyway?

Unread postby hmbjeff » Fri 05 Nov 2004, 18:47:29

Can anyone explain in simple terms why gold is some sort of bedrock of monetary value? I know it has played that role historically, but in what way does that thinking apply to future post-oil scenarios?

It is a somewhat useful metal, it is pretty, and it's scarce. But it doesn't (by itself) help you grow food or build shelter. Why is it's value inviolate while everything else we use for currency is not? This is not a troll, I really would like to know.
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gold

Unread postby MrGresham » Fri 05 Nov 2004, 19:08:46

"backed by their reserves" -- well, not quite. Those reserves might be held in a nation's central bank, and they could theoretically be used to pay out upon claims by holders of its paper currency. But, what's to stop them from just canceling the old currency first? Then, start a new one. Talk about "bang for the buck" -- or two pops for a nickel...

It's all politics, and so far for the last century, paper money has been a very profitable game to play (for those allowed to print it). The above scenario would be unlikely for the currency-issuer who wants to win the game of competing papers. But for one not in the game, or soon to be out...

In fact, that leads to the second answer: gold's value starts in its commodity and jewelry value, but then takes off into the monetary realm simply BECAUSE of government's propensity to print paper money. The very fact that they can't print gold propels its value in times when they're going bonkers with paper.

The fact is that a few billion peasants around the world (as well as a growing middle class in India and China) will give you current market value for gold for centuries to come. For whatever reasons, it is fact.

When Indonesia's rupiah collapsed in 1997, farmers with gold bought the fields of farmers without. Property that had been in one family, perhaps hundreds of years, changed to another family's. That's pretty momentous in the overall picture.

Yes, I usually look for a basis upon which people do or ought to do something. But sometimes, the sheer forward inertia of custom, accompanied by a small ignition of supportive events, is enough to propel great gains.

(Don't forget, too -- copper has more than doubled in price in the last year. Got plumbing?)
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Unread postby frankthetank » Fri 05 Nov 2004, 21:23:18

Copper, huh? Strange... haven't really heard to much about that...

OK...so since they don't have to back currency up with anything..?? (gold, silver, diamonds?) they are free to print print print??

I always like to tell people, when they talk about money, that its only worth what someone will give you for it.
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Re: What is so great about gold, anyway?

Unread postby gonin02 » Fri 05 Nov 2004, 22:27:50

hmbjeff wrote:This is not a troll, I really would like to know.

Glad you asked... I'm no expert myself, so here's my feeble take. Gold is independent of the actions of governments, fashionable policies, etc. It cannot be debased like a fiat currency can by turning on the printing press. It's supply is limited and increased only through mining. It pays no interest to hold gold in a safety deposit box, but why do other investments pay interest? I think it's because they have risk. The greater the risk, the greater the reward..etc.. Gold pays no interest cause its zero risk. A piece of gold cannot be bankrupt, it is no one's liability. I think all civilizations have independently discovered two things... alcohol and gold. It also is very hard to destroy...all the gold ever mined still exists in one form or another. Must be a reason for it... And, it looks kinda cool :P

Some interesting quotes on gold..
Charles de Gaulle: "Indeed there can be no criterion, no other standard than gold. Yes, gold which never changes, which can be shaped into ingots, bars, coins, which has no nationality and which is eternally and universally accepted as the unalterable fiduciary value par excellence."

George Bernard Shaw" "You have to choose [as a voter] between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold."
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Re: IS any currency....

Unread postby gonin02 » Fri 05 Nov 2004, 22:34:26

frankthetank wrote:Backed by gold??? Just wondering if there were any out there...

No currency is currently backed by gold.. the Swiss Franc was backed by gold for awhile after all other currencies were de-coupled from the yellow metal... I think their gold backing ended once they joined the IMF (1992), but I don't know all the legal details link
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Unread postby frankthetank » Fri 05 Nov 2004, 23:16:37

So the question becomes (from your post) whats worth more after peak, alcohol or gold??? :-D

I
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Well said

Unread postby MrGresham » Sat 06 Nov 2004, 14:11:44

Well said, gonin02 -- that Greenspan essay is one for the Ages, isn't it? Pretty hard to believe he's repudiated those thoughts -- he just has a different day job now. ;)
Let's see if I can recall the five main characteristics of money, off the top, right now:
Durability
Divisibility
Malleability (not sure I'm not just hallucinating this one, before my morning coffee)
Portability
Scarcity

hmmmm... I better look this up --- ok, Wikipedia has something wiki
Money is an agreement, between a community, to use something as a medium of exchange, which acts as an intermediary market good. It can be traded and exchanged for other goods. The agreement can either be explicit or implicit, freely chosen, or coerced. Money is an abstract form of power. As discussed below, money also has other characteristics.

Money itself must be a scarce good. Essential characteristics of money Money has the following three characteristics:
1. It must be a medium of exchange
When an object is in demand primarily for its use in exchange -- for its ability to be used in trade to exchange for other things -- then it has this property.
This characteristic allows money to be a standard of deferred payment, i.e., a tool for the payment of debt.

2. It must be a unit of account
When the value of a good is frequently used to measure or compare the value of other goods or where its value is used to denominate debts then it is functioning as a unit of account.
A debt or an IOU can not serve as a unit of account because its value is specified by comparison to some external reference value, some actual unit of account that may be used for settlement.

For example, if in some culture people are inclined to measure the worth of things with reference to goats then we would regard goats as the dominant unit of account in that culture. For instance we may say that today a horse is worth 10 goats and a good hut is worth 45 goats. We would also say that an IOU denominated in goats would change value at much the same rate as real goats.

3. It must be a store of value
When an object is purchased primarily to store value for future trade then it is being used as a store of value. For example, a sawmill might maintain an inventory of lumber that has market value. Likewise it might keep a cash box that has some currency that holds market value. Both would represent a store of value because through trade they can be reliably converted to other goods at some future date. Most non-perishable goods have this quality.
Many goods or tokens have some of the characteristics outlined above. However no good or token is money unless it can satisfy all three criteria.

I also recommend reading Peter Bernstein's book, although it is frustratingly full of tales of blood and gore associated with gold-seeking and short on modern financial applications.

Geez, I've always wondered about that "10 goats" situation. I mean, if people will haggle over the price of ONE goat, then wouldn't any recipient want to cherry-pick the BEST 10 goats out of the herd? Do we see a problem here?

So, WHICH bottle of alcohol will you specify in your contracts? :)

Let's say I were to put all of my wealth pre-Peak Oil into diesel generators, which I thought would hold value for me and buy me the things I want later. Well, I am really speculating on the "price" (in whatever future good) I can get for my diesel generators. And I'm pretty vulnerable to some Chinese company coming along and flooding the market with cheap diesel generators. (Actually, I'd probably do better stocking up on windpower parts, but -- similar risks no matter how noble the business intention.)

I might want to diversify into bottles of whiskey. But -- same problem, eh? And not if everybody else goes into the whiskey-storing biz. "Sorry, Bud. Got enough of my own already."

Gold represents ultimate diversification, as its conversion back into whiskey, or generators, is likely to be smoother, and with less transaction cost/loss, then, say, trying to turn generators into a drink of whiskey on a Friday night.

Yes, some commodity or asset MIGHT appreciate in price, relative to gold. If you KNOW what that is going to be, then by all means, stock up a boatload. Your profit will more than cover the sales costs back into other goods.

BUT -- you don't know, do you? Nor does everyone else. (Think of tulip bulbs for a moment, please.) That is why money exists -- to cover the general uncertainy about the basket of all prices, and to allow us to cheaply move from one good to another, as we need or choose to.
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Unread postby gonin02 » Sat 06 Nov 2004, 17:42:24

Lol... it's best to have a diverse portfolio in this case... 50% gold, 50% alcohols...
frankthetank wrote:So the question becomes (from your post) whats worth more after peak, alcohol or gold?
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Evaporation?

Unread postby MrGresham » Sat 06 Nov 2004, 18:35:18

Long as you put a timelock on the liquor cabinet -- those long cold winter nights, y'know.

Now just because we have a Prez who's determined to "spend my capital" doesn't mean you want to take a chance on drinking yours away. (Hmmmm.... maybe that analogy is closer to reality than I'd like to think about at the moment...)
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Re: Well said

Unread postby gonin02 » Sat 06 Nov 2004, 19:15:48

Good point... gold has the characterisitics of a money, and then some...which probably explains why it has suvivied the test of time... What's the title of the Peter Bernstein book, Mr. Gresham?
MrGresham wrote: Let's see if I can recall the five main characteristics of money, off the top, right now: --snip-- So, WHICH bottle of alcohol will you specify in your contracts?
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currency collapse

Unread postby Leanan » Fri 11 Mar 2005, 13:01:37

Some are worried that the U.S. dollar is heading for a crash:

http://money.cnn.com/2005/03/11/comment ... /index.htm

We are borrowing money just to pay the interest on our debt. This is not good.
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Unread postby Lehyina » Fri 11 Mar 2005, 13:14:22

What exactly is a crash? Hasn't the dollar been crashing in value for a long time already. Or is a crash the point at which interest rates have to go sky high?
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Unread postby Leanan » Fri 11 Mar 2005, 13:29:14

Crash as in Argentina-style collapse. Where stores post prices three or four times a day, because inflation is so high. Where people rush to the store on payday to spend their entire check, because it will be worth less in a few hours. Where, instead of bringing your money in your pocket and taking your purchases home in a wheelbarrow, you bring your money in a wheelbarrow and take your purchases home in your pocket.
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Unread postby trespam » Fri 11 Mar 2005, 13:35:59

Leanan wrote:Crash as in Argentina-style collapse. Where stores post prices three or four times a day, because inflation is so high. Where people rush to the store on payday to spend their entire check, because it will be worth less in a few hours. Where, instead of bringing your money in your pocket and taking your purchases home in a wheelbarrow, you bring your money in a wheelbarrow and take your purchases home in your pocket.


But by and large this only happens if the fed decides to start printing money to purchase bonds in their open market operations. I think this very unlikely. The fed has made credit easy, producing large amounts of debt, but rates are on the way up, though still below inflation.

The words collapse and crash and those similar to it should be used cautiously. When I was a kid, the dollar "collapsed" in the 70s. Somehow we survived. I think the dollar may have some additional downside but the most likely outcome of this is large number of defaults and a super recession.

That may not be for a year or so. Inflation and the Asset Economy are still working their black magic.
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Unread postby threadbear » Fri 11 Mar 2005, 13:58:37

Leanan, The scenario you describe is more like a Weimer pre-war Germany hyper-inflationary collapse, where the paper currency became essentially valueless. Many people think this will be and ALWAYS is the eventual destiny of all fiat (paper, not backed by gold) currencies. They could be right.

However, Argentina has substantially recovered from defaulting on their federal debt, and depegging their currency from the one to one relationship it had with the American dollar, which was a really freakin crazy way to appease the IMF, as Argentina is pretty dependant on exporting it's products.

The American situation is pretty grim, but historically speaking, isn't as bad as other countries who have climbed out of the depths.

The wild card, though, is whether most oil producing countries will start to insist in payment in Euros, which will mean the US dollar's value as the reserve currency of the world will be over. This collapse in international confidence will have grave consequences for the dollar. Sky-rocketing interest rates won't be able to substantially counter it's effects.

The US may find itself in the same position as a third world country like Nigeria or Burkina Fasso, for example. No matter where these countries peg their interest rates, would you invest in their currencies?

It's another step towards a more localized economy, for the US, symbolized by a more localized currency, spurned by the international community. Let the economic quarantine begin.
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Unread postby Leanan » Fri 11 Mar 2005, 14:25:43

Exactly. Argentina did survive their currency collapse, contrary to what all the economists predicted. (Which makes you wonder about the use of economists.)

But there's a difference. And that's the petrodollar and peak oil. The petrodollar has let us run up a debt that would kill the economy of any other country. The "correction," when it comes, may be brutal.

In the end, larger debt and debased currency amount to the same thing: pushing off repayment into the future. Eventually, though, we are going to have to pay, and I think it's going to be sooner than many economists think.

And I do think the feds will try printing more money to pay the debt. They know they shouldn't, but they won't be able to resist. Will we let the soldiers in Iraq (or Iran, or Syria - who knows where they'll be by then) go without armor? Will we not pay our Congressmen? Will we not pay IRS agents...when without them, we can't collect new revenue? The temptation will be irresistible.
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Unread postby threadbear » Fri 11 Mar 2005, 14:52:29

Leanan, Ultimately, if printing themselves out of the mess fails, the fed will try to stem capital flight out of the country, they'll also tax the crap out of the wealthy, by closing tax loopholes and raising taxes. The hard right wealthy, who voted in this band of thugs, is in for a rude awakening.
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Comments requested

Unread postby EnviroEngr » Fri 11 Mar 2005, 15:23:34

Welcome back.

Have you seen this thread yet:

http://www.peakoil.com/fortopic5527.html
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| Whose reality is this anyway!? |
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