Comment by mark_l_watson | Hacker News Reader

Comment by mark_l_watson | Hacker News Reader

James Rikard (author of Currency Wars) in his newest book Aftermath predicts that the dollar's reserve currency run may soon be over, and special drawing rights (SDR) reserve currency might only be 1/3 dollars. I think he is probably correct on this prediction but maybe not on another prediction: currencies like China's and Russia's might soon be 20% backed by gold. He makes the point that there is no need for 100% backing from gold since a smaller percentage would still prevent a country from printing new currency out of thin air.

I think the dollar has a lot of inertia so it might reign for a long while longer as reserve currency, but then I also think about how much debt we have. Our treasury can not account for $21 trillion (ref: Catherine Austin Fitts http://solari.com) and the amount of consumer, educational, real estate, etc. of debt worries me, but: I expect a slow burn of our economy, not falling off of a cliff, economically speaking.

We can adjust to a decade long slow downward economic trajectory, people are resilient.

> currencies like China's and Russia's might soon be 20% backed by gold. He makes the point that there is no need for 100% backing from gold since a smaller percentage would still prevent a country from printing new currency out of thin air.

What is the conceptual difference between a currency that is 100% backed by gold and one that is 20% backed by gold? Or rather, what is the difference between a currency that is 20% backed by gold, and another currency that is (a) 100% backed by gold; and (b) worth five times as much as the first currency?

as compared to dollars, of course.

(alt s/dollars/bitcoin/)

I don't understand this. Can you expand on it?

whatever they come up with will still be valued in terms of dollars, as dollars are still the fundamental unit of currency inherent to the universe.

I think that his point is that 100% gold backing would make the price of gold very high, and a partial gold backing would be easier to accomplish with many of the same benefits like better long term stability (if some shorter term pain).

So, in these two scenarios:

1. The currency is 100% backed by gold.

2. The currency is 20% backed by gold.

How much gold does it take to purchase 200 apples? You are saying that it will take more gold in the second case, right? Why?

No in the first case it might take 1 currency to buy 200 apples. Then in the second case it would take 5 currency to purchase the same 200 apples.

1 gold = 200 apples 1 gold * 1 currency = 200 apples 0.2 gold * 5 = 200 apples

That's what I was saying, but mark_l_watson is saying that in case 1 the price of gold is higher, meaning a smaller amount of gold to buy the same number of apples.

I don’t have Rikard’s book in front of me, but from memory I think he was saying that the price of gold would adjust to $10K/ounce if currency were 20% backed by gold, but the price of gold would have to be much higher than $10K/ounce if currencies were 100% backed by gold.

I don’t invest in gold, I have always thought that income property is the best investment for common people like myself. Rikard has a different opinion and thinks people should own gold in their portfolio (like 5% gold). I don’t understand the gold market, while income property is easier to understand.

In this case I interpret "backed by" as that the central bank will give you the corresponding amount of gold for your currency. But, the opposite would not be true, they won't give you currency for gold alone, you'd have to also provide the same kind of backing as for non gold backed currency.

So paid in gold or the currency, you'd get the same number of apples in each case. But if you'd convert the currency to gold via the central bank (rather than on the open market) you'd get 1/5 as many apples in the second case.

In normal operations this won't make any difference, no one in their right mind would use the central bank rather than the open market to buy gold. But it means that the central bank can't just print money as they see fit, reducing the risk of runaway inflation. It also acts as insurance in the case of runaway inflation, you'll lose at most 80% of the value.

In the case of Russia, does anyone really expect the central bank to “give you” gold in exchange for notes in a crisis?

They’ll certainly exchange some amount of gold for something but I doubt it would be the face value of the notes.

The difference is, when you go to the gold standard, how much gold you acquire to support the currency.

After that, they are the same (but keep in mind, the value of a currency is dependent on a lot of factors, and not just the gold that is backing it. Otherwise currencies backed by nothing would all be worth nothing, which we know isn't true).

> (but keep in mind, the value of a currency is dependent on a lot of factors, and not just the gold that is backing it. Otherwise currencies backed by nothing would all be worth nothing, which we know isn't true).

True, but once you've pegged the currency to gold, it can't fluctuate very far from the price of gold. A change in one is necessarily an equal change in the other. Currency that isn't backed by gold is free to fluctuate independently of the gold price, but gold-backed currency isn't.

You could have a currency backed by a weighted basket of commodities, but that would be "backed by a weighted basket of commodities", not "backed by gold, but the backing is metaphysically different than you might expect".

> True, but once you've pegged the currency to gold, it can't fluctuate very far from the price of gold.

I think this depends on what your definition of backed means. If you include the government not just buying the currency for a given amount of gold, but also selling the currency for the same amount of gold, I agree.

But, otherwise, if the government guarantees it will only buy the currency for gold and not vice versa, then I disagree. For example, I could state tomorrow that I will guarantee to give anyone 1 oz. of gold is they give me $100 trillion in USD, and then technically USD would be backed by gold (by me), but such an offer would have no real effect on the how the market would value USD.

I might be wrong about what backed means, but if so, then I also don't understand what is meant by partially backed.

What would happen to life in the US if the dollar was no longer the global reserve currency?

I think it would put us on par with other countries, we would lose a nice advantage. Worst case scenario would be a sharp economic decline, but I optimistically think it would be a slow leveling out, a slow decline in consumer purchasing power, limit government expenditures, etc. But, I am not at all sure what will happen.

Do you think that hostile foreign nations are actively trying to end the run of the petrodollar?

I think the point of the original article is yes, it is in some other countries interests to end the dollar being the sole reserve currency.

On the other hand, the USA provides stability, so everyone who is rational in the world should want any transition to be slow. The whole world is in this together, I think we prosper together, or suffer together. Let’s hope for the first option.

Costs will be very high.

Have you ever been to third world countries and wondered why their shopkeepers, barbers, regular service people don't live in houses with good materials?

Because its too expensive for them. That expensiveness will come here to the US

I think the main immediately recognizable change would be a slide in dollar denominated assets— houses, stocks, bonds, etc, as countries and corporations and crime syndicates stop using the US as a safe place to invest their wealth. Though that may go along with inflation, so it might be hard to tell it’s happening right away.

The most direct impact would be an increase in costs because the American supply chain, which is currently almost completely dealt in dollars would need to factor in currency risks, since, for example, they may have to start paying manufacturers in Yuan, and shippers in Euros.

More indirect results would be things like making American companies less competitive than they are worldwide. For one thing, most American companies have little to no experience dealing with multi currency issues, while companies in other countries deal with these every day and do have experience. This will give those other countries and people a slight advantage against American competitors.

Also, America gets a decent chunk of stuff for free or cheaper than it would otherwise, because countries are paying Americans goods and services in return for pieces of paper. Those benefits will gradually reduce and disappear.

>since a smaller percentage would still prevent a country from printing new currency out of thin air.

When people argue against bitcoin, they say that limiting the supply is a source of deflation and that deflation is risky for a currency.

Money can be used to store value but first of all, it is meant to exchange value. Don't you kill your economy with such a supply-limited currency since your economy cannot grow beyond your ability of acquiring gold?

New gold is being mined constantly.

I never liked the idea of a 100% gold backed currency, but 20% sounds OK.

If new money is not printed out of thin air, it seems like prices for things would adjust. Slowly increasing money supply, faster growing productivity/goods/services would mean that prices would go up to keep things balanced. I am not an expert in this subject but it interests me.

Per Wikipedia, there are 187,000 tons of gold above ground, and about 2000 tons are mined a year. That's about 1%. If all the gold was used to support currencies, mining would only let you increase the currency supply by 1% a year. If the economy is growing by more than 1% a year, then the currency has to be deflating.

But all the gold isn't being used to support currencies. So here's a different scenario: A currency is 20% supported by gold. We need, because reasons, to increase the currency supply. 2000 tons of gold is 4 million pounds, which is 48 million (troy) ounces. Gold is $1500/ounce at the moment, which gives us $72 billion of gold mined in a year. That lets one country use the whole world's mining to create $360 billion of currency in a year. Well, in 2008, the US created $4 trillion to keep the economy from collapsing. So mining isn't going to let you prevent deflationary collapse when you need to.

Thanks, I understand your point.

Without a doubt short term, it is good to be able to inflate the currency when there is a 2007/2008 event. But the counter argument is that making many ‘best for the short term decisions’ can cause more damage in the long run. Do we want the best world for our lifetime, or plan for something that is sustainable so our grandchildren’s children will have a great life.

Native American Indians believe that major decisions should be made for what is best for the seventh generation after them.

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