So I'm hearing the " the dollar is over, throw everything into gold, fiat money is doomed" in other forums. Can anyone give some conterpoints to that narrative?
Regarding the USD, the same doom cults say the same things during every major global problem / event / disaster going back generations. The dollar was supposed to go away with the great recession; the dollar was supposed to go away with the intense inflatation of the 1970s; the dollar was supposed to go away with Nixon's abandonment of what was left of the gold standard; the dollar was supposed to be doomed with FDR's various moves.
There is zero evidence the dollar is under meaningful risk here.
It's fine to utilize gold as a store of value, there is absolutely nothing wrong with that. And that's an entirely different matter than whether governments will abandon their fiat currencies. The US, Eurozone, China, Japan, Russia, India and so on have absolutely no interest or willingness to give up control of their present fiat + central bank systems. They dictate whether fiat money is doomed or not, via their enforcenment capabilities.
Take one blatant example. Russia has de-dollarized itself heavily, has accumulated a lot of gold lately (relatively speaking), and still has zero interest in giving up the power, flexibility and convenience that controlling the national fiat currency provides. For Russia, gold is just a diversification opportunity that backstops some of their national financial condition. The same is true for China, another accumulator of gold reserves.
The value of the dollar in 1968 was - roughly - (1/40)th of an ounce of gold. The dollar today is roughly (1/1660)th of an ounce of gold.
That is a >95% reduction in value over less than a lifetime. The people who argued the dollar was going to undergo intense inflation would probably be confused about why people argue they were wrong. Some of the young ones (~30 in the 1970s) are probably still alive to argue that point although not on HN. Anyone who stuck with gold rather than dollars when Nixon closed the gold window has been making ~7.7% per annum nominal investment return from holding on to a rock.
The major thing they got wrong was thinking that people would stop using it after it lost whatever % of its value it did. 97% or somesuch so far. Turns out not.
Now, sure, the dollar lost a lot of value between 1968 and now. I don't deny it. But it also lost value between 1935 and 1968. Measuring the value of the dollar in terms of gold makes it look like all that happened after 1968, which makes the rate look higher than it actually was.
But regardless, when people say "collapse of the dollar", they're not necessarily saying the dollar is going to vanish. They're saying it's going to lose its value. Whichever part of history you look at, history shows it's a poor store of value as we just print more of it than goods. Nearly any asset is going to look good next to it if we continue the status quo...
$35 to $1,650 looks a lot more like a collapse in value. And that is after the demand for gold presumably plummeted because it wasn't official money any more, and mining got a lot more efficient through the 70s to the 90s. Maybe the Asians made up for that with new wealth and demand or something. If I'd been alive in 1970s, arguing that the dollar would collapse in value, I wouldn't feel like I'd lost the argument looking at how history played out. I'd probably have gotten the timeframe wrong, but the mechanisms are playing out as expected.
The thing that really stuns me is that countries are willing to hold US dollars as a reserve currency. It is a terrible move for value preservation. They aren't aiming to maximise their savings.
[0] https://en.wikipedia.org/wiki/History_of_the_United_States_d...
And, gold was pegged to $20/oz. Then at some point in the Depression, it was moved to $35/oz in a step function. It wasn't gradual.
And I argue that the actual value of gold wasn't $35/oz at the end of the gold standard. That's why the value shot up so quickly when the market was allowed to determine the price - because $35 was the wrong price on day one. There was a lot of inflation between 1935 and 1968 to catch up for that was not reflected in the $35 price, because $35 was never a market price.
How do I know that $35 was the wrong price? Because the US was bleeding gold. Other countries were buying gold from the US at $35, and the US could see that the official price was unsustainable.
I'm more than happy to agree it is not a precise comparison. A lot has changed over the last 50 years. But even after leaving a reasonable allowance for that, someone arguing that the move off the gold standard would destroy the value of the dollar appears to be (100-2)=98% correct. If you like we can agree that the starting price was $150/oz in market prices, in which case we can agree they were 90% right.
The US government has an inflation policy; they explicitly want to reduce the value of the dollar at a rapid pace. The government is publicly on the record as thinking that is a good outcome. So maybe they would have destroyed the value of the dollar even if it was on a gold standard. That seems likely to me.
If someone was arguing that the unit of trade wouldn't be called the US dollar they were wrong. If they argued it wouldn't be used as the international unit of account they were very wrong. If they argued it would be quick then they are laughably wrong. By pretty much any other measure they were mostly right. Whether this was a bad outcome or not is debated, but given the collapse of real wage growth vs steadily growing productivity after 1970s I don't see how it can be argued that inflation is working. Working to do what, get everyone indebted to banks? High real GDP growth is good for the averages but hasn't done very much for real median wages for example.
If you had $35 US, you theoretically had the equivalent of an ounce of gold. You couldn't actually buy the gold, though, not until (IIRC) 1965.
> I'm more than happy to agree it is not a precise comparison. A lot has changed over the last 50 years. But even after leaving a reasonable allowance for that, someone arguing that the move off the gold standard would destroy the value of the dollar appears to be (100-2)=98% correct. If you like we can agree that the starting price was $150/oz in market prices, in which case we can agree they were 90% right.
Sure, I'd go with that. But that also means that there was (150-35)/150 = 77% destruction of the value during the time when we were nominally on the gold standard, but people couldn't actually use the dollars to buy gold.
If you wanted to argue that it wasn't a real gold standard when people couldn't use the dollars to buy gold, I would agree with you. I wouldn't even complain about "no true Scotsman", because the difference seems to me to be a crucial one.
> The US government has an inflation policy; they explicitly want to reduce the value of the dollar at a rapid pace. The government is publicly on the record as thinking that is a good outcome.
Well, they say they're targeting 2% inflation. To me, that's eroding the value of the dollar, but not "at a rapid pace" - I saw 14% inflation in the late 1970s. I will admit that even 2% inflation adds up rather shockingly when you look at 50 years, though.
> So maybe they would have destroyed the value of the dollar even if it was on a gold standard. That seems likely to me.
If they had a real gold standard, I don't think they could have - they would have hemorrhaged gold until they had none left, and then they would have had to give up the pretense. But a "gold standard, but you can't actually convert" let them inflate while pretending that they weren't.
> Whether this was a bad outcome or not is debated, but given the collapse of real wage growth vs steadily growing productivity after 1970s I don't see how it can be argued that inflation is working. Working to do what, get everyone indebted to banks? High real GDP growth is good for the averages but hasn't done very much for real median wages for example.
I see it like this: After World War II, there were cycles of prosperity and recession, but each cycle was at a higher rate of inflation than the previous (comparing the same points in the cycle, obviously). Then in 1979, the Fed changed strategy. Since then, each cycle has had lower inflation, but also a lower fraction of the population employed. I think (but cannot prove) that the lower fraction of employed workers has something to do with the lack of wage growth.
As to what the Fed should do differently... that's way past my level of understanding.
I know in Australia if you are looking for wealth preservation it is a hands-down win for gold but I don't know enough about the US tax system to comment on what would happen. I suspect the returns are a lot less rosy and it turns out most of the real wealth ends up being transferred to the government.
Enemies that become an unwanted source of distraction are deinstalled by an act of god.
Buy an index fund and wait I say.
As these cycles take a long time, it's better to look at long term charts, like this:
https://www.macrotrends.net/1378/dow-to-gold-ratio-100-year-...
Gold is an asset that was able to keep its value for 5000 years (unlike fiat currencies), and it has to be mined, it can't just be created in an excel spreadsheet in the FED. If you put these things together, it makes sense, that having a new high every few years is normal (just like with stocks).
Gold performs well in highly inflationary environments, so the question is whether the FED stops printing money, or it will just print much more than it did recently (about 4T). To me it looks like it just has gotten started.
What we see now it large parts of the stimulus package are devoured by the top level bureaucracy never doing anything but being transferred to Cayman islands as performance bonuses.
How about we try the trickle up economy for once?
We are. The vast majority of the stimulus so far has gone to benefit the bottom 3/4 of the US economically.
Here is some of what's in the $2 trillion recent stimulus:
- $268b to extend & expand unemployment benefits.
- $293b one time check (which won't be one time)
- $377b small business loans & grants; this has been more than doubled since then
- $150b aid to state & local governments
- $153b boost health related spending
- $42b boost to smaller social safety net programs, such as SNAP
- $45b boost to disaster assistance
- $40b boost to education spending
People will attempt to retort that: well, but big corporations have improperly taken some of the small business loans; they'll try to use a rare edge case to attempt to nullify the overwhelming point that in fact most of the stimulus is going to the bottom 3/4, not the top 1%.
Further, we'll do more stimulus programs yet around sending direct checks to individuals, which will continue to tilt this scale in the favor of the bottom 3/4.
The small business loans, unemployment benefits boosters and individual checks also do not have to be paid back, unlike the big business bailouts (such as with the airlines).
Most likely direct checks alone will cost over a trillion dollars before this is over. There is very little capable resistance to doing more in that regard, it will happen.
The gp you're responding to sounds like he/she is talking about personal investment advice to protect an individual's purchasing power (i.e. micro economics).
However, your response is about a macro economic government policy.
Those are 2 different conversations.
Gold was important at the time where balances were done manually and purchases between countries were settled with physical gold.
(And no, this is not a defense of bitcoin. Bitcoin has to be much more liquid and stable for it to work as a store of value)
The wide latitude in the side of the Fed's balance sheet comes from the weakness of other currencies. Central Banks around the world are doing the same thing - creating currency - weakening those currencies, simultaneously actual people are selling their currency for US dollars. This increases the strength of the US dollar, and means the Federal Reserve can create more dollars to weaken it, avoiding deflation. Currencies based on scarce commodities have deflationary economies as the economy grows, which hampers liquidity and investment, the US has had that before and moved away from it because it wanted liquidity and investment. So you can predict that it will avoid deflationary environments.
All fiat currencies are in the same boat, but the dollar is not in that boat in isolation. Coordinated central bank accounts allow this to continue into perpetuity. Ie. If the European Central bank diluted their currency by creating trillions of Euros, the Euro might trade down to parity with the US dollars (at time of writing the 1 Euro can be traded for 1.09 US Dollar), instead of that happening in isolation, the Federal Reserve can also create an offsetting amount of dollars, weakening the dollar enough to force the Euro to still trade for 1.09 us dollars, while both banks have accomplished their goal of adding liquidity to their economy.
So for massive monetary unions, it is much harder to "fail" or enter into a hyperinflationary environment.
But yes, if that a lot of the newly created currency was being used to buy gold, then the price of gold would be expected to go up. It is just a much harder environment for the narrative of it becoming a replacement for the dollar to be there. Other fiat currencies outside of large monetary unions might have utility in switching to a commodity again.
The same will happen here, the Fed is creating lots of inflation, but not enough to cancel out the deflation caused by the virus and lockdown.
Broadly speaking, these people distrust a money supply that can be influenced by governmental powers. They're always making noise about fiat money, gold, and sometimes cryptocurrencies like bitcoin in internet forums. They tend to become extremely vocal whenever the government intervenes in financial markets, such as the current financial crisis.
The first counterpoint would be that the anti-fiat crowd has been declaring fiat dead ever since the gold standard was abandoned ( https://en.wikipedia.org/wiki/Gold_standard#Abandonment_of_t... ). They made the same claims in the recessions of the 2000s, the 2008 housing crisis, during the low interest rates of the 2010s financial boom, and now in the 2020 crisis. Maybe they'll be right one day in the future in the same way that a broken clock is right twice a day, but are you sure this is their time to be right?
The second counterpoint is that outside of very specific windows, gold hasn't performed very well against traditional investments. The gold proponents had a good run for a few years after 2009 when gold was a hot topic, but it generally hasn't been the home run investment that the proponents expect. You can view long-term gold vs S&P trends here: https://www.longtermtrends.net/stocks-vs-gold-comparison/ Drag the bottom sliders to set different start/end dates. It's possible to find periods of time where gold outperformed the S&P 500, but generally you'd have to get both your buy and sell dates just right to come out ahead. That is, market timing. If you bought gold in 2009 and held you're doing okay. If you bought gold in 2012 and held, you just barely came up to net positive returns after 8 years.
The third argument is that it's not a great idea to bet against the weight and power of the government. People declaring fiat dead are assuming that the government is going to destroy the value of money via manipulation, but most of them can't put together cohesive explanations for how the Federal Reserve operates. The Federal Reserve is a complicated system that can be difficult to understand. If you misunderstand the function or purpose of certain steps, it's easy to get the wrong impression that the government is printing money to buy stocks like all of the memes say. In reality, the system is much more complicated than that and you're unlikely to find unbiased explanations in internet forums, especially if they're coming from people who are heavily invested in gold or bitcoin and would like to see everyone else prop up the price of their chosen investments. It's best to spend an hour or two reading up on the Federal Reserve, why the gold standard was abandoned, and what the Federal Reserve is actually doing with their balance sheets. Wikipedia actually has decent articles that explain the high level details well enough: https://en.wikipedia.org/wiki/Federal_Reserve