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Comment by rg | Hacker News Reader

A much deeper article by software entrepreneur "Mencius Moldbug":

http://unqualified-reservations.blogspot.com/2009/12/gold-an...

"If gold will eventually be remonetized, gold is insanely cheap. If gold will never be remonetized, gold is insanely expensive. It's one or the other. Therefore, if you guess right about this question, you will make huge profits, and if you guess wrong take huge losses."

"The reason I still expect gold remonetization to happen - in the long term, not tomorrow! - is that there's simply no other viable alternative. Everyone knows that the global economy needs a new currency. Most can see that the dollar cannot be saved or replaced by any other sovereign currency or basket thereof - because no central bank could tolerate the economic effects of the upward revaluation that would result if its currency replaced the dollar in C[entral] B[ank] portfolios"

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Gold isn't a viable reserve currency. The supply of gold is dictated by mining operations, not by the liquidity needs of the world economy.

And there is a viable alternative reserve currency: http://en.wikipedia.org/wiki/Special_Drawing_Rights

The supply of gold is irrelevant as long as the above ground gold stores dwarf what is mined every year. A single ounce of gold is theoretically sufficient to run the entire economy. The value of that ounce would just shoot up as the economy grew more productive.

What exactly do you mean by "liquidity needs"? If people need cash they earn it or save it. That cash is supposed to represent real wealth someone saved. If it's printed out of thin air it just represents a theft from people who have actually produced and saved.

The value of that ounce would just shoot up as the economy grew more productive.

Which is a coy way of saying "there would be massive, uncontrollable price swings".

With a gold standard and modern economies you don't get wild inflation, but you do get wild deflation, with effects just as bad (since inflation and deflation are isomorphic to each other).

Steady deflation is natural and good. As technology and business grow more productive prices generally fall. Prices fell for most of the 1800s (pre central bank).

The problematic deflation associated with depressions is simply the consequence of fiat money credit bubbles collapsing. That deflation is an indictment of artificial interest rates and fiat money.

But a gold standard, today, wouldn't produce steady deflation, so you're not really arguing with what I said.

(a gold standard, in this modern world, would tend to produce periods of wild price fluctuation, ending with a significant deflation from the previous status quo)

Yes, gold money would result in steady deflation as the economy grows. We have wild price swings now. Look at chart of any major commodity over the last 10 years. Gold would stabilize it as there would be no hot money flows on a gold standard.

I've explained this before, and probably will have to explain it again:

http://news.ycombinator.com/item?id=629390

If you're right, basic economics is wrong. More likely, basic economics is right and you're wrong.

You didn't explain anything. Why would the value of a constant amount of money increasing in proportion to productivity growth lead to "wild fluctuations"?

You seem to take it as given that the opposite imbalance (rapid inflation) would lead to wild fluctuations. I'm inclined to agree, since actual prices do not move in perfect lockstep and there will be a great deal of uncertainty in all markets.

But that's the same as an admission that rapid deflation (a necessary consequence of the effectively fixed amount of gold) would do so as well. This is true because, logically, the effects of either type of imbalance should be similar, with the only difference being the direction of the final stable point (up in the case of inflation, down in the case of deflation).

The US economy grows by about 3% a year, give or take a point. With gold money and a constant supply of gold, I fail to see why this would lead to "wild" deflation. It seems that deflation should mirror economic growth, which is hardly wild.

The problem isn't the average year over year. The problem is the outliers: we live in a modern world where massively game-changing events can occur and spawn whole new industries almost overnight without correspondingly wiping out old industries in the same time period (once such event -- the Internet -- is how you're talking to me right now). These events cause sudden huge upward swings in available goods and services, while gold remains stable. The only thing that can happen to a gold-standard economy in such a situation is crippling deflation.

I didn't see this for a week so you probably won't either, but here goes:

Productivity has grown a few percentage points a year, give or take, consistently, for a long, long time. One industry may boom for a decade, but the economy as a whole is relatively stable. I'm still not seeing anything wild.

Here's a CPI (estimate) chart going back to 1784:

http://nothirdsolution.com/wp/wp-content/uploads/2008/07/cpi...

When the dollar was defined as a specific mass of gold, the prices of goods tended to fall slightly each year, which is what you would expect with productivity gains.

With inflation you lose not only the nominal inflation rate, but also the wealth-enhancing effects of those productivity gains. "That which is seen, and that which is not seen."

The use of coercion, including war, forced devaluation, asset seizure, and forced centralization of financial services, results in wild price inflation, volatility, bubbles, and crashes. This is because coercion moves wealth to its least productive use and hampers the discovery of true prices.

For another example of increased price volatility, see this 200 year chart of the Dow/Gold ratio:

http://www.sharelynx.com/chartstemp/DowGoldRatio.php

Note well that you're looking at a logarithmic chart there, so the wild swings you see after about 1920 or so represent actual, sickening, and deadly phenomena and are not just optical illusions.

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