Friday, August 12, 2011

Is a Gold Standard a Solution?

A gold standard makes sense to many people, especially in times of radical fluctuations of the stock market, when price and value are miles apart. The actual worth of a thing is better understood when there is something finite backing goods and services, stocks and shares and in spite of the fluctuations investors would feel secure. But this presupposes a change in the relationships between nations that hinges on who owns the greatest percentage of gold.

All the goods and services produced by human labor relate to each other as commodities and through one universal equivalent. This is why people buy up gold in times of a financial crisis and is considered the safest investment for their money. The rush to buy gold reflects a crisis of confidence in the primary economy to produce above costs. When a country is not in full production and its goods and services are backed by its currency then it is the quality of the currency as an article of good faith and responsibility that its productive capacity can pay its investors a decent return.

In the past the U.S. dollar was backed by Gold and Silver. Its productive capacity exceeded any in the world and its national growth rate did not require expansion into other nations for new markets. The gold standard was sufficient for itself. But all this has changed. The real world is not one of isolationism for any given nation. When the dollar is backed by debt, its good faith is based on making sure its investments are safest in the world through its military might. Policies of securing expansion of production in cheaper markets while carrying out nation building depends on a relatively calm atmosphere and cooperation from other governments, for the sale of its good and services in more expensive markets. This means that its policies are focused entirely on using its military to open a countries productive resources to buyers at a cheap price. When this happens the goods and services shift from one country to another. Production is weak in the former and strong in the latter and conversely, consumption if strong in the former and weak in the latter.

Other problems emerge from a gold standard, the possessor the greatest share of the world's gold has the power to set the price of gold through supply and demand. In a de-regulated free market system this could be a disaster. If a nation is out of debt or its balance of trade are equal to its productive capacity or paid in full a move toward a gold standard is still not a good idea for nations. Some authority will be required to establish the price of gold. This is the problem with the EU system that a few of its member nations' finance ministers feel resentment being told by an EU central bank to make their bonds more profitable through austerity measures before they get any more cheap financing.

You can expect from this U.S. administration not to abandon its policies of authority to a central authority outside of its own authority to dictate terms for markets. The shift from the dollar to another currency's stability or several other currencies is a more realistic solution to the dollar dominance and the lack of confidence of U.S.'s ability to produce and nation build. With all the changes in world governments, and movements of change, damages done to nations' capacity to produce cheap goods and services are very limited in this changing atmosphere creates this crisis of confidence.

The gold standard is not a good idea after all. A more practical measure is regulation. Placing more restrictions on those forces which drive prices into sharp swings such as speculation, short selling. These forces drive price in contradictory directions in too short a time period is creating an unstable environment for the long term investors comfortable with the policies of their respective governments.

The typical long term investment fund that is considered safe are divided into separate and distinct market opportunities, some more risky than other, but the anatomy of the least risky funds puts a smaller percentage of money into high risk and the greater percentage of money of account into less risky opportunities should help to quell the nerves of most investors.

No comments:

Post a Comment