Monday, September 22, 2008

The Gold Standard

As part of writing my prior post, I read Steve Forbes article How to Cure This Sick System". In that article Steve recommends that "The Fed should declare that its goal for gold is around $500 to $550. That would stabilize the buck ...". I have never approved of the gold standard, but Steve does have an extremely valuable point.

If one looks at the recent rise in commodity prices (such as gold and oil) the question naturally arises as to why these commodities are going up in value? In actuality they are NOT going up, the dollar is going down in value. (My perception, not based on research)

This can also be extrapolated to house values (a type of asset) going up. The value of housing, in very very simplistic terms, has NOT being going up. The value of the dollar has been going down.
(My perception, not based on research)

T. Boone Pickens for example has been pointing out through TV commercials that we export some of out wealth every time we buy a barrel of oil from a foreign source.

Steve writes in his article "
What enabled their taking on so much debt and so many questionable assets was, primarily, the easy-money policy of the Federal Reserve." The availability of cheap credit also allowed many home buyers to pay more for houses that they otherwise could not have afforded.

Additionally, the Federal government is running a budget deficit. Spending money that we have not yet earned and that we currently do not posses promotes inflation.

In essence through the creation of cheap credit, running a budget deficit, and exporting our wealth overseas we are devaluing our currency. This devaluation, since we have a world wide economy, is reflected in perceived increases in the prices of real assets such as houses, gold, and oil. (Of course some increases/decreases in commodity prices can be attributed to global demand)

As a nation we may be rich now. We won't go broke immediately, but if this trend continues we will end up in the poor house when the foreign holders of our debt decide to foreclose.

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