You say this but then you say that all the gold in the world isn't worth as much as the US economy is. Did it occur to you that if we kept using gold as a currency that gold would simply be worth more?
(This is an argument for buying gold as undervalued btw)
This is the problem with having a physical currency, deflation. As the economy grows if the supply of the physical material being traded doesn't increase, it becomes more valuable. So if you earned $100 worth of gold and stuffed it under your mattress, it would gain value as the economy grew. This does a lot of interesting and bad things when it comes to economies. Deflation stifles growth since it discourages investment in the economy.
It may actually be an optimal scenario that nations have a fiat currency that they inflate as closely as possible with economic growth - so that the currency stays exactly the same value. The government can use that inflation to offset taxes, funding itself with the economic growth of the nation (a good incentive program for government). I know our government prefers small but positive values of inflation - because it sparks a greater incentive to invest, but I think it encourages malinvestment, something that would be more and more visible with large values of inflation.....
It seems to me that Danoff and Dapper have both touched upon the problem with having an economy based upon some physical asset, like gold. There is a relatively "fixed" quantity of this physical asset, and therefore there would be an arbitrary limit on how fast an economy could grow if the money supply was directly based upon its value.
It also highlights the disparities between nations and their reserves of gold and their potential ability to acquire additional quantities of gold.
According to the World Gold Council, the US has gold reserves of 8,133 tons. At a market value of $1,700 per ounce (or $59,840 per kilo), this would equate to a value of $442.4 billion. Does this mean that the US economy should shrink from its current level of $15 trillion down to $442.4 billion? Or should we inflate the value of gold to match the $15t economy?
South Korea has gold reserves of only 39 tons. This equates to a market value of $2.1 billion. Should South Korea's economy contract from $1.1 trillion down to $2.1 billion?
Brazil has gold reserves of only 34 tons. This equates to a market value of $1.8 billion. Should Brazil's economy contract from $2.5 trillion down to $1.8 billion?
I found an article that addresses the US valuation problem by recommending to only back the US M1 currency with the current market value of what the US currently has in gold (ie. the $442.4 billion dollar number mentioned above). Since the US M1 currency is currently valued at about $2.2 trillion, the US would have a gold reserve that was equal to 20% of its money supply.
Once this gold standard was in place, I'm not sure how the US economy would expand from year-to-year (a concern mentioned by Dapper). The US currently only mines approx. 242,000 kilos of gold each year (which has a current market value of $14.4 billion dollars). This would put a severe limit on US growth (approximately 0.1% per year). In addition, I don't think that any of this new gold is being produced by the US Government, so I'm unsure how the US money supply could expand at all. Would the US Government have to buy gold? How would these gold purchases help anyone other than the gold mining companies?
Wouldn't going back onto the gold standard reward any country that could produce gold, and dis-advantage any country that didn't have gold as a natural resource? In order, the top seven gold producing countries are (I think this data is from 2008):
China (361k kilos)
South Africa (272k kilos)
Australia (247k kilos)
United States (242k kilos)
Peru (203k kilos)
Russia (159k kilos)
Canada (104k kilos)
Long-term worries:
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What happens if the US finds that there is no more gold in the US to mine? Does the US economy stop growing? Do we buy gold from other countries? How would this help the US economy?
What happens if some other country (say Iran or Canada) finds and develops a new gold mine in their country that can suddenly produce 10,000 tons of gold a year? (equivalent to $544 billion dollars)(current world production is approx. 2,700 tons a year) Wouldn't this country be able to purchase every US asset within 20-30 years? Or would this excess supply of gold devalue the rest of the world's gold and every nation's economy would contract 10% a year for every year for the forseeable future?
What would happen to the US economy if in the future we found a new element (called Faminium) that could replace gold in most of its industrial uses? So the only intrinsic value that gold would have would be for jewelry, and maybe even this "jewelry" value would decline due to this new element?
Wouldn't this severly devalue the World's money supply and every economy in the world would contract horribly (except Iran and Canada)?
Respectfully,
GTsail
Jesus. I can't be a part of such pointless crap.
