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What would happen to an economy if physical precious metals were legal tender currency?
Imagine money that had intrinsic value. How would this affect banking, government spending, saving, and consumer spending?
Better or worse than fiat money?
peter lindsay 30+
Krisztián Pintér 200+
first, if paired with 100% reserve banking, it immediately stops inflation, and the economy returns to a slow deflation, its natural state.
second, since the government (or its sock puppet, the central bank) can not create new money to pay its debt, interest rates will rise to some 5-10%, which is the true rate following from the time preference of people.
third, since there is no inflation, bank deposits fall, as some people now will consider keeping money in some vault.
fourth, due to the rising interest rates, borrowing hugely slows down. only investments able to churn out more than 10% return will be undertaken.
fifth, a whole bunch of businesses will go bankrupt, because they were counting on cheap loans. with the rise of interest rates, these businesses will be revealed to be not profitable, and will be liquidated. entire sectors are expected to collapse, like mortgage derivatives, and their dependent fields like the construction industry.
sixth, since governments can not maintain their level of spending, political crisis will follow. those that live on benefits or otherwise dependent on the state will march on the streets, cars will be set on fire, stones will be cast, and the unions will cry doom. the current political system built on lies and deception will collapse like a house of cards.
seventh, the truth will be revealed, profitable businesses will take the place of the wasteful old and corrupt ones, honest politics will take place of the dishonest old one, wars will be ended, end the economy will grow in an unprecedented rate.
Alan Sloan
"..... the truth will be revealed, profitable businesses will take the place of the wasteful old and corrupt ones, honest politics will take place of the dishonest old one, wars will be ended, end the economy will grow in an unprecedented rate."
I think we need to take a good look at he externalities. A UN study, GAEZ calculates that we can feed 10 billion people - in the current phase we can assume that we are or will be pretty well maxed out on the ecological credit card over the next couple of decades if we get that far.
.What that means is that the New Dawn optimistically forseen by Krisztian has to take place "on the lean" - a healthy sustainable population of 10 billion without war is entirely possible within ecological limits but it would require a deeply materialist understanding and a very high discipline in the way we use material resources and accessible birth control may be a help too. I'm sure that any economy growing quickly during this time will have to be working on a zero sum basis and the role of profit itself will have to re-examined. In another post I've described the resulting state as "The new Mercantilism".
Krisztián Pintér 200+
Alan Sloan
There is far to little attention paid to the human condition as experienced by the human species as opposed to the individual. the literature on Population all seems to point in the same direction - although the human carrying capacity of the planet is variously estimated at between 0.25 and 500 billion many of the more realistic ones estimate agree with that 10 billion area. If you're going to treat all those other people too with the same (hope fully humorous) disdain , well, well, I'm running out of words. OK, I agree, Enough said.
Brian Ruckman
Secondly, in your opinion would this change be good or for whom would it be good for?
Krisztián Pintér 200+
banks has no way to change that. interest rates will rise, as they are below market level now. banks has to offer higher interest rates, but also will charge higher interest rate on their borrowers. this will lead to a shrink in total lending, which will indeed make banks desperate, until some of them go bankrupt, and we reach a new balance.
in the long run, it will be good for everyone. it will be good for entrepreneurs, as they will be able to calculate more reliably. proper market interest rate is central to the calculation of ROI and other measures. market interest rates are also good for savers. as the investment market stabilizes, one can more easily estimate future yields, and find safe investments. and it will be good for the economy, thus benefiting everyone.
Comment deleted
Grant Schumacher
Yes, it is possible to have recessions and bank runs similar to our current situation with a physically backed or a commodity currency, especially following an era of easy credit. There were many recessions and bank runs before the US went off of the gold standard, as well as before the existence of the Federal Reserve System. When people do not believe that a bank can meet demand for withdrawals, there will be a bank run, which may lead to a bank panic (systemic).
In this recession, the packaging/ sale of mortgage backed securities and under the table derivatives trading, combined with Fed policy & regulations incentivizing banks to make poor loans. The market for mortgage backed securities collapsed (people realized borrowers were not creditworthy) and the market for them dried up, leading to a liquidity spiral (banks dump securities at the same time, leading to lower prices and more dumping -> need for a lender of last resort). It would still be possible for banks to package and sell loans if there was only a commodity currency, and a commodity currency would not prevent derivatives trading.
Any time there is a fractional reserve system (+ mix: poor national bank policy, perverse incentives & non-disclosure) this can happen.
Also, there can be problems with the purity of the commodity (i.e. gold) as it can be diluted which can increase transaction costs relative to a fiat currency.
To Alan:
Yes, I agree, if there were a transition back to a physical currency standard, it would be very difficult and likely cause a collapse. In my response I was focused more on the long term consequences on funding liquidity, abstracting from the transition. You bring up a good point; I don't know if there would be a satisfactory and orderly way to go back without bank runs & panics to redeem the currency for the commodity. It would probably require a complete financial collapse beforehand or a temporary, complete government control of the financial system. Bad.
James Burns
Alan Sloan
In the chaos we'd have to triage/restore the most essential systems first and it would be an absolutely fantastic opportunity to rebuild the rest on a fully sustainable basis (as measured by the Ecological Footprint system).
I've just posted an outline of this "New Mercantilism" on another thread - I'll see if i can recover it and post it up here if you're interested. EDIT - Found it by looking up "Full conversation" and looking down the list - right there under my name. I'm new this TED game, as you will understand....
Brian Ruckman
Alan Sloan
I took that to mean the phase before capitalism when trade was just starting to lubricate the move onward from feudalism. Yes, but there are aspects of modern life it would be unthinkable to lose.
If we triage those and develop essential network functions intelligently we could the reduce our ecological impact in Europe buy a factor of 4 to bring it in line with the best guess of a sustainable Ecological Footprint. Such a deeply political process could be sustained (but only under conditions of financial implosion/duress because of the deep rooted problem of vested financial interests) through intensive advertising and propaganda - impolite but brutally honest terms we should use for for the highly necessary and highly ethical process of Rapid Education/Knowledge Delivery.
I'd be delighted to cooperate with anyone interested in this thesis to promote the concept under the banner of "New Mercantilism" or any other banner you like - It been thoroughly thought through to the ultimate conclusion and I'm ethically comfortable with those conclusions. The idea is now complete and needs properly laying out, elaborating scrutiny, editing and development. Further research is needed on many facets of it (How to create more scientifically robust EF standards, Game theory, Marketing, Licencing issues and Maintenance and many others).
The Internet is a fantastic medium but NM is simply set of principles which could be established with a small manual and a pencil and paper. NM is not an ideology it is an idea. As it is science based it is inevitable that it ill change as the knowledge base increases (Initial rapid growth) , and admin overheads will also increase (linear growth). Uptake, if the principles as explained become acceptable would be exponential and hopefully keep pace with the decay of the old regime, mopping up the mess.
Lindsay Newland Bowker 50+
I actually think currency should have a measureable common global value.but the U.S,and the U.K. could not conceivably willingly choose that without risking a long time of economic collapse and uncertainty
What we really need to do to stabilize our economy and make our currency "real" is figure out how to achieve sustainable balance..to get off needing to grow at 3% plus per year. Then we would be getting somewhere worth getting..
Alan Sloan
Alan
Grant Schumacher
Brian Ruckman
Alan Sloan
Precious metal has many disadvantages, the main one being that it ignores the real needs of man in favour of an idea. I propose a physical currency based on the concept of Land-Time, which relates directly to the human material condition. Because of the lack of a speculative upside, and omitting the (considerable!) value of "footfall" the cost of a house should tend toward;
Cost of land (in term of the lost potatoes its not growing)
Cost of Materials (in terms of land required to sequester carbon emissions + mining materials + labour).
Cost of labour (in terms of land required to support the workmen for that much time)
These "Real" costs do not change much year on year - but changes to higher technology have actually INCREASED Land-Time costs considerably. This can be reversed by designing more intelligently, using materials neared their natural state (Masonry, Timber in the round, Thatch or Slate) or very carefully chosen higher tech materials in very carefully audited contexts ( Glass is extremely expensive but lasts for very long times). In real terms the cost of a thatched cottage is the same today as it was in 1600.
This analysis is based on the Ecological Footprint equivalent of the "Perfect Marketplace" in Classical Economics. In real life a house closer to the shop or with or footfall is always going be preferable, so worth more (even in the stable Land-Time currency proposed) , just as in the real Cash Market, the inflated price of a ridiculously over-large house miles from the shops is set by the willingness of Banks to dish out mortgages and not by the theoretical "perfect marketplace" economy it exists within. .
Alan Sloan
That's a bit of an under-statement isn't it? It sees to based on the idea that we are still growing, but slowly. In the UK and other overdeveloped economies we are contracting in real terms.
Wouldn't Fractional reserve banking completely implode at the first whiff of any alternative? Its all the world's financial authorities can do at the moment to manage a sustained and relatively gentle deflation....what do you really think would happen if people saw a realistic alternative?
Lindsay Newland Bowker 50+
Charles Curt
Alan Sloan
We simply cant go back to 1650.
A Modern Mercantilism might look like a very frugal and austere economy on the surface. People would ride to physical work on bicycles, or telecommute electronically. Wasteful and inefficient transport systems like cars would have to be stripped out of the economy, and a highly integrated web of alternatives set up.
But because of the numerous population we have now, there would need to be an underlying wireless electronic infrastructure for the rapid dissemination of knowledge and research, transactions and communication.
The currency used in this imaginary future would be base on peer to peer agreement using a currency created from an understanding of agreed environmental limits and a basic equity between humans.
The bloated financial services sector will collapse. The most numerate of this population can go to work in the brand new sector of Ecological Control of Currency Creation, the remainder will have to go into the rapidly evolving disciplines of Low Energy Materials Engineering, or Ecological Engineering (as Farming use to be called). Speculative research into Nano engineering, Space Travel etc will no longer have huge amounts of money being thrown at them, and investment will be severely reduced and necessarily targeted far more strategically and accurately to produce more bang for the buck.
The Web allows the rapid viral creation of new networks, and there will be scramble to get on board, out of the infrastructure providers the smartest first adopters will take the bulk of a vastly reduced pot.
Research, Concept Development and Standard Setting needs to be done in several areas before launch date. PM me with a 140 character outline of your interests for Job Specifications.
ALan
Charles Curt
Alan Sloan
I posted this yesterday, but it didn't tag to you comment so got lost. I've deleted it and m reposting as a response to your comment that "everyone just gets what they truly need and are suited for because hopefully in the future greed and selfishness will be eliminated and humans collectively choose where their resources go"
I said, 22 hours ago: Then you should sign up to the the GRB.net
That's another dream that won't work because of the anonymity at the heart of the system.
Mutual recognition is a prerequisite to a transactional methodology.
carolyn mcauley 10+
Brian Ruckman
I don't know for sure but I don't think it is a mineral bonanza as you describe it. There are other regions in the world that can definately compete.
Christopher Halliwell
Brian Ruckman
Lindsay Newland Bowker 50+
Alan Sloan
Money is not Gold or oil Butterflies or butter. It is a fungible concept of value and as a concept it can be very simply changed by thinking differently. The irrational fluctuating value of Gold will not go away if it is adopted as a standard unit of currency. It will still rise and fall as the need for the metal changes with fashion and technology.
If countries have no food producing capacity but they do have Oil then we have to sell them food NOT because we need the Oil (We don't, because we did the sums and worked out how to organise ourselves around the problem) but because we have an obligation toward our fellow man. If they have both food and oil , what's the problem?
Power is not found down a back alley squabbling to the death over the last barrel of Oil - it is found in the minds of the intelligent and civilised - those with the capacity to organise communities to feed, house, clothe, police and educate themselves within sustainable system boundaries.
Addiction to Oil or Gold is not power. It is weakness, and when you talk about the strength of a currency, you must also ask what value it has, what can it buy.
Robert Winner 50+
Ben Jarvis 50+
to combat the huge banking scam, how about setting an upper limit on income (we have minimum wage, so make a maximum too, say $10m a year)? that way there'd be no benefit to gouging customers because the bankers couldn't possibly make any more money anyway.
Brian Ruckman
Here was my thought, have a flat tax rate for everyone and any income over $10 mill gets taxed 100%. This would help control concentration of wealth.
Obviously some greedy bastards would leave this country so that they could be even richer.
Ben Jarvis 50+
Brian Ruckman
The flat tax wasnt really the main point of my idea anyways. I just thought it would put everybody on an equal level. Also no more deductions or subsidies.
Ben Jarvis 50+
a tax curve does put everybody on an equal level! you pay for what you use, and usually people with more money are employers, and have a much larger dependency on public services such as roads to ensure their goods keep moving and their customers can keep coming. completely agree that all deductions and subsidies should be ended, though there should be kickstarter funds given to advance business, to keep our quality of life improving.
carolyn mcauley 10+
Brian Ruckman
Lindsay Newland Bowker 50+
Robert Galway 20+
http://en.wikipedia.org/wiki/Silver_Certificate
http://en.wikipedia.org/wiki/Gold_standard
Lindsay Newland Bowker 50+
Alan Sloan
But there's a problem because we don't have any very sound ideas of what we can get away with (In terms of Climate change, Fertiliser and other input costs, Oil stocks and costs of conversion to useful fuel, Food production capacity, long term capacity to monitor used fuel dumps) in crude physical terms.
The markets are supposed to value the risks on these things and generally do a good job, but one could say they are not working so well because of the speculative element. How would non - market intervention based on production planning and consumer portion control affect the international value of a Country's currency (Assuming the currency was based on the value of its own wheat stock) ?
Brian Ruckman
Grace Greene 10+
Once upon a time, you could hire a bank to hold your assets securely. But one day, bankers realized that not everyone wanted their assets back at the same time, so they could lend assets that they didn't own and charge interest - and no one would know about it (unless there was a run on the bank - which was prevented through the establishment of a federal reserve - a cartel of bankers - who convinced the people that the dollar in your pocket has value, and who never get around to telling you that it is nothing more than a promissory note. They could do this for as long as they had the government-granted authority to print - invent into existence - more money to cover their theft)
But one day, when they saw what had happened to them and how they had been deceived, they created a corruption free social glue to replace money as a social glue, and they lived more-or-less happily ever after.