David Hillary wrote:
> Claude Cormier wrote:
> >
> > A recipe for stagflation
> >
> > http://www.goldeconomy.com/thepriceofgold_08.htm
> why oh why do 'goldbugs' seemingly always seem to predict a large rise
> in the price of gold in the medium term?
> The price of gold in terms of US dollars has been enaything but stable
> in the last few decades, whereas, the widespread (near universal) use of
> USD in the $10 trillion US economy, makes the price of USD stable in
> terms of goods and services, at least in the short term.

You are comparing "last few decades" to "short term". You may be
comparing apples to oranges here. I can't say though as I don't know 
how long (or short) "short term" is.

> Variable inflation of this currency attached to the economic giant makes
> the price of gold, an inflation hedge, makes for wild changes in the
> real price of gold, as expected inflation changes. 

Maybe, maybe not. It depends on what country you're living/working
in. The _*real*_ price of gold would be gold priced in coffee 
(hopefully Capulin, I've been spoiled for ever) or other things
that have intrinsic value.

The emergence of
> inflation when nominal interest payments are heavily taxed, can easily
> make the real return on savings less than zero, in which case savers

> look for alternative stores of value. Combined with economic uncertinty
> over the direction of stockmarkets and the real economy, and gold
> becomes a very good investment, a stocks become risky and poor
> investments.
> This makes gold a poor currency for a small open economy to adopt, and
> makes gold a poor unit of account, measure of value and store of value.
> If gold were the general means of exchange in a large open economy or in
> a closed economy, its performance as a unit of account, measure of value
> and store of value would be much better.

I don't see how size has anything to do with it.

> The adjustment required of a small open economy that adopted gold as
> money  would be difficult and painful. If US inflation and inflation
> fears were ignighted, the real exchange rate of the SOE would rise very
> sharply, and require downward adjustment of wages and prices in the SOE.


The price in gold (priced in USD) wouldn't affect local business within
the SOE (small open economy) that is using gold as money. Who cares
what the price of gold in USD is if locally I'm getting paid in
gold and spending gold. If there's an inflation problem in the US,
and the SOE wants to buy some US goods or services, that's not much
of a problem. The money of the SOE (gold) has been buying more
USD to be able to buy the US's goods and services, as the prices of 
goods and services have been going up (in USD, not gold) in the US. 

On top of that, if the SOE has been using gold for .. say 2 decades,
it's probably got a hopping, maybe screaming economy because it
has been attracting capital (including brains) because of it's more 
stable prices, businesses are able to do better (compared to the 
US) planning because of more stable local prices.

> This deflation would cause land and building prices to collapse. 


> inflation and deflation in a SOE that used gold would be significant and
> arbitrary, and cause asset prices in the SOE to be highly volitile. 


> situation would be similar to SOE such as Hong Kong, where the currency
> is fixed to the USD. 


Property prices fell by around 40% in 1998 in Hong
> Kong as inflation turned to deflation. Unemployment rose from about 2%
> to over 6%, real GDP fell by over 5%. By contrast Taiwan and Australia,
> both highly exposed to the Asian Crisis, continued to register
> significant growth and asset prices did not crash and unemployment did
> not rise. This is largely because their nominal exchange rates fell,
> reducing the need for adjustment and the extent to which sticky prices
> cost output.

I can't say one way or another about the above.


"We assume that the currency which is in all our hands is fixed, 
 and that the price of bullion moves; whereas in truth, it is the 
 currency of each nation that moves [i.e., loses purchasing power], 
 and it is bullion which is the more fixed [i.e., maintains
 purchasing power]." - Henry Thornton, An Enquiry Into the Nature 
 and Effects of the Paper Credit of Great Britain, 1802. 


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