Monday, January 31, 2011

Why Gold?

Why gold as a reserve currency? Here's a cogent explanation from, emphasis added:

The Gold Standard

Some people ask the question: "Should the dollar be backed by a gold standard." But that is the wrong question. The right question is what will happen.

Any government that is strong enough will want to enact a fiat currency. If the government is greedy it will enact a fiat currency to reap the benefits of seinorage. If the government is benevolent (or thinks its benevolent) it will enact a fiat currency to smooth over economic fluctuations.

The world switched to a fiat currency when the U.S. had enough domestic and international hegemony to enforce the dollar as the global standard. The fallacy that many believe is that gold was made obsolete because of technology and "progress". They believe that somehow basing a currency off a inert, mostly useless metal is somehow archaic.

But gold is not a natural currency because its shiny. It's a natural currency because it is the best Schelling point/Nash equilibrium for a group of independent actors to settle on as a store of value. If you have five independent, mutually wary agents (either individuals or governments) trying to negotiate a common store of value, then gold is the default because a) no one can simply print infinite amounts of it b) it has the highest stocks to production ratio, so its has the least amount of dilution from mining.

As the American manufacturing base rots, its military fails at yet another war, and its political system continues to spin in circles, people and nations may start to lose faith in the dollar as a store of value. At that point, the most natural alternative as a reserve currency will be gold.


Be pretty if you are,
Be witty if you can,
But be cheerful if it kills you.

If you're so evil, eat this kitten!

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