Thursday, November 12, 2009

Sticking it to the Goldbugs

... is just what Willem Buiter does in his most recent blog post where he takes issue with the whole concept that gold has real value.
Gold is very close therefore to the stone money of the Isle of Yap. This stone money, known as Rai, consists of large doughnut-shaped, carved disks, consisting usually of calcite, that can be up to 4 m (12 ft) in diameter, although most are much smaller. Apparently, the total stock of Rai cannot be augmented any further. It also depreciates very slowly. This intrinsically useless form of money in the Isle of Yap is in all essential respects equivalent to gold today in the wider world. Another example would be pet rocks, as long as the rock in question is rare and costly to get into its final shape.

Gold has become a fiat commodity or a fiat commodity currency, just as the US $, the euro, the pound sterling and the yen (and a couple of hundred other currencies) are fiat paper currencies. The main differences between them are that gold is very costly to produce, while the production of additional paper money has an extremely low marginal cost. If we count the deposits of commercial banks with the central banks, which together with currency in circulation make up the monetary base, as fiat money, then the incremental cost of fiat base money creation is zero.
H/T: Thanks to B-Daddy for leaving a link in a comment that led me to Willem's outstanding blog.


W.C. Varones said...

Indeed. The only thing more worthless than gold is paper currency.

K T Cat said...

Please post a photo of you paying for gas at the local Texaco station with some gold.

K T Cat said...

Sorry, that was meant to be followed by a :-).

W.C. Varones said...

Zimbabwe Ben dollars are a more convenient medium of exchange, particularly for small transactions.

A convenient medium of exchange is not the same as a store of value.

Jeff Burton said...

Let me respectfully disagree with the idea that gold does not have "real value." If gold does not have real value, then nothing does. Value is conferred by human beings. Period. If gold does not have "real value", then it follows that iPods don't have "real value" and neither does a Georgia O'Keefe painting. Gold is a commodity with "real value" determined by supply and demand.

BTW, the title of his article should tip you off that something is wrong with his reasoning somewhere. He calls it a fiat currency. The problem is, gold's role as a store of value pre-dates any government fiat that I know of. In other words, gold seems to be a commodity with natural monetary characteristics, independent of gov't fiat. Now some goldbugs may proclaim that gold has inherent value, which would be wrong. On that I would agree with you.

In a certain way, I sort of sympathize with Buiter, because I used to be as rabid a gold hater as he, buying into the "barbarous relic" nonsense and all the rest. A bit of reflection on the history of paper fiat currencies made me realize that tangible assets are safer ways to store wealth in times of government insanity, and those include gold.

W.C. Varones said...

I meant to add a smiley too.

I love this discussion.

I fully agree that gold value is a nebulous concept. But dollars have all of the same negatives, and they lack gold's one big positive: scarcity!


K T Cat said...

The title of his post is that gold is a 6,000 year old bubble. He's poking fun at himself with that, showing that he just doesn't get why a shiny rock has value, and yet for all time, it has.

I'm with him. I'm like the dummy at the zoo looking at the platypus saying, "But there ain't no such animal!"