I’ve been discussing recently how I’ve changed my mind on crypto currencies…
And how, from speaking to experts on cryptocurrencies they do not require innate value to have ‘value’.
Well I just want to go back to this idea of “innate value” again today – as I think it’s important…
Before 1972, the US used to back their currency up via gold (the gold standard).
They (the Fed) believed that if they had an innate store of value, it would be a lot easier to keep the value of the dollar consistent.
They thought that by simply keeping this price pegged, things would be successful.
The issue here is that you need the supply of money to be manipulated easily to be able to affect the interest rate (therefore preventing inflation or deflation).
When gold is your store of value, you have to increase or decrease your gold holdings according to the situation…
The inherent issue here is that gold takes time to mine!
This means that the value of the dollar cannot be affected correctly when required.
So pegging the dollar to gold was of no real benefit.
Now on the flip side, I don’t believe that the way ‘money’ has value now is of any real benefit…
In fact, I’d say most economic problems are down to the central banks creating money out of thin air (debt).
Whenever a treasury bond is made, that’s effectively money being made from the central bank…
Out of thin air.
And this money being made pushes down rates and we get the very rich being able to buy houses cheaply, reinvest in offshore schemes with cheap financing etc, etc.
However, it does give the Fed far more flexibility when it comes to being able to work through market downturns.
Well, in theory anyway…
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