Knifonomics (part 11): what is money?

Ron rules!

Ron Paul is a clever man. He always polls well in the competition for the Republican nomination, but as nobody thinks he can get in (true), he doesn’t get more airtime.

Ben Bernanke is also a clever man, running the United States Federal Reserve, as he does. Here is their widely quoted exchange from July, also available on video:

Rep. Ron Paul: “The price of gold today is $1,580. The dollar during these last three years was devalued almost 50 percent. When you wake up in the morning, do you care about the price of gold?”

Ben Bernanke: “Well, I pay attention to the price of gold, but I think it reflects a lot of things. It reflects global uncertainties. The reason people hold gold is as a protection against what we call tail risk, really, really bad outcomes. And to the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.”

Paul: “Do you think gold is money?”

Bernanke: “No. It’s a precious metal.”

Paul: “Even if it’s been money for 6,000 years? Somebody reversed that and eliminated that economic law?”

Bernanke: “Well, you know, it’s an asset. Would you say treasury bills are money? I don’t think they’re money either, but they’re a financial asset.”

Paul: “Why do central banks hold it if it’s not money?”

Bernanke: “Well, it’s a form of reserves.”

Paul: “Why don’t they hold diamonds?”

Bernanke: “Well, it’s tradition. Long-term tradition.”

Paul: “Some people still think it’s money.”

Good points by Ron. Here’s the more detailed analysis, with the history.  The key passage:

“Historically, currencies were based on precious metals such as gold or silver, but fiat money is based on faith and on the performance of politicians, bankers and central bankers.

Because today’s fiat money is not linked to physical reserves of gold and silver, it is becoming worth less with each passing month and risks becoming worthless should hyperinflation take hold. 

If people lose faith in a nation’s paper currency, the money will no longer hold value.

Throughout history most fiat currencies have not survived more than a few decades and have succumbed to hyperinflation.”

As a general observation, if one of the absolute fundamentals of living in a decent, secure society is ultimately completely dependent on “faith” in politicians, it’s not likely to last, and we will suffer accordingly.

Gordon Brown, in a unique double whammy, illustrated all the relevant points here, by selling off our gold at the bottom of the market, then destroying the economy to the point where he ended up printing more of our own fiat currency, to try and save his bacon. His first class honours is in history, incredibly.

...thanks to The Daily Squib

PS: In the interests of fairness, here is a note of warning from the FT…

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One thought on “Knifonomics (part 11): what is money?

  1. The really criminal element of Brown’s sale of the country’s gold was that he announced he was going to do it before he did it.

    The market price, supply being boosted by a G8 country’s whole gold reserve hitting the streets, fell.

    So not only did Brown sell at an all time low, he helped to create that low.

    Ever since then, when some sycophant like Balls said Brown was a “towering intellect”, one knew that one had to substitute “ego” for “intellect”.

    The man was a psychotic cretin.

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