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With all the talk about recession, depression and doom, gold seems to be again in the mind of many people, and its price climbed significantly (with large fluctuations). So why would people rush to gold?
We live in a world of fiat currency, and if people stop trusting in the currency, they abandon it and by experience something else it used as money, typically another currency. This phenomenon of dollarization is based on the fact that people still trust the replacement currency, ofter the US dollar. But what if people do not trust that either, as some imply is likely?
Thus people fall back on gold. But gold is not a good currency for everyday transactions, as it is not possible to have small change in gold. This used to be a problem before fiat money, as discussed by Thomas Sargent and François Verde.
But whether gold is the optimal currency is not the question here, it is why people value it at all. It is rare, it is shiny, people like to look at it (although this may just be because it is highly valued). But it is not particularly useful. If you think about it, if society or the market collapses, there is not much you can do with a gold bar apart from hitting people with it or using it as a doorstop. Ammunition, tools, clothing, food are much more valued in such circumstances.
Is the value of gold just an illusion, as much as the value of fiat money? Why would people trust gold more than money? In fact, Dubey, Geneakoplos and Shubik argue that given that gold has no consumption value, it should not be valued. Cigarettes, however, are valued, and their value disappears once consumed.
Wednesday, April 9, 2008
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8 comments:
They're all idiots. That gold has few alternative uses is exactly why it is MONEY! It has the highest "stock/flow" ratio of any substance and little consumption demand. We don't worry about a freeze destroying this year's "gold crop" unlike oranges. Why is paper money? Why should something that can be printed for say 3 cents, a paper dollar, be worth a dollar? Why do we now see the alchemists of 700 years ago as fools but do not see all the paper money pushers as modern day alchemists? Why is counterfeiting illegal except when Helicopter Ben does it? Gold production regulates itself, unlike dollar production which is determined by fiat. Gold is the economists enemy. Why? With gold we don't need them. When gold hit $875 in 1980, did Uncle Sam sell? No. Why not? Because it was worth more than $875 then and Uncle Sam knew it.
The real mystery: why do people treat paper dollars as if they are wealth? If Helicoper Ben suddenly ten tupled the Fed's balance sheet would we all be ten times richer? What nonsense to believe creating dollars creates wealth. In a regime of totally fixed money stock prices would continually fall. So? The falling prices are in effect "interest" as expressed in other goods. Interest for what you ask? Holding gold, by which you "lend" value to the rest of society.
independent accountant: in terms of regulation, gold is a really poor object. As the gold standard showed, prices are highly dependent on gold production and in particular gold discovery. Why should the price of milk depend on what is discovered in South Africa?
Also, I think everybody agrees money is neutral, at least in the long run. If M0 is multiplied by ten, I bet all prices get multiplied by ten as well. Printing money does not create wealth.
independent accountant: The post is mentioning that people value gold for no obvious reason. You appear to value gold above all. Care to explain why? Your rambling about dollars does not explain why you value gold over, say, cigarettes.
Can I have all of your valueless paper dollars, then?
Also, can I have your laptop. If societies collapse, I doubt we'll generate the power required to run or repair them.
Finally, gold has many scientific uses and applications which are unique to gold, the least of which is its high conductance.
I agree, gold is vastly overvalued compared to its underlying value. It is thus not much less a fiat currency than US dollars.
people value gold because of it's rarity, it's permanence, it's difficulty to counterfeit. its been used as currency for over 6000 years because of these properties by different cultures, many of whom were isolated from the rest of humanity.
There's many good reason's why gold is valued other wise it just plain wouldn't have been almost universally across the world. people can suffer mass delusion's but for them to be identical whilst unconnected? Please...
I just came across this article, where the second item indicates why humans seem to like shiny things like gold and diamonds that have no intrinsic value. We evolves in this way to instinctively recognize clean water from dirty one.
Gold, cash, silver, what have you, has value in modern civilization. When shit hits the fan survivor groups will be interested in trade, much like the American Indian, whom deemed gold bad luck to touch. Until larger groups are reformed and become governments or an empire, then it will be desired again. The question of why?, that takes you back to the beginning and how it looked, how easy it was to work with, and the fact that is was hard to find, all played a role in why. Let me ask this. If the remains from a distant exploded star, found its way, in a fire hail storm, to the earth, leaving a new deposit of pure gold, larger then the last, would gold be so valuable?
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