Friday, July 15, 2011

On Ron Paul's Gold Fever

"Ron Paul on line two for you, Mr. Beck!"
The Economist schools the Paultards on basic market economics (again):
Gold is a store of value. It's an asset that can be and often is held as a store of wealth. But while gold is not money, it shares a very important characteristic with money: its value (apart from limited industrial uses) is derived from the market's perception that it has value. This is the nugget of truth in Mr Paul's comments. There's nothing all that special about gold except for the fact that over much of human history people have behaved as though there is something special about gold. That belief (and the fact that it's on earth in sufficiently limited quantities) is what makes gold a useful store of value. People think it's valuable because people think it's valuable.

But that's precisely the way that fiat money works. People believe the flimsy pieces of paper we call dollar bills are worth some basket of real goods only because everyone else believes the same thing. The crucial difference in the perception of value is that new gold can only be obtained at great difficulty while new bills can be produced by the truckload at virtually no marginal cost. Gold's inherent supply limitations supported the popular confidence in its value. And when economies began switching to paper money, the link between the new confidence-based currency and the old confidence-based currency was a very useful way to build public faith in the new confidence-based currency.

No comments:

Post a Comment