Gold - Commodity or currency?

[Atilla]

Well, precisely... It's actually pretty simple: the Western countries have to devalue their ccies relative to the EM countries, in particular China. Whether that happens because RMB appreciates or USD depreciates doesn't really matter. Ultimately the Chinese have to realize that the longer their pisstaking continues the more unsustainable and dangerously imbalanced the global situation becomes. So there's no question that they have to be prepared to take some pain and slow themselves down and the only question is how. Either they do nothing now, the mkt eventually realizes that US treasuries aren't gonna be worth very much and they take a massive writedown on the paper they own. Or they revalue, let their economy cool down a bit and let the US and the rest of the West grow themselves out of the sh1t we're in. If I were them, I'd go for the latter option, since they should be able to control the process.

The same exact way the USA has a deficit with China today...

US isn't paying China with debt, btw. US pays them in dollars, which the Chinese then choose to invest in US treasuries, simply because there's no viable alternative.

Why should the Chinese revalue? I beg to differ. If countries not paying their way they need to adjust consumption and expenditure.

If China chooses to revalue to take pressure of inflation it's purely their judgement call.

This is where pegged stable currencies or the gold standard anchors currencies such that idiots in charge don't mess up with their self indulgence.

I have a different perspective.

 

[Martinghoul]

Why should the Chinese revalue? I beg to differ. If countries not paying their way they need to adjust consumption and expenditure.

If China chooses to revalue to take pressure of inflation it's purely their judgement call.

This is where pegged stable currencies or the gold standard anchors currencies such that idiots in charge don't mess up with their self indulgence.

I have a different perspective.

Well, do you not agree that a "peg" is a violation of the most fundamental free market mechanisms, where price determines supply and demand and is determined by them in turn? Specifically, in the world of exchange rates, China doing so marvellously well should lead to RMB appreciating a LOT against the Western ccies. Sort of like what we see happening with the free-floating ccies out there, with CHF being one of the more extreme examples. Point is that the exchange rate, when it's free floating, is a very important lever by which the mkt rebalances itself. China, by pegging, is preventing the rebalancing from occurring.

So when I say China has to revalue, I am jumping a step. What I mean is that China has to free-float the yuan and let the mkt determine the yuan exchange rate against everything else, including gold. Yuan will appreciate a LOT when they let it go and the free mkt should hopefully take care of the rest.

 

[Atilla]

Well, do you not agree that a "peg" is a violation of the most fundamental free market mechanisms, where price determines supply and demand and is determined by them in turn? Specifically, in the world of exchange rates, China doing so marvellously well should lead to RMB appreciating a LOT against the Western ccies. Sort of like what we see happening with the free-floating ccies out there, with CHF being one of the more extreme examples. Point is that the exchange rate, when it's free floating, is a very important lever by which the mkt rebalances itself. China, by pegging, is preventing the rebalancing from occurring.

So when I say China has to revalue, I am jumping a step. What I mean is that China has to free-float the yuan and let the mkt determine the yuan exchange rate against everything else, including gold. Yuan will appreciate a LOT when they let it go and the free mkt should hopefully take care of the rest.

Addenda - I do not agree. On the contrary I strongly disagree. (sorry mistyped response as busy at work)

Reasons why currencies fluctuate is precisely because of imbalance in production / consumption. If you baseline any currency and agree to trade in terms of those valuations - how do you account for changing those values at will?

Not fair at all.

I print money and buy your 10 apples. You take my dollars and find tomorrow you can only buy 5 apples as the dollar has fallen. Not fair play guv.

 

[Atilla]

That old chestnut again :-0

http://www.marketwatch.com/story/gold-signaling-hyperinflation-2011-05-30

 

[new_trader]

The same exact way the USA has a deficit with China today...

US isn't paying China with debt, btw. US pays them in dollars, which the Chinese then choose to invest in US treasuries, simply because there's no viable alternative.

The US is paying with debt. Their imports are vendor financed by China. No country exports 'stuff' to the USA in order to receive little bits of paper in return, China certainly isn't that dumb and if it is, it won’t stay that dumb for much longer, soon they will demand ‘stuff’ from the USA instead of paper. Gold on the other hand is money with intrinsic value. The money itself is ‘stuff’.

A country exports their surplus production in order to import 'stuff' that they either can't produce at all or they can't produce as efficiently as another country. The bits of paper the USA sends to China are claims on future exports.

No viable alternative? GOLD! A simple hypothetical; Let’s say that the USA finally decides to get real serious about tackling its deficit. They ramp up gold production and anyone on social security who is fit and healthy is put to work in the gold mines. After a while they have enough gold reserves to readopt a full gold standard without a dramatic change in the price of gold. Now, instead of giving China $US1500 of paper for its exports, it pays for the ‘stuff’ with an ounce of gold it has mined, in other words ‘stuff’ in exchange for ‘stuff’ and the trade is balanced. China needs gold for its manufacturing industry and jewellery and anything else gold is used in. If the USA can produce gold more efficiently than China due to its industrialised mines then China might decide to divert resources from gold production into widget production which it exports to the USA. It gets gold in exchange for the widgets and everyone is happy. Economics isn’t anymore complicated than that.

 

[Martinghoul]

Addenda - I do not agree. On the contrary I strongly disagree. (sorry mistyped response as busy at work)

Reasons why currencies fluctuate is precisely because of imbalance in production / consumption. If you baseline any currency and agree to trade in terms of those valuations - how do you account for changing those values at will?

Not fair at all.

I print money and buy your 10 apples. You take my dollars and find tomorrow you can only buy 5 apples as the dollar has fallen. Not fair play guv.

I don't understand what you're saying. You're saying that central planning of economies is OK?

The whole point is that exchange rates fluctuate freely, rather than being determined by a single planning authority. So if my dollar can buy fewer apples tomorrow and that's just a result of the mkt's apple/USD exchange rate changing due to supply/demand, that's perfectly fine with me. However, it's an entirely different kettle of fish if someone in authority just suddenly decides that your dollar can buy 5, rather than 10 apples.

If you believe central planning is acceptable in a modern capitalist economy, we can discuss that instead, 'cause this is much more basic premise that we differ on.

 

[new_trader]

However, it's an entirely different kettle of fish if someone in authority just suddenly decides that your dollar can buy 5, rather than 10 apples.

You keep thinking in terms of paper money instead of production and that is why you have trouble accepting the gold standard. The idea isn't to trade 10 apples for 1 paper dollar. The idea is to trade 10 apples for a fruit that you don't grow, such as oranges. If an authority decides that it wants 20 apples for 10 oranges then you either grow the oranges yourself of get them from somebody else.

 

[Martinghoul]

The US is paying with debt. Their imports are vendor financed by China. No country exports 'stuff' to the USA in order to receive little bits of paper in return, China certainly isn't that dumb and if it is, it won’t stay that dumb for much longer, soon they will demand ‘stuff’ from the USA instead of paper. Gold on the other hand is money with intrinsic value. The money itself is ‘stuff’.

Huh? Vendor financed? Are you seriously saying that Chinese vendors are lending to the US importers to buy their stuff? That's totally nuts, mate. As to China demanding stuff, what stuff is that? And, finally, what is the "intrinsic" value of gold? This is a question that I've never been able to answer for myself.

A country exports their surplus production in order to import 'stuff' that they either can't produce at all or they can't produce as efficiently as another country. The bits of paper the USA sends to China are claims on future exports.

Not at all. The bits of paper are claims on future dividends from all economic activity that the US government has a claim to, not just exports.

No viable alternative? GOLD! A simple hypothetical; Let’s say that the USA finally decides to get real serious about tackling its deficit. They ramp up gold production and anyone on social security who is fit and healthy is put to work in the gold mines. After a while they have enough gold reserves to readopt a full gold standard without a dramatic change in the price of gold. Now, instead of giving China $US1500 of paper for its exports, it pays for the ‘stuff’ with an ounce of gold it has mined, in other words ‘stuff’ in exchange for ‘stuff’ and the trade is balanced. China needs gold for its manufacturing industry and jewellery and anything else gold is used in. If the USA can produce gold more efficiently than China due to its industrialised mines then China might decide to divert resources from gold production into widget production which it exports to the USA. It gets gold in exchange for the widgets and everyone is happy. Economics isn’t anymore complicated than that.

Well, this isn't a simple hypothetical at all. There's a LOT of very dubious arbitrary assumptions you're making. Let's forget about all the funny stuff about putting people to work in mines, 'cause that's just weird and wrong on a whole variety of levels. But what on Earth makes you think that the fact that the US will be paying in gold is going to balance trade? Just because you're paying for stuff with other stuff, whether that stuff is bundles of green paper, gold, seashells or Mongolian togrogs doesn't mean that trade will be balanced...

 

[new_trader]

Well, this isn't a simple hypothetical at all. There's a LOT of very dubious arbitrary assumptions you're making. Let's forget about all the funny stuff about putting people to work in mines, 'cause that's just weird and wrong on a whole variety of levels. But what on Earth makes you think that the fact that the US will be paying in gold is going to balance trade? Just because you're paying for stuff with other stuff, whether that stuff is bundles of green paper, gold, seashells or Mongolian togrogs doesn't mean that trade will be balanced...

What assumptions am I making? I'm using gold to show that it is production which is exported and used to pay for imports, not worthless promissory notes. Do you honestly think China wants bits of paper with 'In God we trust' on it? The trade is balanced because exports=imports.

 

[Martinghoul]

You keep thinking in terms of paper money instead of production and that is why you have trouble accepting the gold standard. The idea isn't to trade 10 apples for 1 paper dollar. The idea is to trade 10 apples for a fruit that you don't grow, such as oranges. If an authority decides that it wants 20 apples for 10 oranges then you either grow the oranges yourself of get them from somebody else.

Huh? Are you saying that we don't need a medium of exchange? That we should just barter everything? If that's what you're suggesting? Apart from the fact that you don't need gold under such an arrangement, there's a whole lot of distinct disadvantages to a barter system that you're advocating.

 

[Atilla]

I don't understand what you're saying. You're saying that central planning of economies is OK?

The whole point is that exchange rates fluctuate freely, rather than being determined by a single planning authority. So if my dollar can buy fewer apples tomorrow and that's just a result of the mkt's apple/USD exchange rate changing due to supply/demand, that's perfectly fine with me. However, it's an entirely different kettle of fish if someone in authority just suddenly decides that your dollar can buy 5, rather than 10 apples.

If you believe central planning is acceptable in a modern capitalist economy, we can discuss that instead, 'cause this is much more basic premise that we differ on.

No not at all - I'm not saying we need central planning like the old communist state run economies.

Quantity of money has to be controlled. Not the same as deciding what one should procude or how to price it.



How about we say Wang buys a property in Florida - let's say $500,000 for CNY=3.25m.

Let's say Sam bought a property in Bejing for CNY500,000 yuans for $77,000.

Exchange rate is approx $1=6.5Yuans.

Trade imbalance and Yuan appreciates against the Yuan. New exchange rate $1=5CNY.


Wang sells his Florida home for $500,000 and gets back CNY=2.5m. Wang has lost 750,000 Yuans.


Sam sells his Bejing home for CNY500,000 and gets back $100,000. He gains $23,000.


There are always winners and losers but this creates uncertainty for international trade. So that's why we have futures markets to hedge againts currency risk. If currencies are pegged and controlled then you have certainty and fairness in the markets.

Property values can still change and values then reflect true supply and demand and not government agendas with printing presses.



Now you may say - well the next Chinese body can buy the same Florida home for $500,000 and pay only CNY2.5m. Yes but what happens if dollar keeps losing value. Sooner or later people will simply refuse to buy dollar assets because they know when the dollar drops they'll be well out of pocket.

I feel the US is playing a bluffing game and daring the global economy to back it or lose. bBetter not go into politics of it. But one can perceive it as economic war fare.

Does this make the distinction between real price changes in valuing assets and those induced by nominal revaluation of exchange rates by printing more money?

 

[new_trader]

Huh? Are you saying that we don't need a medium of exchange? That we should just barter everything? If that's what you're suggesting? Apart from the fact that you don't need gold under such an arrangement, there's a whole lot of distinct disadvantages to a barter system that you're advocating.

I'm trying to explain (but you are not listening) that a country doesn't export its 'stuff' in order to get bits of paper that another country prints. If gold is accepted world wide (which it is) because it has utility then it is an ideal commodity to be used as money because it has intrinsic value. You keep banging on about exchange rates and pegging which is irrelevant. Taking your argument to the ultimate conclusion, if China debased its currency to the point where it was the only exporter in the world, what do they get in return? The world gets China's production and what does China get in return? Bits of paper?

 

[Martinghoul]

What assumptions am I making? I'm using gold to show that it is production which is exported and used to pay for imports, not worthless promissory notes. Do you honestly think China wants bits of paper with 'In God we trust' on it? The trade is balanced because exports=imports.

You're making arbitrary assumptions about how much gold can be mined in the US, how productive that activity is, etc.

The notes aren't worthless. They're as much a symbol of some sort of production within the economy as your gold. And I don't know what China wants, but they sure keep buying a lot of these bits of paper.

As to your claim that trade is balanced, that makes no sense. If you define the medium of exchange as an "export" trade is always balanced, regardless of what that medium is.

At any rate, just think about it and I'm sure you'll get it. I need to go to bed.

 

[new_trader]

You're making arbitrary assumptions about how much gold can be mined in the US, how productive that activity is, etc.

The notes aren't worthless. They're as much a symbol of some sort of production within the economy as your gold. And I don't know what China wants, but they sure keep buying a lot of these bits of paper.

As to your claim that trade is balanced, that makes no sense. If you define the medium of exchange as an "export" trade is always balanced, regardless of what that medium is.

At any rate, just think about it and I'm sure you'll get it. I need to go to bed.

It isn't balanced. America sends China dollars and China sends the USA tangible goods. The dollar is an IOU, which is debt.

 

[Martinghoul]

I'm trying to explain (but you are not listening) that a country doesn't export its 'stuff' in order to get bits of paper that another country prints. If gold is accepted world wide (which it is) because it has utility then it is an ideal commodity to be used as money because it has intrinsic value. You keep banging on about exchange rates and pegging which is irrelevant. Taking your argument to the ultimate conclusion, if China debased its currency to the point where it was the only exporter in the world, what do they get in return? The world gets China's production and what does China get in return? Bits of paper?

What is gold's intrinsic value? if you're in it for intrinsic value, why gold? Iron and steel have a lot more intrinsic value.

And exchange rates and pegging are crucially important. However, you're right. China doesn't want pieces of paper in return and, moreover, China actually doesn't care about the pieces of paper either. But what China actually gets out of the current arrangements is infinitely more precious than the pieces of paper. It gets full employment, social harmony and a population that is fast emerging out of poverty, with all the fringe benefits of that. That's the whole point of what, I believe, was Deng Xiaoping's grand design.

It isn't balanced. America sends China dollars and China sends the USA tangible goods. The dollar is an IOU, which is debt.

A dollar isn't an IOU and it isn't debt. If America sends China gold and China sends US tangible goods, that's precisely as balanced as sending dollars in exchange for tangible goods.

 

[Atilla]

It isn't balanced. America sends China dollars and China sends the USA tangible goods. The dollar is an IOU, which is debt.

I think it will all end in tears...

 

[new_trader]

What is gold's intrinsic value? if you're in it for intrinsic value, why gold? Iron and steel have a lot more intrinsic value.

I agree, it can be any tangible product but gold has the following qualities:

1) Gold has a 2000+ year history as money.
2) Its use in manufacturing namely electronics
3) Its use in jewelry
4) Portable
5) Indestructible
6) Reusable
7) Fairly evenly distributed around the world so no country would have a real monopoly on supply.

Gold...there is no substitute!

 

[new_trader]

A dollar isn't an IOU and it isn't debt. If America sends China gold and China sends US tangible goods, that's precisely as balanced as sending dollars in exchange for tangible goods.

No it isn't at all, far from it. Take a close look at your money, it says "I promise to pay the bearer on demand the sum of X pounds" because it was once backed by Silver. Paper money is a promise to pay, ie, debt.

 

[Martinghoul]

No not at all - I'm not saying we need central planning like the old communist state run economies.
...

But you're not addressing the issue and you're describing a situation that is precisely NOT allowed to occur... Money supply and all that will affect the mkt value of assets and ccies in the traditional manner. However, that's not the point. We're not talking about mkt mechanisms here. We're talking about an artificially engineered arrangement where the yuan cannot appreciate against the dollar. So it doesn't matter what Sam and Wang do, it doesn't matter what "real" price changes need to happen, they cannot happen. And yes, the US is playing a bluffing game, but so is China. Both know they need the other guy, but are waiting for them to blink first.

And on that note, time for bed...

 

[Martinghoul]

No it isn't at all, far from it. Take a close look at your money, it says "I promise to pay the bearer on demand the sum of X pounds" because it was once backed by Silver. Paper money is a promise to pay, ie, debt.

Well, the 1 pound coin and a quarter in the US don't say such a thing. Does that mean they're different from a 5 quid note and a dollar bill? And no, paper money isn't a "promise to pay", regardless of what it says, and it's important to make that distinction. But that's a discussion for another day.