How did 'rich' economies get so in debt? | Page 4 | Forex Factory

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How did 'rich' economies get so in debt?

  • #61
  • Sep 23, 2012 4:25pm Sep 23, 2012 4:25pm
Quoting FXTradeX6
Under precious metal backed currencies, currency is issued in relation to the amount of metals in holding. Precious metals are not an infinite resource. They can run out. The number of people in any particular country on the other hand keeps increasing. Under a metals backed system a shortage of currency becomes a real problem as it leads to recession and ultimately depression. That's why no one follows backing currency in metals. The alternative is dismal economic growth and extremely high unemployment.
Apologies for the slow reply - it's been a busy weekend. I'm not aware of anywhere where the situation you describe above has played out, but I'm happy to stand corrected if you have some examples?

When you think about it, beyond some nominal amount it doesn't matter how much metal there really is in circulation. People will be using electronic forms of payment anyway. The point is to be sure that they can redeem their £100 note for a microgram of gold if they wanted to, which is the ultimate check on inflation and debasement of the currency. As an added bonus, money will go up in value over time, so the pound you put away for your grandkids now will have more purchasing power when they inherit it, rather than the complete opposite as is currently the case.
  • #62
  • Sep 23, 2012 4:30pm Sep 23, 2012 4:30pm
Quoting FXTradeX6
Think of it this way. All money, whether it's in the form of gold, dollars, or even sea shells, is just a means of transacting for goods and services. It all serves the same purpose. A means of exchanging one thing for another.
Sure, but sea shells and dollars are very easy to come by for some people (run the printing press or go beach combing), whereas gold is not. Under a gold standard Mr Worker doesn't bust his arse for 40 years to find every dollar he managed to put aside for his retirement is worth about 10% of what it was when he earnt it because greedy politicians can't resist running the printing press to pay for wars/bailouts/concessions for their voting bloc.
  • #63
  • Sep 23, 2012 4:55pm Sep 23, 2012 4:55pm
Quoting DanUK
Greengriff,

Thank you for your comments… the point I was trying to address was that most people misunderstand government debt as being the same as private debt, and it would seem that from your comments I didn’t make the point strongly enough.

I do not mean this rudely or disrespectfully but you are still thinking of government debt in the old fashioned “gold standard” way of thinking which no longer applies. From your comments you obviously favour a return to the gold standard, which I disagree with as a failed system that we have progressed...
I'm very interested in the political dimension of the discussion, but you're quite right that this thread is not the place. Anyway, back to what you wrote above.

I disagree that the gold standard is a failed system. It's 'failure' was political. Again this is a fascinating discussion but one for a different thread.

I (think I) understand the basic principles of the current monetary system, although you undoubtedly know more than me. I still have a couple of questions:

If everything plays out as you wrote above, then why does the government bother issuing bonds that need repaying with interest? Why not just bring into existence as much money as it needs for it's operations?

If the interest rate is the price of money (something it seems we both agree on), and governments (through central banks) can set that price, what price should they set it to in order to best serve the economy?

Why jail counterfeiters? Why not encourage them, especially when there's a liquidity shortage?
  • #64
  • Sep 23, 2012 6:49pm Sep 23, 2012 6:49pm
Quoting greengriff
why does the government bother issuing bonds that need repaying with interest? Why not just bring into existence as much money as it needs for it's operations?
because it's private money (regarding the US). money rules, so who controls the creation of money, controls the government.
Quote
what price should they set it to in order to best serve the economy?
the price of money should be determined by a free market without interventions. that's diffiult, when official money is a kind of ponzi sceme. Sorry for my bad english, i hope you understand.
  • #65
  • Edited 9:18am Sep 24, 2012 8:41am | Edited 9:18am
The gold standard pretty much leads to constant "crisis" and bank failures.

A rising currency value isn't always a good thing either. Your exports become increasingly expensive for your trade partners to purchase. Eventually, they'll stop purchasing if the price becomes too high.


See the link to the presentation below for more on the downside of the gold standard.
http://www.businessinsider.com/ben-b...tandard-2012-3
  • #66
  • Sep 24, 2012 10:24am Sep 24, 2012 10:24am
Quoting Thepipster
The pwobwem soow, wif tat is, when I'm buying a gallon of gas at 3 seashells a gallon and I make 20 seashells an hour at a 40 hourweek, and the gov't decides to restrict refining of gasoline (supply) to drive the price to 30 seashells a gallon, while I am still making only 20 seashells an hour. then the price comes back down some for a while, but then when crude goes back up, I notice, at the same price for a barrel of crude, but gasoline is now 38 seashells a gallon, that means there's inflation, thanks to the central bank of Atlantis manufacturing...
Central banks aren't setting the price of gasoline through inflation. That's another topic entirely. IMHO oil prices are highly manipulated. Again, off topic so i'll leave it alone.
  • #67
  • Oct 31, 2012 12:53pm Oct 31, 2012 12:53pm
Quoting greengriff
I'm very interested in the political dimension of the discussion, but you're quite right that this thread is not the place. Anyway, back to what you wrote above.

I disagree that the gold standard is a failed system. It's 'failure' was political. Again this is a fascinating discussion but one for a different thread.

I (think I) understand the basic principles of the current monetary system, although you undoubtedly know more than me. I still have a couple of questions:

If everything plays out as you wrote above, then why does the government...
Hi greengriff,

I'm sorry I missed your reply/questions... if you ever see this post his is my attempt at answering!....

1. A very interesting question; the govt really doesn't need to issue bonds (with interest payments) in order to pay it's bills but the issuance of bonds does serve other purposes. For instance, millionaires and billionaires have to diversify their portfolio for safeguarding… as there is a limit to how much the govt will guarantee if your bank goes under; investment in bonds provides a return on your money and is pretty much one of the safest investments you can make (not investment advice lol… I’m not a financial advisor!!!). The issuance of bonds also reduces the amount of cash-money in the banking system which supports interest rates that may otherwise fall to zero (another story again!).

2. I think this is a tricky question to answer… tricky because when interest rates are low you upset savers but when they are high you upset spenders! I think you would have to be flexible depending on the state of the economy. At the moment I favour lower interest rates due to the poor state of global economics. However if we weren’t in that situation I’m not sure I would favour government intervention in supporting interest rates… perhaps an open market solution would be more favourable under normal conditions?

3. I see where you are coming from but even when liquidity is needed it must be provided in a structured manner. Even when things are stagnant the supply of money must be closely monitored because when aggregate demand rises again and the economy performs properly an oversupply of money would then lead to inflation.

I hope that answers your questions!

Regards,

Dan
  • #68
  • Nov 1, 2012 3:23pm Nov 1, 2012 3:23pm
I think it all relies in rationalization of debt. People had excuses to buy more than they had to, to afford more than they had in their pockets. We didn't know the consequences until then... Just to summarize the whole deal, just because we could, too many lines of credit were given to people that had no idea how to manage it. This can sink economies sometimes. =]
  • #69
  • Last Post: Nov 2, 2012 2:44am Nov 2, 2012 2:44am
Quoting investguy
too many lines of credit were given to people that had no idea how to manage it. This can sink economies sometimes. =]
I agree in cmmon situation for people this is true, but actually for governments that doesn't always work. All the coutries have debt. The difference is in amount, of course. But they all borrow some money, which is of course more efficient way than issue them... But the big problem of such countries like US is that they don't have a clue how to make an optimisation in economic. So the costs like in public health are incredible huge.

This of course affect the currency. But the real influence is not so evident, because this debt can exist for decades without worrying people)
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