I just watched the 60 minutes story about China's wealth fund owning a high amount of US dollars. Everyone is scared. Is there anything the US can do?

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knor208: It actually just goes to show you that the US dollar is still the preferred currency. The fund wouldnt dump dollars on the market because it woud cause the value to drop ie they would be cutting the value of thier own investments. chinese inflation is running very high and will problably go higher. There is talk of "rice riots" etc.

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April 10, 2008

Posted by aprelle

5 stars ( 1 rating )

The US could change from the current fiat money system back to the gold standard where there is something of value behind the dollar. The current fiat system was first used by the US in the 1920s right before the depression when the massive printing of money devalued the dollar similar to what the government is doing now.

The total amount of gold that has ever been mined has been estimated at around 142,000 tons. Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4 trillion. This is less than the value of circulating money in the U.S. alone, where more than $7.6 trillion is in circulation or in deposit (although international banking currently practices fractional reserves). Fractional reserves are where the government would back each dollar with 10 cents of gold as an example. Because of the fractional backing, a return to the gold standard would result in a significant increase in the current value of gold, which may limit its use in current applications. This is because if the US had 35,500 tons ($1 trillion) in gold and $7.6 trillion in currency, the free market would cause 35,500 tons of gold to approach or equal $7.6 trillion in value.

Fluctuations in the amount of gold that is mined could cause inflation, if there is an increase, or deflation if there is a decrease. However, the rate of inflation/deflation was much lower under the gold standard than under the current fiat monetary systems. For example, despite the huge quantities of gold mined during the gold rushes in California and Australia between 1850 and 1855, inflation in wholesale prices only reached 5% - which is not uncommon with fiat currencies. It has been suggested than an increased value in gold has traditionally resulted in increased mining, including in places that would have been previously uneconomical, whereas decreased value resulted in reduced mining. It has been argued that this automatic adjustment in the growth of the money supply makes gold even more appealing over fiat currencies. Finally, the Great Depression occurred after the United States had left the gold standard for fiat – and the money supply had been significantly expanded under the new system.

It is difficult to manipulate a gold standard to tailor to an economy’s demand for money, giving central banks fewer options to respond to economic crises. Thus markets would become more stable and dependent on real production, supply and demand, rather than the games and devastation that the central banks have gotten us into. It would be a free market system rather than a manipulated system geared towards helping those in control the most.