The Dollar, Gold and the Quality of Money

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Recently by Michael Pollaro: The US Government's Fiscal Plight, an Enormous Problem Without a Solution?

     

Is gold money?

That question, directed to Federal Reserve Chairman Ben Bernanke by Congressman Ron Paul in last week’s hearings before the House Financial Services Committee, strikes terror in the heart of all central bankers.

Bernanke looked stunned and then answered, “No: Gold is an asset.”

The rising price of gold reflects global uncertainties, he explained. “The reason that people hold gold is as a protection against what we call tail risks: really, really bad outcomes.”

The daily headlines report those potential risks: governments needing bailouts, from Greece to Harrisburg, Pennsylvania; the possibility that the euro will splinter; runaway deficit spending in the U.S.

With every headline, it is becoming increasingly apparent how much the governing class has overreached. Those who believe in government are simply running out of other people’s money. For example, President Obama’s call to reverse the tax break given to owners of corporate jets in his 2009 stimulus bill would supposedly raise $300 million a year in revenue, enough to cover less than two hours of current deficit spending. Even if the Federal government could tax 100% of personal income in excess of $250,000 a year, it would collect little more than half of the revenue needed to balance the budget.

These real world results mock the conventional wisdom that given the power to spend, borrow, tax and print money, elite public servants can manage the economy and protect the average individual against the vicissitudes of life. Instead, government itself has become a source of systemic risk, and a direct threat to our prosperity and liberty.

At the center of this political upheaval is the quality of money itself. “Is gold money?” is a show stopper because it raises the questions: “What is money and what power should government have to manipulate its value?

The answers to these questions reveal how our most basic trust in government has been betrayed.

When you or I accept dollars in exchange for providing goods and services, we do so trusting that when we spend those dollars, they will be accepted for an equivalent amount of goods and services. That’s how money frees us from a barter economy.

Trust is always an assessment of some future action. Making a grounded assessment requires us to understand who is making the promise, what action they are promising, and whether they are sincere and competent to fulfill their promise.

When an individual, company or government has a good credit rating, we are saying that we trust they will keep their promise to pay off their debts in the future.

So it is with the value of money. Today Bernanke is making the promise effectively to “do his best” to achieve the Fed’s dual mandate of achieving maximum employment and stable prices.

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