Saturday, February 06, 2010

Yet another reason why the gold standard fails.

Ideally, you want a currency that tracks your economy very closely. When things are going well and the economy is growing, you want a currency that's increasing in value to avoid overheating. When things are going poorly you want a currency that's decreasing in value to support your trade position.

Gold, as a store of value, behaves in exactly the wrong manner. When things are going badly, politically and economically, gold rises quickly. When things are going well, and people are buying gold in order to use it, the price falls.

A gold standard, besides its other deleterious effects, would automatically heighten the booms and prolong the busts.

Whoops.

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