5./ The US had 1.10 for each paper dollar in circulation in 1913. In order for gold to equal the dollar inflation since then at 1 to 1 it will need to be revalued to 7K.
OK, this is where I have a problem. If the current price of gold is $1800, then 7000/1800 = 3.89 which is to say roughly 25 cents worth of gold backing each dollar in existence. Doesn't that seem kind of high when you take into account the trillions of dollars in foreign reserves that are out there, not to mention trillions more that have been created to backstop the banking system?
Using my numbers you get 20,000/1800 = 11.11 so roughly 10 cents worth of gold for each dollar. That number is closer to the theoretical leverage of a 10% reserve based currency system, no?
Therein lies the real problem: fractional reserve. Unless you have one to one gold backing and only issue credit against secured collateral or actual bank capital, you have enough fractional dollars in the system to bid up the price of gold above what the US govt. is willing to pay. In short, a form of carry trade that would allow foreign govt's to outbid the US govt on world gold markets.
I have no doubt they would do this, since their choice would be either to peg their currency to the dollar, or purchase enough gold to achieve the same end. Given the history of US currency mismanagement, what would you do? Back your currency with dollars, or pay say 10% above market and turn your existing dollar reserves into gold?
I'm probably displaying gross monetary ignorance here, but this does make some sort of sense, to me at least.
Of course for any of this to happen you'd have to have an honest accounting of the total number of dollars in circulation (does anyone, including the Fed even know?) and a mass write down of all unsecured credit, which is to say just about the entire (alleged) capital of the US banking system. Which is more likely then? That, or continued Pesoization until the whole thing blows up and the solution (whatever that is) is forced on them?
ebear
