Hi Pete!

Yes, the Japanese announced before the G20 meeting that they are willing to lend up to US$100 billion to the IMF. Have not heard a word about it since then.

What’s the difference between the explanations on your links and our explanations? Your sources say that there’s no difference between swaps and loans except for the technicalities. For all intents and purposes, they’re the same. Please read the explanations on the links again. Obviously, you have not read your own sources.

discusses Gold Leasing, Gold Swaps, and much more

discusses Gold Leasing

Something that occurs to me is that perhaps if China gets all this gold from the IMF, maybe that will have some repercussions like:
- gold price skyrockets?
- gold gets banned by US (and other westernised countries), who don’t want China to have power over them?
- gold price plummets (perhaps in the short term?) because economies are ‘okay’ now that they have been bailed out?
- the US will crumble now that China doesn’t have all those US bonds?

1. Yes, gold price may skyrocket because there may be rumours (especially among the gold bugs) that China may be using gold as their reserve currency instead of US dollars.

2. Banning of gold- that happened before in the US in 1930s while the US was still under a gold standards.

3. Marc Faber believes that gold can still experience short-term pain.

4. Not sure whether the US will crumble now. If it happens, it will be a very difficult period ahead for everyone in the world.

Doesn’t the US have a reasonable chunk of gold too? Maybe if the US waits a while for the gold price to go up it can sell some…but that isn’t really the American way is it.

I guess the China story will always be a tricky one, because as you mentioned Ed, they are subtle and news reports on exactly what China are up to are strangely rare.

Something that occurs to me is that perhaps if China gets all this gold from the IMF, maybe that will have some repercussions like:
- gold price skyrockets?
- gold gets banned by US (and other westernised countries), who don’t want China to have power over them?
- gold price plummets (perhaps in the short term?) because economies are ‘okay’ now that they have been bailed out?
- the US will crumble now that China doesn’t have all those US bonds?

Just some ideas and a ramble

We think you are on the right track on this! Yes, we agree with you on that. Wealth is a relative term. But unfortunately, we still use fiat money as a yardstick of measurement for living standard. As we said in How is inflation sabotaging our ability to measure the value of things?,

If you want to measure the length of a box, you may use the ruler to do it. The reason why a ruler can do such a job is because its length is reasonably consistent for the foreseeable future. Now, imagine that ruler is as elastic as a rubber band. Do you think it is still a useful tool to measure the length of the box? An elastic ruler is useless because you can always make up the measurement of the box to whatever you please just by stretching the ruler such that the edge of the box is aligned to any intended measurement markings in the ruler.

Now, let come back to measuring the value of oil. Since oil is priced in US dollars and if the supply of US dollars can be expanded and contracted at will by the Federal Reserve, how useful do you think it is as a calibration for measuring the value of oil?

The problem is, this yardstick is as elastic as rubber band (through inflation/deflation) but it is generally treated as if it is a reliable ruler (mentally). The trick is for everyone to get this mental scales out of our eyes, after having been brainwashed by decades of inflation. And by the way, sustained inflation is a new phenomena, relative to the entire history of human civilisation.

Yes, in theory, it is possible to see wages fall in nominal terms under a gold standard. But that is not such a disaster because:
1. It will drift down slowly in tune with increase in productivity. Real productivity growth will not soar as rapidly as the increase in the supply of money and credit.
2. It is relative wealth that is important, not the absolute nominal wealth.

Some questions:
How does the gold standard work in terms of wages? Could we see a decline of wages year by year in the context of population grows? This in the end has the same effect of inflation. The wages of a clerk years ago are worth more than those of now. Same amount of gold shared among more people when the poplulation grows. Gold per person will decline. In the end, is wealth just relative?

I have been thinking of this inflation/deflation for a while. Not sure if i am on the right track.

I think we are often confused wealth with living standard. My living standard in terms of health, entertainment(tv, mp3) is surely much greater than that of any emperiors who lived a century ago. But my wealth has no way to even compare with them.

So in terms of wealth preservation for retirement, make sure that your wealth grows relatively better than other people. So in a gold standard, suppose you had 10 oz gold 30 years ago, the gold per capita at the time was also 10 oz. 30 years went by, you now only hold 8 oz, and the gold per capita for the nation now is 6 oz. You are in fact richer than you were. Whereas in a inflative fiat system, $10, 000 could buy a house 30 years ago. Even with greater housing supply of houses than 30 years, now $10, 000 couldn’t even pay the stamp duty.

The issue of inflation/deflation comes from how we measure product/service in number in the context of productivity/population grow and decline. There is no way we could know it. Gold standard may be better than fiat system in terms of fairness. But it too is not perfect.

The central message is that we should measure living standard in absolute terms, but wealth with relative terms.

Whilst I completely agree with your comments, I was wondering how a gold standard would work with increasing population + economic growth.

Well, there’s no need for the supply of gold to keep up with economic growth. The important thing is to allow prices to adjust freely. This means that prices should be allowed to adjust downwards in response to increased productivity.

We’re all already experiencing this downward price adjustment today:

1. The prices of computing power and IT equipment has been adjusted downwards since the IT age begins. Today’s computers are thousands of times more powerful than the ones we had a couple of decades ago. Yet, the prices are so much cheaper. Does that affect innovation in the IT industry?

2. China’s manufacturing capacity has been increasing by leaps and bounds for the past couple of decades. For the last 10 years, the prices of ’stuffs’ imported from China had helped to keep a lid on prices in Australia and the US because of increased Chinese productive capacity.

You see, no one would argue that Australia and US should inflate the money supply even more to maintain the price of Chinese goods/IT products. Falling prices due to increased productivity is good deflation.

Likewise, there’s no need to increase the supply of gold to cater for economic/population growth. All we need to do is to ensure that prices are free to adjust accordingly. In fact, freely adjusting price is beneficial because it sends a very clear signals to the producers in the economy with regards to resource allocation. For example, if prices of goods X is falling with respect to goods Y, then it is a clear signal that more resource should be allocated to goods Y. Once we introduce monetary inflation to ‘maintain’ the price of goods X, then we are distorting this signal and as a result, impair the ability of the economy to allocate resources more efficiently.