Saturday, March 15, 2008

#115 - Some Currency Thoughts

In perspective, do I feel a FIAT currency is completely unethical and bad for the economy, not entirely. We live in a free world which is why I think a Hayekian attempt at establishing competing domestic currencies would be a good thing. Thought I think it's unethical to have a FIAT currency backed by a government, cause then the effects of liquidity and most economic crisis's fall much harder on taxpayers than back in the pre-Depression gold standard days.

If I were to shape US monetary policy the US dollar would have some solid tie to gold (read A) for value and would have fairly constant level of supply instead of printing or removing dollars from circulation through government policy. There would be no federal reserve, although since there would be competing currencies if the Banks wanted to band together and form a third-party Fed like bank with their own FIAT currency, they'd be free to do so. Many other currencies would pop up and many of them will fall similar to when Paypal was competing many other similar internet payment methods and currencies. Eventually the consumer will choose the currency with the most purchasing power and the banks will choose the currency that offers the most on demand liquidity.

At this point I think we'd see banks dealing in two currencies which gives them the ability to deal with a strong US dollar but be the backers of their own FIAT money supply for their liquidity crisis's without footing the bill of minting and inflation to the US taxpayer. Plus this helps many of the other global currencies which are backed by US dollars.

It's true that there would probably be a lot of failed currencies that hurt a lot of people on the way to the market finding it's way to this point, but that's what always happens when new is in effect.

(A) One way you can tie the dollar to gold without having an all out gold standard would be to set target values, like keeping gold between 500-600. Then manipulating liquidity of the US dollarto that target but then this would essentially be the same kinda manipulation with a different goal that the Fed is doing now, but the dollar would remain fairly stable.

Probably just going back to silver/gold standard would be best for the US dollar AFTER competing currencies has established their third party FIAT currency of choice.

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