Let’s take the Home analogy further to understand Exchange Rates.
When you can not meet your expenses, you borrow, say, from your neighbor.
Nothing will go wrong if he does not borrow like you.
If he borrows from the next man, the cycle of borrowing goes on and extends through out your city.
Here money you actually have has not increased.
What happens is that you get money from some one who has spare(because his Wants are less than yours) and on a large-scale the artificial money is high when compared to the produce available.
So the city gets things from the next city or where the produce is available.
The hitch is they are also running into the same confusion of artificial money there.
This cycle goes on.
This is exactly what is happening to the World Economy now.
Another point to note is that when you buy from the others as a produce, it has to be valued.
Barter system did not have this problem.
You wanted something which you do not have ,another man has and has no need of it when you ask him.
The question of Money and valuation does not arise.
Thanks to Money Value system, some Value has to be fixed as Values of products vary.
Some joker said God is the standard and fixed it as a medium of exchange.
That is when you want to pay others you pay a in a Currency the value of which is determined by the Gold your group, in this case, the Government holds.
The fallacy here is that the price of Gold is not Fixed and it is variable, though currency is linked to Gold taking Gold Value as Fixed.
To prevent the process of not having adequate Gold every Nation has to maintain a Gold Reserve.
It is unsaid that if one country does not or can not pay the Gold it has, can be sold by the Debtor to realize his dues.
Fun is that who will buy that and at what rate!
This option has never been resorted to nor even talked about .
Linked Exchange System.
A system of managing a nation’s currency and exchange rate by linking the national currency to another base currency that is held at a fixed ratio in deposit at domestic banks.
Once the exchange rate is set, there is typically no interference from the government or through monetary policy decisions that will affect the exchange rate. Currency is only issued when there are reserves in the linked currency to back it up. If the exchange rate begins to shift from the fixed ratio, currency is immediately added to or taken out of circulation to bring the ratio back into balance.
This is different from simply pegging one currency to another; in a linked exchange rate system, currency can only be issued when confirmed reserves in the linked currency are held at local banking institutions. In Hong Kong, for example, this means that every Hong Kong dollar that is floating around in the economy is backed by several U.S. dollars held in reserve.
The advantage of this system is that it stabilizes the currency and keeps inflation ultra low. On the downside, the nation using it can’t leverage advantages in trading with foreign partners, and can’t carry out monetary policy to adapt to shifts in the domestic economy.
Now the cost of Excavation of Gold is shooting up,
When the cost of the Fixed Gold is variable, how come the related exchange rate is expected to remain constant?
The people are paid, at the Mine itself based on the value of Gold at a predetermined Price while the Gold they extract is costlier.
Can there be anything sillier than this?
Underlying problems are these in Gold Standard.
1.Gold Price is variable and not fixed, it is fixed in the minds of Politicians, economists.
2.Demand goes up every year, from Governments and Public, leading to less Produce more demand.
3.There is high speculative market in Gold, akin to Online trading where no physical transaction place;everything is notional and paper Transaction to ensure demand and hence Profits.
4.Fundamental of any sound economic system is Savings.
To ensure Global economic stability all Nations must ensure the habit of Savings backed by Manufacturing .
The greatest culprit is the self-proclaimed and yes-men of the world, is the USA.
`It has disproportionate demand to what it produces and gobbles up be it energy or electronics.
people think it is because of its Economy.
No it is because of its military might Nations imagine it it o be a Giant in Economy.
If the US stops its Imports it is gone with no Gold Reserves.
Now this brings the issue of Gold that is in Fort Knox.
Gold as we have seen is the bedrock on which the Exchange System is Built up.
What is in Fort Knox, US?
An estimated $130 billion in gold was in Fort Knox.(2012)
Is it?
Reference;
http://www.livescience.com/32328-how-much-gold-is-in-fort-knox.html
http://www.investopedia.com/terms/l/linked-exchangerate-system.asp
Continues…
Related Articles
- The Gold Standard and Analysis (majinjxo.wordpress.com)
- Rupee Advances a Second Day on RBI Steps to Boost Dollar Supply – Bloomberg (bloomberg.com)
Leave a Reply