What are the political and economic consequences that will occur, nationally and internationally, if the United States tried to end it's fiat currency policy? Also/or: How likely is reform to occur considering the democratic nature of the United States?
Dustin Jussila:What are the political and economic consequences that will occur, nationally and internationally, if the United States tried to end it's fiat currency policy?
The United States has no interest in ending its fiat currency policy. It is an empire that depends on money printing.
The political consequence would be increased individual liberty, something that must not be allowed to occur because that would diminish the power of government.
The economic consequence would be increased prosperity as scarce capital is allocated in accordance with the market process. The boom / bust cycle would be eliminated. Again, this would make people less dependent on government which is unacceptable.
Initially, there would be political and ecomonic chaos as everyone realizes the value of their Federal Reserve Notes is rapidly sinking toward zero. I believe this would not last long, but it would be impossible to tell. It is also likely a dictatorship would be imposed to restore "order".
Dustin Jussila:Also/or: How likely is reform to occur considering the democratic nature of the United States?
The likelihood is zero. It will not happen because the power of government would be reduced.
I'm not sure what the democratic nature part of your question has to do with it. The democratic nature of the U.S. means that people can vote for benefits for themselves at the expense of others. And I'm not talking about D's as opposed to R's. I'm talking about the inherent nature in democracy of being able to select people who will coerce other people into doing my will, ie, the democratic process.
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
What if Ron Paul was president?
Dustin Jussila:What if Ron Paul was president?
Could you be more specific about what you are asking?
Do you think if Ron Paul was president, would there be a better chance of monetary reform?
There would be monetary reform, but he's not going to be President, so no monetary reform.
Dustin Jussila:Do you think if Ron Paul was president, would there be a better chance of monetary reform?
No, because the Congress would have to pass a bill to repeal the Federal Reserve Act. Since Ron Paul could not be President and hold a sufficient number of seats in Congress at the same time, then nothing would change if he were President.
He would makes things interesting, though.
As I've outlined above, central banking provides government the means to expand its power, which is the purpose of government. No government exists to make itself smaller.
The central bank buys the government's debt (first indirectly, now directly). The central bank creates the boom / bust cycle which is GREAT for government. The voters want government to DO something when the economy collapses, so the government complies. Millions of unemployed people become dependent on government.
The bust is great for business if your business is government (sounds kind of catchy, doesn't it?)
What will happen to foreign countries holding US debt?
Dustin Jussila:What will happen to foreign countries holding US debt?
Your questions are very short, I'm having trouble understanding exactly what you are asking. I will give it a try.
I assume you're abandoning for now the scenario related to the return to sound money. Perhaps we both agree that this will never happen as the result of government action.
I think what you're asking above is, "What will happen to the value of U.S. government bonds held by foreign governments?".
The last time U.S. treasuries dropped in value was during the Volcker era, 30 years ago. I believe the long bond went to about 17%. Volcker knew he had to tighten the money supply to prevent a hyperinflationary break down. He did.
If such a rise in yields, drop in price, of treasuries occurred today, there would be panic. Bonds would be sold rapidly to try to get out of the way of falling values / rising yields. This would cause yields to fall even more rapidly. The very definition of a panic.
Today, the U.S. central bank would buy bonds in mass. Bernanke has already done this, he was chosen from the beginning to be the man for the job. Bernanke will not let the bond market panic spread (or at least he would believe he could stop the panic). U.S. Banks, foreign banks, foreign governments, and foreign central banks hold U.S. debt. These are the U.S. central bank's primary clients.
What is different from 30 years ago? $1.5 trillion deficits, a baby boom generation that was not able to save due to a lifetime of taxes and inflation, an expanding empire that "policy makers" 30 years ago could only dream about, the U.S. economy was restructured during the '80's to export dollars and import goods. This was done to provide foreign central banks the ability to buy U.S. debt through currency exchange, increasing the market for U.S. debt.
These things were not in place during the 1970's.
So, foreign holders of U.S. debt will be made whole, at least in nominal terms. The US central bank will buy their bonds if panic strikes. Of course, the world would be flooded with greenbacks. A hyperinflationary depression would result.
Short Answer: Foreign countries would be made whole in nominal terms. Individuals would have to endure a hyperinflationary depression.
What would happen the value of US bonds if there was a return to a sound currency? Sorry for the short answers, I'm at work.
Dustin,
I would think US bonds would become nearly worthless with a return to sound money. How could the U.S. ever pay back or service this debt without central bank monetization? Through taxation alone? Through additional borrowing?
The "dollar" would become a weight of gold (for example). For this to happen, it would take perhaps 25,000 or 30,000 (guessing) FRN's to redeem one oz of gold, where now it takes 1,300 FRN's.
Nobody knows what the resulting conversion factor would be. It is a result of total fiat money divided by the gold supply to be used as money. That ratio used to be about $20.00 / ounce of gold prior to 1933. An ounce of gold today is the same as on ounce of gold 100 years ago. Same gold, same weight, the stuff does not deteriorate. The "$" though, is quite different.
I would think a return to sound money would be disastrous for existing holders of U.S. debt. Let's say you own a $100,000 (FRN) treasury note before the conversion. After the conversion, you would need a $2,300,000 treasury note to redeem the same amount of gold (purchasing power) you had prior to the conversion (30,000 / 1,300 x $100,000, guessing). The loss on your investment would be about 95%. A near complete loss.
Yet another reason a conversion to sound money won't happen.
Here are some links on the subject:
Mises - 1953
Returning to Sound Money - Polleit
Taking Money Back - Rothbard
I hope you might find these helpful.