Rhunzzz

Gold: Not Just for Gold Bugs Anymore

Dear Sir,

I am reading the article you linked. I have some points to raise.

1. The article states that the Fed's balance sheet liabilities would have to be backed by its current gold reserves. In other words, not every single dollar would need to be backed by gold. So why would this be any different from a fractional reserve system? It would just be a fractional gold reserve system - only partially backed by something of value (debt in the current system, gold in this putative system).

2. Current spot price of gold is $743.35 per troy ounce, last I checked. For the dollar to be pegged at the reserve price $7,000 per oz. would mean a 950% devaluation of the dollar in gold terms. This would appear to me to have catastrophic inflationary and redistributive effects upon the economy. All of a sudden those who had accumulated gold would suddenly see a sharp increase in their purchasing power, relative to everyone else. I don't see how this could be good for the US economy.

I don't see anywhere in the article suggesting how to deal with such a huge drop in the purchasing power of the dollar in gold terms. If I have missed it, please point it out.