the Constitutiution and the debt ceiling

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And lets be specific. An item is worth what you can get for it.

A dollar is worth 80.6244 japanese yen. Right at the moment anyway.

All values are relative. Having a currency value that reflects your GDP makes more sense than tying it to a rock.

But you have re-opened it, so I am not letting your empty rhetoric go unanswered.

The Federal Reserve balance sheet is in the black, and the value of notes issued is less than the open market securities it holds. The treasury notes that it holds are roughly equal to its deposit obligations. Fiat currency is not worth nothing--like every other thing on the planet, it is worth what people are willing to pay for it.

Your recollection of the United States' halcyon days ingnores a few salient issues: at the time that the United Staes had this economic power you speak of, it was far and away the largest producer on the planet, particularly given the large markets that were closed to competition. The fact that the United States is not the economic power that it was in the 50's has much more to do with China than it has to do with abandoning the gold standard.



Yes, yes you do. And there is a purpose in that--so that you maintain the currency within an accpetable range of value. Otherwise, as your economy grows, the value of the dollar grows out of all recognition and your export trade evaporates.

Economies will not allow values to grow out of scale--if your exports become too expensive, monetary policy suggests that it is better to lower the price to make them competitive, than to have your export industries shut down and throw your economy into recession.



Calling it worthless does not make it so. Clearly the people who are buying up US dollars do not believe it to be worthless. Clearly the people who are trading US dollars in the forex markets don't believe it to be worthless. And most importantly, clearly the US economy is functioning--it may have structural pressures on the public expenditure side, but people are still buying goods and services, and they are doing so in exchange for dollars.

If you want an example of a failed fiat currency, look at the Zimbabwe Dollar, or the Kenya Shilling. Look at countries where transactions on the street are conducted in US dollars because no one has faith in the local currency. Does that sound like the circumstance of the US marketplace? I thought not.



You cannot set a value for the currency and simply make it so. The central bank must hold assets to maintain that value. In the case of the Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank, and every other major central bank on the planet, those assets are a combination of government debt and correspondent bank deposits. The model is not unique to the United States, and it works in countries where governments are perceived by the market to be credit worthy.

There are a multiplicity of problems with commodity based currency:

1) You have to acquire the commodity. The total amount of gold mined in human history is about 5.3 billion troy ounces. At current prices, the United States would have to acquire approximately 12% of all of the gold ever mined on earth in order to underwrite its current currency issue. Of course, taking that much gold out of circulation would vastly distort the price, so let's be fair and say that you'd really only need about 10% of the gold ever mined in human history.

2) You have to segregate that commodity. You can't use the gold that's backing your currency, so all industrial or commercial uses of that commodity are cut off from that potential supply. This is the biggest impediment to using other commodities as currency reserves. Unlike platinum and palladium, gold has a relatively small number of industrial and commercial uses, and it is non-perishable. (Also, it bears noting that you have to keep and store the commodity, a not inconsiderable proposition.)

3) You cannot respond to exigencies. When the price of gold soars because of domestic conflicts in the middle east, a currency that it backs will soar with it. Suddenly the dollar goes from being worth (say) 0,60 Euros to 1,20 Euros (I'm making the numbers up). That makes US exports prohibitively expensive, because US exporters have to produce their goods using US dollar inputs, but sell to people who are buying the products and services (or the dollars that they will use to acquire them) in their local currency. Who's going to buy an American car or take a holiday in the United States in those circumstances?

4) An economy deflates if the currency appreciates in value faster than the economy grows. Generally speaking it is not possible for any currency issuer to match the growth of its commodity standard to GDP growth. If the economy is growing faster than the ability to issue new currency, then the value of the currency rises. There are only two ways out of a deflationary spiral: currency devaluation or depression. Monetary policy suggests that it is better to manage that devaluation through new currency issues than by being forced into large scale devaluation through a threat to the current account.

5) You cannot exercise any control over interest rates. In a deflating economy, for investment markets to attract investment they have to offer a better return on investment than holding currency in specie. Accordingly interest rates and bond rates will rise by the margin between GDP growth and growth in commodity reserves. And that growth compounds with each year that you fail to keep up. (until, of course, devaluation or depression does the job for you).



The fed reports that figure weekly. It is there for anyone to see, and I found it in under 30 seconds. http://www.federalreserve.gov/releases/ ... tm#h41tab9

On Wednesday July 6, 2011, there was $990,861,000,000 in federal reserve notes in circulation. That was an increase of $5,073,000,000 from Wednesday, June 29, 2011 and an increase of $83,163,000,000 from Wednesday, July 7, 2010.



How many times do I have to say it? The federal reserve creates currency by buying T-bills. The public debt of the United States is not nothing. As any first-year law student can tell you, a promise to pay is good and valuable consideration, and it is enforcable.

When I buy a bond issued by GM I am not buying "nothing." So, too, when I buy a US government bond, I am not buying "nothing." The entire bond market in the US is worth in excess of $80 trillion dollars--all of which is "nothing" more than promises to pay on the part of the bond issuers.