Monday, June 30, 2008

Op-Ed at RealClearMarkets - Oil Speculation

A more polished version of my post on Friday was published today on Real Clear Markets. It can be found here.

Friday, June 27, 2008

As American as Oil Speculation and Apple Pie

There has been a lot of accusations about speculators driving up the price of oil. This of course implies that a handful of people can manipulate prices outside of the laws of supply and demand. Perhaps it is also possible that the world is flat and the moon is made of cheese.

To explain why this is incorrect, let me use an analogy.

Aunt Ethel decides to open a booth at the county fair making her wonderful apple pies. Every pie costs her $2 to make so she decides to sell them for $2.50. Almost immediately, her pies are a hit. A line grows in front of her booth. Her sister Eileen is running the cash box and suggests to Ethel, who is making and baking the pies, that they raise the price to $3 since the pies are so popular. Ethel agrees and they raise the price. The line continues to grow. They raise the price again to $4 then to $5, yet the line continues to grow and customers are starting to get impatient.

Eileen, being the better businesswoman, then suggests to Ethel that they sell tickets that promise to deliver a pie later that day. This will shorten the line and limit the number of people standing and waiting for their pies to be finished. The line gets much shorter as Eileen sells the tickets and Ethel feverishly cranks out more and more pies. Ethel and Eileen are making plenty of money and everyone is happy. Well, except the lonely lady at the Dippin Dots who complains to the fair chairman of their “excessive profits”.

Now Jacob, runs the tilt-a-whirl and notices how many pies Ethel and Eileen are selling. He hears someone say, “Her pies are so good I would pay $10 for another.” Jacob gets an idea to buy the tickets and resell them later, at dinnertime, for a higher price. He’s going to speculate on the price of pies. He heads over to Ethel’s booth and starts buying up pie tickets. Then he starts selling them for $7, then $8, and then $10.

Other ride operators notice what Jacob is doing, so they get in on the gig as well, knowing that soon Ethel can’t possibly promise too many more pies. They start buying up the remaining tickets. Of course, Eileen is no fool. She raises the prices to $12, to $15, to $20, and all the way up to $25. The speculators keep buying the tickets, pouring more and more money into the apple pie market at the county fair.

Here’s the problem. What will happen if no one wants to buy the pies for $25? What if no one is willing to pay more than $10 for a pie? The pies are coming whether they want to eat them or not. People attending the fair have to buy the pies from the speculators or the speculators will be left holding a bunch of pies that nobody wants. Unless the speculators are complete idiots, they know this too. There is a chance that the price will crash because they have paid Ethel to produce way too many pies.

I could imagine that ride operators at the county fair might not be so wise, but to suggest that Wall Street analysts would be so foolish and not realize that this was possible is a stretch. If they bid up the price of oil much higher than refineries are willing to pay they will likely face catastrophic losses.

Even if they are this foolish this is good for the consumer in the long run. The price will eventually crash and oil will be cheaper than ever before. When prices are high, oil companies spend more and more money building oil rigs and pipelines, and they will find more and more oil. They are just like Ethel, churning out more and more pies. If the price plummets this new capacity doesn’t go away, because the costs are sunk costs. There will be a huge glut of oil for a long time. If the speculators are really driving up the price of oil, our current pain will soon be alleviated with years of cheap gasoline.

I am not so arrogant to believe that Wall Street is filled with a bunch of idiots who nevertheless studied much harder than I did in school, so I don’t believe that speculation is driving up the price of oil to begin with. Even if I’m wrong, it still is a good thing in the long run for consumers of gasoline because the price will soon plummet.

Leave the speculators alone. If they are right, they will make money. If they are wrong, they will lose money. Either way it doesn’t change what we have to pay at the pump. Just because Jacob bought a pie for $25, doesn’t mean that visitors to the fair will pay $25. Just because Jacob and speculators paid Ethel to bake 500 pies, doesn’t mean people want to eat 500 pies. When a speculator pays $140 a barrel for some oil months in advance, it doesn’t mean that refiners will pay $140 when that oil arrives. When speculators pay drillers to pump a trillion barrels of oil, it doesn’t mean that we will want a trillion barrels of oil. Supply and Demand still rule the retail market.

Wednesday, June 25, 2008

Is Texas Getting Screwed?

Of the many topics currently being debated in Congress virtually every position that the Democrats are pushing is bad for Texas. Here's a list.

Mortgage Bailout: The foreclosure rate in Texas has been flat and ever so slightly decreasing over the last 3 years, as included in my op-ed here. Home prices have not significantly declined, if at all. The bailout that just passed the Senate is for $300 Billion in loan guarantees. How much of this money will Texas get? Not likely much since we never had a housing bust. Now California with it's huge price declines and foreclosure rates that have surged over 300% will probably get the lion's share. This will be a huge redistribution of wealth out of our state.

Colombia FTA: Right behind New Orleans, the Port of Houston is likely to be the second largest beneficiary of increased free trade from Colomia from what I gather. Nancy Pelosi killed this one with a massive delay. Thanks for killing job opportunities in Houston, Nancy!

Cap and Trade: While I support the mechanism as a theoretical device, the cap being proposed by many will cripple manufacturers. Texas leads the nation in the growth of manufacturing jobs, with Houston being the largest center of those jobs in the country. We also tend to have heavier polluters because of the concentration of oil refineries. Texas will be disproportionately affected by the punitive limitations.

Windfall Profits Tax: With the overwhelming percentage of oil and gas companies headquartered in Texas, this is a direct assault on our state. Had it not failed, this would have been an enormous confiscation of profits, leading to fewer jobs and less investment capital.

Nationalizing the Oil Industry: I don't know if this is serious, but some House Democrats have expressed their support of this idea. This is grossly unconstitutional. Virtually every country on the planet is slowly denationalizing industry because they know from experience that the government can not efficiently run a business. This would cripple and atrophe an industry that employs tens of thousands of Texas.

Renegotiating NAFTA: There are thousands of companies that have set up shop in Texas because of our proximity to Mexico. They either sell to Mexico, buy from Mexico, or take advantage of cheaper labor in Mexico. Remember what the Smoot-Hawley act did for the U.S. right before the Great Depression? Wouldn't that be great for Texas?

Much of the same could probably be said for Oklahoma and Louisiana since their economies are dependent on much of the same industries.

Tuesday, June 24, 2008

Housing Crisis Beginning to End

New S&P Case-Shiller data came out today that shows that home price declines are starting to end. Two months ago all of the 21 metro areas tracked by the index experienced declines. Last month, their data showed that 2 metros had finally started to increase(Dallas and Charlotte). This month's release shows that 7 metros are beginning to rise. Only one metro that was previously falling, fell faster than the previous month (NYC). On the index, 19 of 21 showed slower losses or faster growth rates than the month before. However, certain parts of the country seem to have more room to fall. California, Arizona, Nevada, Florida, and Detroit.

I made some perilous predictions a few months ago. Here's how it has gone.

---------Predicted-------Since Prediction
Los Angeles.(-31%).................(-13%)
Las Vegas....(-28%).................(-15%)

All of these cities are still experiencing falling home prices, but Las Vegas and Washington look like they may be near their bottoms because their price declines have slowed.

Monday, June 23, 2008

Let's Be Like The French

...and Switzerland

Last week I attended a business conference in lovely Corpus Christi, Texas. Among the speakers was a gentleman named Dr. Selvoy M. Fillerup, MD. He has written a book called Chronic Crisis in which he analyzes health care systems around the world and reports what seems to work and what doesn't. I don't agree with him 100%, but I wouldn't be heartbroken if his suggestion were inacted in the United States.

What I did find interesting in his presentation was the revelation that the single-payer socialized medicine model of the UK and of Canada is actually quite rare. Much of Europe allows for extensive private insurance. The universal mandate is very common, but often it is only for limited coverage.

The percentage of population with Private Health Insurance for various industrialized countries:

(No private primary, just supplementary)

UK - 3.3%
Canada - 11%

(With Private primary)

Germany - 10%
Netherlands - 31%
Australia - 46%
Ireland - 49%
Japan - 60%
France - 86%
Switzerland - 99%

I'm not sure what America's percentage is exactly, but I have seen number in the range of 66% for the amount of health care expenditures paid by private insurance companies and individuals. The rest being from Medicare, Medicaid, and Veterans Administration.

It was the opinion of Dr. Fillerup that all of the countries in the (with Private Primary) list had superior health outcomes than the UK, Canada, and the United States. All countries with a single-payer socialized plan had very long lines. The U.S. is the rare exception that does not mandate that every citizen have insurance.

When asked, he had criticisms for both Hillary and Obama's health plans, saying they failed on 3 of 5 points he suggests. He made no comment on any of John McCain's positions. However, I talked with him afterwards and he did support my position of dropping the tax breaks for employer provided health care. I think McCain also supports this position, and proposes a tax credit for buying personal coverage.

Tuesday, June 17, 2008

Happy Father's Day

A few months ago I was involved in a conversation at a men’s bible study. We were discussing the handful of deepest fears and challenges that men face. Among these were:

The ability to defend oneself and one’s family from a burglar or attacker.
The ability to achieve in one’s career, keep a job, and take care of your family financially.
The ability to woo a woman or keep the attention of the one you are with.
The ability to stand up for what you believe in.

When the fourth one was mentioned I didn’t think that it was really one of the core fears, but several of the other guys seemed to agree that it was something they dealt with. For the next couple of weeks it was brought up a few more times and I was confused as to why they thought it was such a big deal.

It took me a while, but it finally dawned on me that this wasn’t a fear for me because I have always been outspoken about what I believe. In fact, I had to make it a habit later in college not to argue with every person who said something that I disagreed with. My outspokenness was not winning me very many friends.

As much as I would like to think that this was a level of bravery that I chose for myself there are a couple people in my family that should get much of the credit for modeling this behavior for me. Foremost is my father. While he and I disagree on some things he rarely, in my life, holds his tongue when it comes to what he believes in. It is sometimes good, sometimes bad, sometimes embarrassing, and sometimes funny, but you always know what he thinks about the issues. From my father I learned that there is no use in having an opinion if you’re not willing to defend it.

Secondly, is my Grandpa. He knows that I disagree with him on some things, but it doesn’t stop him from arguing his point. For better or for worse, he has held to a faith that has set him apart from most others. He has allowed his convictions to determine his lifestyle, instead of letting his lifestyle determine his convictions.

Not surprisingly, when the three of us get together the topic of conversation is almost always religion or politics. It probably drives my other relatives crazy, but I always find it fun.

To correspond with this recent Father’s Day I wanted to say thanks to my father and my grandfather for giving me such a strong legacy of conviction, that not defending my beliefs doesn’t really cross my mind.

Gasoline and Mexico

The Houston Chronicle has an article that adds some information to the policy I proposed a few months ago to exchange more visas and citizenships for liberalization of Mexico's oil industry.

The specific quotes I found interesting were:

"The kick is that the fuel is being refined in the United States and trucked across the border to Mexico, only to be sold at prices subsidized by the government..."

"So even while the nation still exports crude oil, it imports about 40 percent of its fuel."

Mexico, because it refuses to allow American investment in their oil industry, does not have the refining capability or technology to produce their own gasoline. This demand for gasoline likely drives up the price of gasoline in the U.S. My policy proposal would fix this.

Mexico's subsidization of gasoline also leads its citizens to consume more gasoline than if the price were allowed to float in the market. This decrease in consumption would lead to less consumption of gasoline from the United States. It would also decrease the demand on crude oil.

One way to lower gas prices is to offer Mexico incentives to allow American investment in their energy industry and drop their subsidization of gasoline. Offering more avenues of immigration can be this incentive.

Monday, June 16, 2008

Republican Party Convention of Texas

During Thursday and Friday of last week, I attended Texas' Republican Party Convention in Downtown Houston. I had a really good time. It is a rare event that I am surrounded by people who want to talk about politics.

I was able to listen to quite a few speakers, so I thought I would pass along my impressions.

Sen. Kay Bailey Hutchinson - She seems like a very sweet lady, but she is a terrible public speaker.

Sen. John Cornyn - I was more impressed with him than I have been in the past. He wasn't spectacular, but he seems to be quite smart.

Gov. Rick Perry - I know that he's not the most popular governor we've had, but I think he is consistently a good speaker. I also remember him just humiliating Sanchez back in the 2002 gubernatorial debates. He is a smart guy, and comes across well everytime I hear him.

Lt. Gov. David Dewhurst - Not a great speaker, but not bad. He was soundly booed when he mentioned his support for a national ID card. He seemed to get flustered by the response. Overall, not a good moment for him.

Former Speaker Newt Gingrich - He's good and insightful, but not very inspiring. I was disappointed by his populist dig against speculators driving up oil prices, which I think is bogus. He's fun to listen to though. His humor avoided the cheeky one liners everyone used.

Fmr. Gov. Mike Huckabee - Absolutely superb. I did not, and will not, vote for him for a number of reasons, but I found what he had to say very compelling. He avoided economic topics, which is good because he doesn't have a clue. He's funny and charming. Odd how 20 years in the pulpit helps someone become a good communicator.

Michael Williams, Texas Railroad Commissioner - Very good! He came across knowing much more than I do about the economics of energy, which is unprecedented in any politician that I have ever heard. Funny, engaging, and persuasive. I hope that he runs for the Senate in 2010 to replace the retiring Hutchinson. The crowd loved him.

There were other speakers from Texas, but none of them rose much above mediocre.

Wednesday, June 11, 2008

My Rebellion

Over the last few months, my wife and I have decided that we are going to home school our children. We are doing this for some of the same reasons that others are doing it, but our focus is different.

In the end, my children will annihilate most of their public school counterparts both socially and academically. This is not necessarily our goal, but it is simply stating the way it will be. In addition to the path that they choose, they will be extraordinarily well learned on the virtues of freedom both externally, through the study of history and free market economics, and internally, through philosophies that lead to freedom from sin.

Why Are Public Schools Inherently Inferior?

We believe that public schooling, run by a government monopoly, has proved to be so endemically miserable because the system inherently cannot escape failure.

Reason 1) A public school system is a large public bureaucracy and suffers from a principal-agent problem (no pun intended). School managers cannot actively observe the behavior of individual teachers. The teacher’s prerogatives, as virtuous as they may seem, are not going to align perfectly with the prerogatives of management and parents. Thus, states and districts create curriculum and measurement that applies to all teachers in an attempt to curtail inferior or aberrant teaching.

The curriculum binds teachers to present information to students that will not match the interests or passions of every child. The more uniform the curriculum and the more diverse the population of students, the less likely that any individual child will be engaged to learn. The curriculum will approximate the values of the dominant political class in the region creating the curriculum. It will serve only the students who most embrace those values. Students who differ from the ideal will receive an inferior education. Many students will receive instruction that is impertinent and impersonal. Thus, the public school monopoly fails many students.

Any measurement of success used by schools will inherently distort the behavior of managers and teachers to maximize the methods that lead to measured success. Much as we have seen through by the No Child Left Behind act, which is amongst many failed measurement techniques, teachers focus on certain subjects at the expense of others. Measurements based on minimum standards will lead educators to focus on improving those students below the minimum standards at the expense of those who are already above them. The bad incentives brought by measurement yield an incomplete education to every student.

Reason 2) A public school system groups children with varying levels of expectations. These expectations reveal themselves in the behaviors of students. These behaviors model inconsistent values. Modeling of these behaviors (peer pressure) will push all students towards mediocrity. This mediocrity dulls the genius of the most academically focused students, and slows the progress of human ingenuity overall. An educational system that leads to mediocrity leads to a society of mediocrity.

Reason 3) A public school system, because of the separation of church and state and other requirements of pluralism cannot offer purpose in education. A public school system can only offer bland and inoffensive materials in political, economic, religious, and literature. It is a system that squelches minority opinions. The lack of purpose leads to the oft repeated tautologies “It just is”, “You’ll need to know this in the real world”, and “It will get you ready for next year” in response to students who question the importance of pieces of curriculum. Older children learn less because they do not see a purpose to what they are learning. They see less purpose because a public school system is limited from imbuing purpose to maintain political harmony. They see less purpose because the bland purposes that public school systems are allowed to imbue are highly unlikely to match the values of many students.

Why is Home Schooling Inherently Superior?

Reason 1) Home Schooling can teach with purpose. The direction that home schooling education takes can be guided by the purpose the child finds most appealing. In early years the child will need direction and a purpose imposed on them, but as they discover their talents and interests they can be supported in those endeavors without the choking limitations of public schools.

Reason 2) Home Schooling greatly reduces the predatory behavior of social competition. A home school student will not waste his or her faculties worrying about their clothes, hair, skin, makeup, car, or other measure of status during their education. They are free to dedicate their faculties to things that will actually matter in adulthood. In my home, they will not be exposed to the peer pressure of low expectations, or inculcated with the “virtues” of anti-social behavior.

Reason 3) Home Schooling is less restricted by the pragmatic realities of a larger public school. A home school environment is not bound by bells, bus rides, bathroom breaks, calendars, report card cycles, or curriculum. It is not bound to a classroom, a couple field trips to local museums, and a simple playground. Home School students can make use of the wasted time of a public school with more learning or more playing. Home School is not bound by geography and can take children to experience what their public school counterparts will only read about.

Reason 4) Home Schooling does not suffer from a principal-agent problem because the principal and the agent are the same person.

Aren’t you limiting your children by only offering a Christian viewpoint?

No, because we won’t only be offering a Christian viewpoint. No, because you do not understand that sin is a burden, and that the optimal life is found by throwing off its shackles. No, because my children will not be so dulled by a mediocre educational system that they will not have the brainpower to question their own beliefs.

Thursday, June 5, 2008

Report from the International Oil Price Fixing Convention

This past week the 41st annual International Oil Price Fixing Convention was held in Houston. While in the past it has been located at an undisclosed location within the underground convention center complex in Geneva, Switzerland, the price of airfares became prohibitive. Because every major oil company in the U.S. and Western Europe has major operations in Houston, it seemed only appropriate to host it within easy driving distances of most of the attendees. The price was steep, but I was able to negotiate a pro-rated price with Sherry, the receptionist, since I was only going to attend the Saturday portion of the convention.

The first presentation was from the Italian economist Giovanni Illuminati who gave a devastating epistemological deconstruction of theories posited by Nobel Laureate John Forbes Nash and the accepted solution to Prisoner’s Dilemma. He revealed that, in fact, a long-term international cabal to manipulate prices was not only feasible, but because class determines one’s form of logic, massive conspiracies are inevitable.

The second presentation was from the Disinformation Section President. One of the more impressive accomplishments of this group was their ability to hack into California Congresswoman Maxine Waters’ word-a-day e-mail subscription and remove the word “Nationalize”. The direct effect of these efforts can be seen in this video here

Text from the video:

Waters responded, in part, "And guess what this liberal would be all about. This liberal will be about socializing … uh, um. …"

The congresswoman paused to collect her thoughts.

"Would be about, basically, taking over, and the government running all of your companies. …"

The Disinformation Section President also clued us in on Operation Truth in Plain Sight. Because Rep. Ron Paul’s candidacy for President has led him to be much more visible, and being the only person in Congress who understands that the weak dollar is a main driver of oil prices, he needed to be marginalized. The organization has funneled well over $1.2 million dollars of campaign donations from a laundry list of cranks and crackpots. They have also fed news stories to dim journalists to create a heuristic halo of crazy around the good Congressman from Texas. The Section President extended his thanks to the good people of the Wall Street Banking conspiracy for their assistance in these efforts.

During the question and answer session, a young gentleman asked some questions on how U.S. companies can continue to maintain a worldwide collusion over the price of oil. The Section President answered that through the assistance of consultants from TMZ and People Magazine we have been able to blackmail a number of world leaders to toe the line. Apparently, Vladmir Putin has an obsession with Rocky IV, Red Dawn, and Molly Ringwald, which would not bode well for his nationalistic credentials. As for a number of Arab Sheiks, what happens in Dubai, unlike Vegas, does not stay in Dubai. The student then pressed for any new hopes of controlling Hugo Chavez’s behavior. The Section President stated relations have remained tense with him for some time. Some progress was thought possible after Big Oil convinced the Houston Rockets to return their colors to Chavez’s favorite red. (Hugo was in agreement with many local fans that the unsightly navy blue uniforms cost them at least two championships.) However, he considered the Chinese influence on the logo font was in his words, “A slap in the face to the people of Venezuela.”

The next speaker of the Saturday convention meetings was Jim Kazlinsky. Around two years ago, ExxonMobil’s CEO and Convention Chair Rex Tillerson was surfing the internet only to stumble upon a banner ad that guaranteed a 78% return over 9-months. Eventually he was able to track down Mr. Kazlinsky and his former college roommate who had set up E-trade and Forex accounts on their home computers after finally passing their Series 6 exams. Both men had apparently won several stock picking contests amongst their friends in college. Mr. Kazlinsky, through the aid of several charts and some pretty sweet youtube videos explained to us that Eugene Fama’s Efficient Market Hypothesis was totally wrong. One chart revealed that oil prices had been going up for several years now and that if we had only bought a series of call options we could have made a profit of no less than 3500%. It was through his iconoclastic presentation two years ago that the Exorbitant Profits Council was able to spread the word that speculation in the market was a guarantee of profits and also a way to lift oil prices into the stratosphere. Mr. Kazlinsky continued his presentation by comparing the rise in the price of oil to the beanie baby bubble of the mid 1990s. Using a highly technical linear approximation technique he referred to as “eye-balling” we can predict that oil prices will plunge beginning late this year.

After Mr. Kazlinsky left the stage, Chairperson Tillerson had some ominous accusations as well. Someone, possibly in the room at that moment, had leaked information on oil price speculation to the Daily Kos website. What had been a highly profitable, low cost collusion had now prompted Congressional hearings and significant patronage would now have to be paid.

The last presentation of the evening was a forward look into the future. The Propaganda Section had already created a number of videos of “Average Americans” who had been wiped out by investing their hard earn money in oil futures and under cut by evil short sellers. A draft bailout of oil future investors hurt by the oil bust has been drafted. It was their expectation that no less than 90% of the bailout money would go to corporations secretly owned by Big Oil.

After the presentations, we had a great dinner. The party lasted well into the night. Royal Dutch Shell’s CEO Jeroen van der Veer got a little soused and forced a clearly uncomfortable James Mulva (ConocoPhillips) up on stage to sing a few Hank Williams karaoke songs. Till next year.

Wednesday, June 4, 2008

Capitalism Does Not Cause Income Inequality

An interesting article in the British newspaper, The Financial Times.

Some excerpts:

"But the belief that market liberalisation increases social inequalities is not borne out by the evidence. The UK certainly has higher levels of poverty and inequality than France or Germany. But pointing this out is just selective use of evidence to support a predetermined conclusion. If there were a strong correlation between levels of market liberalisation and social outcomes, one would expect to see the pattern replicated across the European Union - not just in a carefully selected group of countries."

"The nation with the lowest levels of poverty and income inequality in the EU, as well as the lowest rate of long-term unemployment, is Denmark - a country with competitive product markets and some of the least restrictive labour laws. Countries with the worst social outcomes (Greece, Italy and Portugal) all have restrictive product and labour market laws. Liberalisation, it seems, no more threatens social justice than regulation guarantees it."


"The reason the Nordics and the Dutch have the most egalitarian outcomes is that they provide the best education. The correlation between educational and social outcomes across the EU is striking. People with low levels of attainment at secondary education are most exposed to the risk of poverty. Moreover, the more educated people are, the more likely they are to be in work: the employment rate for Europeans with tertiary education is 80 per cent, whereas it is just 50 per cent for those who fail to complete their secondary education."


"In short, inequality in the UK seems to have more to do with high drop-out rates from upper secondary education than with the country's privatised rail system, liberal labour laws or levels of social transfers. If this analysis is correct, it suggests that the British government faces an uphill task trying to reduce inequalities through the tax and benefits system. It also suggests that countries in which drop-out rates are high are the most exposed to increases in income inequality resulting from globalisation and technological change."


"The European countries most at risk of rising social inequalities are those with underperforming education systems."

So if school choice lowers the drop out rate, which I believe it does, then income inequality will decline. Interesting how a free market system accomplishes the goals of socialism better than socialism.

Tuesday, June 3, 2008

Explaining the Gold Standard

During the Republican primaries, Rep. Ron Paul talked at length about the need to return to the Gold Standard. Steve Forbes, former Republican Candidate for President and publisher of Forbes Magazine has mentioned recently his desire to return to the Gold Standard. What exactly is the Gold Standard and what are its advantages?

From what I have read, there are generally two definitions of a gold standard. Most people think of the gold standard being when the currency is backed by gold. That is, every dollar bill is effectively a voucher for gold. If you desired, you could go down to the Federal Reserve Bank nearest you and exchange your dollar for some amount of gold printed on the bill. This is the 100% reserve gold standard. Every dollar promises to be exchangeable for a certain amount of gold, and the government would have on hand, that amount of gold. This is the kind of gold standard supported by Ron Paul, although he supports this through privately printed currencies, which I will not go into now.

Another kind of gold standard is merely pegging the dollar to a certain price of gold. Currently the price of gold is around $880. If we pegged the dollar to $880/oz., the Federal Reserve would simply print or destroy dollars until the price of gold moved back towards the pegged price of $880/oz. If the price of gold went up to $900/oz. this would imply that there too many dollars out there. The Federal Reserve would print fewer dollars and start destroying older ones. If the price of gold went down to $860/oz. this would imply that there are too few dollars. At that point, the Fed would start printing dollars to move the price back up. Under a dollar pegged to gold, the government does not actually have to hold any gold.

The downside to the 100% reserve gold standard is holding the enormous amount of gold and trying to set the value of the dollar. There is an enormous amount of currency in the United States and we do not currently have enough gold to back all of it. The adjustment period between our current system and this system could be traumatic, as prices would swing significantly. However, under a dollar pegged to gold, this is not a problem. As long as the dollar is pegged at a price of gold near its current price, the transition should be a seamless one.

Why a Gold Standard?

Recently, the dollar has been losing an immense amount of value. A number of economists (but I would not say the majority) believe that most of the rise in the price of oil and other commodities is because of a weak dollar. When the dollar is weak, it buys fewer imported foreign goods. Most oil has to be imported, thus the rising price. The dollar loses value when the Federal Reserve increases our money supply faster than other countries. I feel that this likely explains about half of the rise in oil prices, but that is just a gut feeling.

The amount of gold in the world is slowly increasing, and no new massive supplies are expected to be found. Because the supply of gold is stable, pegging the value of the dollar to gold would generally lead to a stable supply of money. A stable supply of money would mean little inflation and less risk for investments. More certainty leads to a better allocation of resources and more economic growth.

A Gold Standard prevents the Federal Reserve from arbitrarily creating new money. Congress has given the Fed authority to fight inflation, maximize employment, and smooth out economic panics. It needs to be pointed out that the Fed only tries to do this, and often does not succeed. In my opinion, the Fed makes far too many mistakes, not out of incompetence, but from the impossibility of herding the financial behavior of 300 million Americans.

Historically, while the U.S. was under a Gold Standard, interest rates stayed low and long-term inflation was virtually non-existent. Some economists do not like a dollar peg for the sole reason that it limits the government’s ability to “fix” the economy. I find little proof that they are very adept at this.

I am still learning and reading on this topic, but I feel comfortable stating that I support pegging the dollar to a certain price of gold. In recent years, the Fed has caused a number of problems by trying to do too many things. Discipline and stability need to be reestablished, and a gold standard pegging the dollar to a certain price of gold would be a great help.