What is the ideal Gold-Dollar peg price?

Forbes has piece by Louis Woodhill that argues for a $225/oz peg for the dollar.

I think that price is wrong for several reasons. It is way too low. The starting for any discussion about a dollar to gold ped is the current market price.

Currently, an ounce of gold will get you (in round numbers where I live):
- 350 gallons of gasoline
- 400 gallons of milk
- 1000 rides on the bus,
- 700 cups of coffee at Starbucks (Grande)
- 3 iPad2s 16 gigs, 3G
- 3 low end 1911 45acps (thinking Rock Island Armory GI version as an example)

Mind you, you have to exchange your ounce of gold to currency to make thos purchaces, but the fact remains, with an ounce of gold in your hand, you can command the above into your possession.

Institute a dollar gold peg at $225/oz, the relationship between an ounce of gold to what it can buy changes dramatically. I would need more than 2 ounces of gold to pick up a low end 45. The Fed would wind up selling all their gold at essentially garage sale liquidation prices.

L.W. bases his $225/oz price on changes in the consumer price index since we went off the gold standard. But He fails to take into account improvements in productivity over the years. All things being equal, had we been on a gold all along, we would have seen a slow reduction in prices due to improvements in productivity, similar to what we experience and take for granted with computers and electronic equipment.

So that argues for a higher gold price than $225/oz.

At the same time, I believe that the current gold price is somewhat forward looking, that it anticipates expansion of the money supply that is anticipated but not yet occurred. If you take that anticipated expansion off the table with concrete plans to return to a gold standard, the price should drop. People will prefer to hold gold denominated assets that pay a return rather than gold itself. That would put downward pressure on the gold price.

I would argue for a transition period where we find out what the natural gold price is. For example, you could set a date certain of a return to the gold standard with peg price being the previous 12 month moving average. I think something along those lines would stand the best chance of getting the gold peg price right.

Btw, the 10 gold coin in the picture contains about a 1/2 ounce of gold. Today a 1/2 oz American Eagle or 1/2 Kugerrand goes for about $800.

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Greece - A Lesson in Economic Reality

I have been following this situation in Greece with great interest since it first came out in the news some three years ago.

Greece has become the place where the economic fairy tales we were taught as college students collide with economic reality and dis. Not only that, it is the place where conventional wisdom is repeatedly proven wrong.

My sense is that the Euro is something of a socialist monetary scheme (as are all fiat moneys at the end of the day) that has come to function something like a gold standard. It is a socialist scheme in that the European Central Bank through the intermediary of European banks lends printed Euros to countries like Greece. This is socialist in nature because what the Greeks receive in the form of a loan in essence comes from the small reduction in value that occurs to all Euros in existence as a result of printing. Btw, when I say printing I don't necessarily mean physical printing, but the creation of Euros, mostly in electronic form, out of thin air by the ECB. This causes a slow erosion over the years of the value Euro over the years and this slow erosion of value is the tangible evidence of a hidden transfer of wealth from holders of Euros as a whole to the primary recipients ( and therefore the primary benificiaries) of the printed Euros.

These benificiaries are divided into two categories: a) the banks through whom the printed Euros flow purchase sovereign debt, and b) the parties that the governments in turn pay with their printed Euros: government works, pensioners and banks who receive the interest on the debt.

What this whole Euro crisis has come down to is a struggle between Germany who wants to limit the further printing of Euros and countries like France and Greece who want to print with abandon. All the hollering ahd foot stomping in Europe boils down basically to that.

That is why I have for a long time thought that first country to leave the Euro could very well be Germany, if the rest of the Euro zone over-rules Germany and goes ahead with some Euro-printing scheme. Euro-bonds are just one such scheme. Scheme where the ECB either directly or through the intermediary of regular banks purchase Euro-bonds with printed Euros.

The Euro has become a kind of gold standard to the limited extend that Europe has refused to purchase more Greek debt with printed money. Greece has been prevented from monetizing their debt. They have had to attract Euros into their country the old fashioned way: by trading for them.

We are being told daily that Greece is going to have to quit the Euro. Why? They don't want to quit the Euro. Opinion polls show strong support to stay on the Euro. People are pulling their money out of they banks. Why? Because they don't want their money converted in some surprise bank holiday to drachmas which everybody knows will quickly become worthless.

How do you kick a country off the Euro who doesn't want to leave it? You can stop lending to it, cease to funding their unsustainable socialist state. Ok. What happens then? My guess is the government will turn from downsizing and switch to Drachmas. This they will use to pay their employees and meet other obligations.

But what about the rest of the economy? Best I can tell, much of the economy has already gone underground, operating on cash to escape punishing confiscatory taxes. Those who have pulled out their Euros in cash will be insulated from the inevitable bank holiday where bank deposits within Greece are forceably converted to Drachmas. So I see a parallel cash based Euro based underground economy will continue. This economy will avoid much of the taxes and any taxes that are paid will be in increasingly worthless Drachmas.

This underground economy will have to function without the benefit of an in-country banking system because people will be very reluctant to deposit their Euros risk having them converted to Drachmas.

With the government back on drachmas, the underground economy will have to get back to basics and attract euros to Greece the old fashion way.

Sometimes, I think the best thing Greece could do is go to the Drachma. The sooner the better in fact. With the government carrying on business in a decreasingly worthless Drachma, it will become increasingly irrelevant. And the sooner the Greek government becomes irrelevant, the sooner the rest of Greek society can move on.

I think in a scenario like that, Greece can teach some elemental truths about economics like it taught us Democracy, like there is no such thing as a free lunch.