my connection with the tea party

[Jester]

It would need to be a composite index that correlated strongly to hedge inflation. The purpose of pegging the dollar to a standard is to protect savings from eroding. In a bad economy, a gold standard is more heavily influenced by passion and fear. That is what makes it unreliable as a standard. It's just morally wrong that the US is resolving it's debt problem by printing the money.

First off, I don't see how it's morally wrong. It's a business transaction, no different from any other. Lending money in sovereign currency leads to sovereign risk, and investors price that into their purchases. The market determines the price, and each investor decides for themselves if they want to take that risk. If they do, then they took their chances; caveat emptor.

Second, you don't need an index - indeed, I was having a dickens of a time figuring out how such a thing would work. But the solution is as I said - simply make the dollar exchangeable for the basket of commodities itself. Pete had it right, although presumably you would use fixed quantities of uranium, platinum, oil, etc... rather than a pack 'o smokes and some lottery tickets. Want to trade your dollars in? The fed gives you your picnic basket of metals and whatnot. It would make the dollar somewhat illiquid, since nobody wants to sell off a bunch of separate commodities after converting their dollars, but it would be slightly less vulnerable to gold shocks.

It's worth noting, however, that gold shocks are highly correlated with other commodity shocks. It's not like platinum, silver, chromium, etc... move independently of gold. For every bit of correlation, you lose some of the hedging benefit. Correlation is bad, not good - otherwise, why not just use gold itself?

However, I seriously doubt the benefits of such a currency overcome the severe downsides of being unable to print debt in your own sovereign currency, or the ability to make macroeconomic adjustments. Were the US dollar hooked up to a basket of commodities, debt deflation would have broken the backs of every debtor in the US during the 2008 crisis. Is that really what we want? I think it would have been a new great depression, with US states going the way of Ireland and Greece, and homeowners completely wrecked.

-Jester