my connection with the tea party

[kandrathe]

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.

Can I borrow $10000 from you then. I promise to pay you back in fertilizer eventually. The good news is that people will think twice about buying our debt, making it harder for us to deficit spend.

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.

The index would need to be broad enough to avoid commodities that have spikes. Yes, you are right about the correlation. You would want something stable that holds a steady value independently. Rare commodities do this since there is a limited supply. The biggest problem with gold was that due to people like Cecil Rhodes, it ended up being less rare than previously supposed. It is odd that you would be adamantly against the US returning, at least partially to a standard, since the EU, and many other nations still have a standard or a partial standard.

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.

I'm not sure we're out of the woods yet. It feels like the tension from 2008 has been coiled up and needs to be relieved or something will snap again. The mathematician in me wants the equations to balance, and I don't sense that it's happened. By printing money, the US is relieving some of that pressure, to the detriment of bond holders, and especially onerous for our relationships with our foreign bond holders with $4.5 billion (China, OPEC, Japan, UK, Canada, Brazil, Taiwan, Russia, Switzerland, etc). I suspect at some point when and if the economy turns around, that we will see an unprecedented period of inflation to account for the rapid increase in dollars flooded into the market. If inflation is the result of too many dollars chasing too few goods, then we have half that equation covered. All we need is a return to 2008 demand. Currently, if you look at manufacturing inventory and sales charts, you'll see they are at <50% of 2008 levels.

Here is a good chart on M3, and linkage to inflation. http://nowandfutures.com/key_stats.html

Since 2008, the total money supply has increased from $3.5 trillion to over $11 trillion. You must expect the price of goods and services to quadruple in response. But, accordingly, wages will follow as people cannot afford goods and services. It all depends on how much money they print though. They've screwed debt holders out of 2/3rds of their money, that must have repercussions for the lenders (perhaps bankruptcy) and their willingness to lend more money in the face of such an eroding value.

Then, you get to the *real* problem with this scenario. Poor grandma Mildred, who's now 75 and worked at the aircraft plant for 40 years sees her pension and savings value reduced by 75%, and Congress will be paralyzed to raise her Social Security and other entitlements back to the 2008 values. Caveat emptor indeed.