jimmy
June 6, 2008, 6:40am
73
Erm… no it’s not. It’s a way of ensuring one of money’s most important characteristics - which is scarcity. If money is not backed by something inherently scarce then it in inherently flawed. I’ll re-post my original argument from above, since you don’t appear to have read this. If you can see any problems with this argument then I’d certainly be interested in hearing them:
jimmy:
Firstly, all money is of value precisely because you can trade it for something (goods and services)… so I see why some people might think/say a currency is implicitly backed by the GDP of the countries using it. However, this is not really the purpose of backing… the purpose of backing is to give some guarantee of the value of each money unit (e.g. we guarantee to give you $35 for an oz. of gold). However, the GDP of an economy says nothing whatsoever about their currency and whether this is being inflated or not (and thus whether it’s will hold it’s value or not). Nominal GDP ignores inflation and real GDP is inflation adjusted and so could be positive regardless of whether or not (and to what degree) each unit of the money in question was loosing value.
As such, it would seem to me that a currency who’s only “backing” is the GDP (i.e. the goods and services you can buy with that currency) is a currency that is completely unprotected against inflation and which is, in effect, not backed at all. As such, I’d say that trying to back a currency with the GDP is a retarded idea.