One of the large arguments from supporters of the gold standard concerns the Chinese.
They often mention how threatening it is that the Chinese control much of our debt. I dont really see why that is threatening. I guess they are worried that they are going to lock it away and somehow regulate our supply of money. So basically why is having demand for our currency bad? Also, how would the gold standard fix that, they would still be buying the bonds and owning the debt. The only difference would be the nature of the debt.
The problem is not that there is demand for our currency, the problem is that there is a tipping point where other central banks as well as individuals may begin to dump their dollars all at once. The problem is not that it is China that holds so many dollars, but that no one will want to hold them once a panic starts. With a sudden surge of dollars dumped on the wolrd market you would likely see a hyperinflationary incident.
A gold standard, if strictly followed, would prevent government from inflating the currency and moving us towards that tipping point. The other forms of taxation are more readily apparent to the public and would almost certainly face greater opposition. Of course, it is useless to call upon the creature that benefits from inflation to reign it in and put controls on itself. But that is a story for another day.
Ok, but under what circumstances would this happen? I am guessing when you say panic you are talking about some panic within the US economy. But seeing how as long as we see demand for our goods & services, there would not be this problem. However, if peopel dumped the dollar for any arbitrary reason it would just create an incredibly mispriced currency for a short time, rather than an inflationary state.
It’s like a game of musical chairs. The panic occurs when the first few players start to grab a chair. The remaining players still standing realize that they’d better follow quick or be out of the game as there are far more players than there are chairs.
The fact is, that with the printing presses running full-steam since 1913, there are many times more dollars than all the wealth in the world. The value of your dollars is contingent upon other players not spending their dollars first. As such, the fiat currency is incredibly mis-priced (overvalued) right now and the panic occurs when this fact is revealed.
Although it suffers from all forms of government restraint, there is nothing inherently weak about the US economy. If individuals were allowed once again to engage in honest contracts (not subject to the redistributive lottery of fiat currency) and the liquidating of malivestments was permited, then real economic growth could finally resume and prosperity would abound.
The panic does not have to start in the US. If one central bank drops its dollars, this could be enough to get the next to drop, which might get the third to drop and so on. Demand for our goods and services is not the key here, because that is not going to take a drastic change. The drastic change is in the money supply. When a hyperinflationary incident starts, people are increasingly eager to dump their dollars and therefore prices begin to rise. The rise in prices increases at an ever increasing rate as people begin to anticipate further dolllar dumping and further price increases. Late in the incident, people are frantic to buy something, anything, they can hold onto and will drop buckets full of cash. I read about an incident in Europe where a woman, near the end of the hypeinflation, gave away everything she had saved in her currency to buy a few dozen bedpans. By the end of the incident, the currency is no longer accepted anywhere and has zero purchasing power.
The problem, then, is not that there is a temporary “mispricing”, the problem is that the currency itself dies and people lose their savings. This is the inevitable result of too much printing of money.