aussie economy in full blown recession next year, page-19

Stolwyk,

You just dont get how Central Banks can act, will act and so act.

Lets assume we get a systemic shock that in a gold- or silver-backed currency, would create a classic nineteenth century panic. Say, 9/11 or something bigger than LTCM (dunno, lets say JP Morgan and Co is $80bn in the hole on doubled and re-doubled oil shorts).

If the massive mistake of having a gold-backed currency has been made, at this point we're f!cked, as the shock rolls thru the financial system and counterparties on transactions start to fail, so everyone gets jittery and stops dealing and calls cash in ... and it's a classic 19th century panic, like what crippled capitalist economies every twenty years or so, back when we used non-fiat currencies.

BTW, the amount of gold reserves you need to cover a leveraged financial system is so utterly stunning that it becomes part of the problem, as all the gold needs to be sitting in vaults, and there is no cash available at the market at any price (cf, say, Venice after the Alexandria convoys left).

Now, if it was just speculators losing their shirts, personally I wouldnt care. But it goes rapidly into the real economy, and people actually lose jobs, and then demagogues hit the streets and the risk of getting really unpleasant governments goes up.

With a fiat currency, you just cut a cheque from the Central Bank to cover about half of the losses, and recvoer the other half from a financial bailout (essentially, you send the boys around to everyone else, and refloat the comapny ... LTCM was a classic example. JP Morgan pioneered that technique, back in 1907 ... but he did it as a private citizen).

Hopefully, you then punish the people responsible for the losses, but the track record isnt great on this (although the Adelphia jail sentences are a good start).

Remember, good faith and credit are the core of an economy. Money is a mere convenience.

Ian Whitchurch

PS This isnt bad for a magazine-level overview of financial panics

http://thehistorybox.com/ny_city/panics/panics_article1a.htm

PPS Remember, without fiat currencies, the majority of us speculators would have seen one if not two panics. Compared to the good old days of gold, 1987 was a mere head cold in the body politic.