Reply #121: No it doesn't [View All]

[Nederland]

For the past 10 years, the Chinese economy has been growing at 8%-12% a year. In order to avoid deflation, their monetary supply has to grow by at least the same amount. Now if you have a fiat currency, that's not a problem--all you do is print more money. However, if your currency is on some type of gold standard, your gold reserves need to also grow at 8%-12% a year. This is true regardless of what value you fix the currency at. Whatever the exchange rate is, Chinese reserves would have to grow at a rate that is far larger than the rate at which new gold is being discovered.

Pegging to gold isn't like pegging to another currency. When the Chinese peg to the dollar, they are pegging to an item whose quantity (monetary supply) is being increased continually by the Federal Reserve. If you peg to gold, you are pegging to an item that has to be discovered and pulled out of the ground--and there is no guarantee that you can pull the stuff out of the ground at the same rate as your economy is growing at. In fact, given the incredible rate of growth in the Chinese economy, it is seriously doubtful that they could acquire enough gold to keep up.