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A physicist cogitates on solving the fiat currency problem

November 29th, 2008 No comments

Lubos Motl, a bright young Czech physicist with a winning way with those he considers idiots*, has decided to cogitate on fiat money and the US`s screwed up monetary system, and proposes to peg the dollar to the Dow:

You might think that I am going to defend the gold standard or something of this sort. Well, you are not infinitely far from the truth. But gold is obsolete, arbitrary, and dangerous. Someone can find a lot of gold in the future and we don’t want the world’s economy die at that moment. Gold doesn’t represent the overall economy – what people actually want to pay for – well. And if you think that all the commodities have fixed price ratios and only the “money” is fluctuating, note that the gold/silver price ratio has been oscillating frantically, by orders of magnitude in both directions. Pretty much everything can oscillate and does oscillate. 

The gold standard brings some advantages but now we have a more comprehensive framework to adjust the advantages: we want to suppress the most unstable and harmful degrees of freedom by redefining the money. There is one more general advantage of the gold: you know what you own. With money, you own pieces of paper whose value can be manipulated by arbitrary decisions of the government. And an uncertainty about the value of things – their ill-definedness – is creating havoc. The only reason why prices expressed in the fiat money don’t fluctuate wildly is that the other sellers don’t know any definition of the money, either. 😉 So we want to peg the money to something more well-defined: to redefine them. What is it? It’s the stocks.

I think Motl is hopelessly self-deceived on his proposal, but it`s one made in good faith and presents an opportunity to educate Motl and his audience on Austrian views of money, government and markets.  Any takers?

* Idiots of various stripes, but particularly envirofacist/commies, climate alarmists and yours truly; we have discussed Motl here in connection with Bret Stephens, my favorite befuddled neocon at the WSJ ).