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Posted by Clinton on August 1, 2008, 12:39 am, in reply to "Outcome Reveals Intent"
We are not on the gold standard anymore, so paper money does not represent a sum of gold. You sound smart enough to already know that. Checks represent an amount of currency on hand in a particular depositer's account, but it's my understanding the every penny of a check must be on hand at the bank that is backing the check. The check cannot be written for amounts that do not exist. Money can be LOANED for money not stored by the bank, but a check cannot be written for money that does not exist (unless that check is cut for the purpose of transering *borrowed* money.
Say certificates of gold deposit (or checks, if you want) are lent out to people to purchase a home (a car is a better example since they lose value so rapidly, but let's use an example which is permeating the news presently). The holder of the coins gives the borrower a check representing the gold required to purchase the home. The lender wants 6% interest. The homeowner buys the home, but evenutally doesnt have the means to pay the interest, or even the original principle borrowed. In the process, the home has actually become worth less than what is was originally purchased for due to a poor housing market. So, the lender has less coins, and debt (home not worth what it was purchased for) where it once had gold coins. This is called default, and it's default of the worst kind because the lender doesnt even have an asset to trade for the gold he lent.
This is what is happening ad nauseaum right now in the news. The government is having to go in a bail these banks out (even though I say let them sink). In the US, we have already lost one huge lender. Two more massive ones almost sunk this week. Others might be on the way. Your scenario is not as simple as you act.
Also, money is just paper. True. Then again, gold is just metal and cannot be actually used for anything either (except really cool gold teeth and jewelry). So, the scarcity of geniune curreny floating around is part of what makes it worth something. The perception that it has value is no less relevant with curreny than it is with gold, although this is a seperate thread, I think.
Clinton
