Commodity Reserve Currency

The majority of Americans disapprove of the job that Barack Obama is doing in handling the economy, according to the latest survey from NBC News and The Wall Street Journal. Backing their claims is evidence that Obama’s economic policies are leading to inflation that will soon add to the misery of high unemployment.

Source: The Wall Street Journal

During the course of the year, prices of commodities have followed a negative correlation with the value of the U.S. dollar (see figure; R2 = 0.69).  Obama’s so-called “stimulus,” consisting of flooding America’s economic engine with dollars, has led investors to use commodities as a store of value, one of the roles – in addition to a unit of account and a medium of exchange – defined by money.

With companies planning to raise prices, due to increasing costs for raw commodities, inflation will follow for Americans, of which nearly 10% are currently unemployed.

But all the money that Obama has flooded into the economy, now accumulated in savings with characteristically low interest rates, will add to inflationary pressures as Americans compete to store value in goods and services before the value of the dollar plummets any further.

Obama’s looming misery could have been avoided, had he made the economy a priority instead of wasting more than a year with unconstitutional legislation for health insurance reform.

If legislation were enacted to make the dollar a commodity reserve currency, the U.S. government would supply the economy with dollars in exchange for commodities that are then stored in warehouses.  As opposed to being on the sidelines during a period of inflation, the government meets increasing demand for commodities by selling the warehouse stores, thus making currency more scarce and valuable, by taking it out of the money supply, while making commodities more readily available and less expensive.

References

Milton Friedman, “Commodity-Reserve Currency,” The Journal of Political Economy, Vol. 59, No. 3 (June 1951).

F.A. Hayek, “A Commodity Reserve Currency,” The Economic Journal, June-September 1943.

N. Gregory Mankiw, Principles of Economics, Fifth Edition (Mason: Cernage Learning, 2009).

Advertisements

One thought on “Commodity Reserve Currency

  1. Pingback: Bricks « Ronald Grey

Comments are closed.