Scroll down the comments of any financial article posted on Yahoo Finance and you’ll read predictions of impending economic disaster. These comments can be downright scary to anyone reading them, no matter how deep their economic knowledge. I have to admit, after a comment reading session on Yahoo Finance, I am ready to sell all the stocks I own to invest my money in canned goods and ammunition. Not precisely! but… It makes me think! So instead of taking a position based on what I heard or read, I decided to do exactly that… I decided to think!

One of the most discussed topics related to the economy is the ever increasing money supply. Economists such as Ron Paul and Peter Schiff argue that by increasing the money supply, the government indirectly taxes the people. This argument makes a lot of sense. The first lesson taught in any economics class is that as the supply of something increases, the value decreases. This is one of the reasons why the value of the US dollar has declined so much over the last decade. I remember back in 2002 when I was stationed in Okinawa, I could buy 120 yen for $1.00. Today $1 will only buy 74 yen. Now, there are other factors, like inflation, that need to be taken into account to find the actual exchange rate, but right now I’m sitting at a bar on the beach in Destin, FL. so I’m not going to get out my calculator and start drawing graphs.

The objective of this article is not to arrive at a conclusive decision, but to present the questions that I have about the money supply; so here they are. If we were to go back to the gold standard, how much gold would the dollar have to back? How would foreign currencies be affected? Would they also have to switch to the gold standard? With the economy becoming more global by the day, would it really be beneficial to switch to the gold standard? What about the money supply? According to many pessimistic economists, printing money is bad. The question I have is about population growth? Shouldn’t the money supply grow at the same rate as the population? If we don’t increase the money supply at or above the population rate, wouldn’t we experience deflation? Of course we would!

Suppose there are 10 people in an economy and there are 10 dollars, then this would equal one dollar per person. Now suppose these 10 people made some babies who grew up and had babies of their own. Now there would be, say, 25 people in the economy but only $10. In this new economy with no increase in the money supply, there would only be 40 cents per person. These people would still need basic necessities to survive, but they would have less money to buy their basic necessities. What would happen? What would happen is that the dollar would strengthen and prices would fall. This is deflation. Isn’t deflation bad? If prices are falling, consumers are less willing to spend because their dollar is getting stronger by the day. Why spend a dollar today if you could buy more with the same dollar tomorrow?

Consumers would also be less willing to borrow. Why would they want to borrow only to pay the bank back with a stronger dollar later? Also, with deflationary pressure, employers would have to cut wages. People, who are the most important component of an economy, would not react well to a pay cut; So why the economy? Is this what would happen in the real economy if we stopped increasing the money supply and backed it with gold? Okay, so we can back the dollar with gold and increase the money supply at the rate of population growth. Is this the answer? One thing I know for sure is that there would be thousands of new jobs in the gold mining industry.

For every dollar printed there would have to be an equal amount of gold mined. Now that I’m writing this, I’m starting to wonder… What is the real value of gold anyway? I can’t eat it. It’s not good for clothes. Maybe we should back the dollar with water. So everyone would be living on the coast, right?

Like I said, the goal of this article was not to come to a conclusive position, but simply to present the questions that come to mind when I’m in the mood to think. I agree with a lot of what Peter Schiff and Ron Paul have to say, but I also agree with their counterparts like Paul Krugman and dare I say Ben Bernanke. I guess I’ll try to make as much money as possible in the economy I’m exposed to and hope the economy strikes a fair balance no matter what decisions are made.