From: cmk@athena.mit.edu (Charles M Kozierok)
Subject: Re: Views? :
Organization: Massachusetts Institute of Technology
Date: Tue, 15 Dec 1992 05:19:01 GMT

In article <1992Dec14.232153.14601@samba.oit.unc.edu> bolden@beta.math.unc.edu (Jeffrey Bolden) writes:
>>>Because the price of oil is fixed to the US dollar it becomes very hard to
>>>bid the price up.  Think of this way.  Your a bank issuing a $5b in
>>>currency off your stock of 200m barrels of oil.  The price goes up to say
>>>$30/barrel.  You will buy up $5b in currency and sell your oil reserves. 
>>
>>to whom? what if they only want to pay $15 a barrel?
>
>Remember were definind the dollar in terms of oil.  It's like me trying to
>buy a $20 bill from you for three $5-bills.  It would simply be nonsense.

please refer to my other posts on the gold standard.
i don't want to repeat the argument yet again.
to summarize: if you define oil as $20 a barrel, and $20 buys X amount
of goods, then if i have oil and i can get 2X amount of goods somewhere
for my barrel of oil, then your dollar is only *worth* 50 cents, regardless
of what you say it is worth.

please respond to the other post. it is better explained there.

>>what if it costs me $5 a barrel to ship it to them? you think you can just fedex
>>a couple of million barrels of oil? 
>>
>>this is no trivial shot at your theory: ease of transfer is an *essential*
>>property of a successful exchange medium. why do you think they started
>>using paper money in the first place? because even carrying around gold is
>>too inconvenient. compared to dealing with oil, it is a joke!
>>
>
>Agreed.  But we have an easy way of transfering oil, there called
>commodity options.  And they're little pieces of paper (actual I've never
>seen one so maybe there big pieces of paper <g>).

pretty hard to call in your currency if you ever lose confidence --
which is part of the point. but i'll grant you some leeway there.

>>>The net effect being to either:
>>>1)  Force the person(s) driving up the price of oil to come up with more
>>>cash than is the entire US economy.
>>
>>baloney. there are other countries out there now. the US doesn't control
>>the world market like it did in the mid-20th century. this trend is only
>>going to continue.
>
>I explained in the banking section, why you couldn't drive up the price. 
>You have to effectly buy up all the US currency(backed in oil) to do it.

see my other post. a commodity-backed currency puts the control
of prices in the hands of those who have the commodity.

>>>>>4)  All of the above would lead much more stable oil prics ->  much more
>>>>>stable energy prices ->  better profits for industry.
>>>>
>>>>but don't you see the problem? let's suppose we say "from now on,
>>>>oil is worth $20 a barrel". if OPEC starts pumping oil and sells to
>>>>germany for DM30 per barrel, that sets our exchange rate at $1 = DM1.5.
>>>>if either OPEC or germany changes the price, they change our exchange rate.
>>>>we lose control over it. if OPEC floods the world with oil, our dollar
>>>>becomes worthless. if they shut off the pipes, our money supply disappears.
>>>
>>>OPEC only controls 35% of world oil exports at this time.
>>
>>that's more than enough to have a significant impact on our economy, IMO.
>>
>
>Yes and no.  See the paragraph belowfrom my previous message.

you're losing me. i don't understand.

>>>It is doubtful
>>>that with guananteed prices for oil (you can always "deposit" it in a US
>>>bank for $25 barrel) that this wouldn't fall to about 20%. 
>>
>>yeah, but now you're argument becomes circular. you get a
>>"guaranteed" $25, but what does that $25 mean? remember, you defined it
>>as a barrel of oil. nobody else has to accept that definition.
>>all the guarantee means is that you can exchange
>>your barrel of oil for whatever the rest of those people who accept
>>dollars say their product is worth in dollars.
>
>I am assuming only that people's faith in the dollar won't go down as a
>result of backing it in oil.  Are you honestly saying that it will?

no. i am saying that just because you say a barrel of oil is worth
$25, that doesn't mean it is. what does that $25 mean? it means
i can buy $25 worth of goods for my barrel of oil. if the real
value of oil increases, the price of every good that can be bought
with dollars has to increase. again, see my other post.

>>let's say you have oil and you want to buy widgets. let's say the
>>current price of widgets in the US is $5, for simplicity. therefore
>>a barrel of oil is worth five widgets. now let's suppose that in
>>denmark (to pick a random example), someone says "well, i don't
>>accept US dollars, but i'll give you *ten* widgets for your oil".
>>what does the seller care about our dollars then? replace "widget"
>>with a few important commodities and you will see my point.
>>
>
>Ok, but than all that's happened is this.
>original price of widgets = 5/barrel = $5 each.
>new price of widgets = 10/barrel = $2.50 each.
>The price of widgets has just gone down.  What's the problem?

:^)
if you can accept that, there's nothing to argue about...
that is called total lack of control over inflation or deflation
of prices. you want to run an economy like that?
i wouldn't.

>>the net effect is that we lose control of our currency. to be fair,
>>i have not yet heard a good answer to this question from the gold-backers
>>either.
>>
>
>How have we lost control of currency.  All we've lost control of is widgets.

come on Jeffrey! widgets = grains, meats, energy, metals, financial 
instruments, land, companies... need i go on?

>
>>>	So lets say OPEC floods the market.  And we buy their entire
>>>supply of oil (I think they havew 500b on hand currently).  So what? 
>>
>>all they say is "sorry, we don't accept US dollars, since you arbitarily
>>set their value relative to our product". then what?
>>
>
>Well I said.  They take dollars now, and do you really think faith in the
>dollar would go down?

i think if we circularly defined dollars = oil, they wouldn't accept
dollars. why should they?

>>>We've bought up like five years worth of oil at a reasonable price and
>>>industry will be very very happy.  Plus OPEC has to deliver it to us to
>>>claim the $25/barrel price.
>>
>>they have to do no such thing. they can sell to someone else. there's
>>no shortage of demand for oil with the US removed from the market.
>>
>
>They have to deliver the oil to us, to get the $25 in cash.  If they sell
>it to someone else, who cares?

if they sell it to someone else, you can't keep your currency backed...

>>>>note: the above argument would be true of gold as well. i'd like
>>>>to hear how those who support a gold standard would deal with this
>>>>problem. i realize off the bat that it wouldn't be as bad because gold
>>>>is not really controlled by any kind of a cartel, but the control issue
>>>>is still there.
>>>>
>>>
>>>No it's much worse for gold, because unlike oil if you get stuck with lots
>>>of gold their is nothing you can do with it but sit on it, and hope
>>>someone will trade you trillions is product for a metal whose primary
>>>value is that lots of people think it looks pretty.
>>
>>not true. people will always trade for gold. it has been that way for
>>thousands of years. if it is so "useless", why was it picked by almost
>>every civilization which had access to it to be their medium of exchange?
>>
>
>Name something in ancient civilizations, that was rare and valuable?  It's
>only recently (meaning the last 1000 years or so) that we've had anything
>other that precious metals that was rare and people wanted.  Why people
>starting wanting gold, I have no idea.

then you must concede that there must be something to it.
and again, does it matter? why?

>>the fact that it looks pretty (has other values too, of course) is a damn
>>good reason to use it. have you seen what "pretty paintings" sell for?
>>are they "useful"?
>>
>
>Actually that's a great analogy. For example the city of philadelphia was
>facing bankrupcy a few years back.  I don't know if you've seen the Phil.
>art Mueseum, but it's pretty big.  Down in the cataocombs of the Museum
>they have an enormous art collection (I would hazard about 4x as big as
>the one on display).  If it were so easy to dump "pretty pictures" than
>why not trade in the art museum for its cash value which has got to be in
>the billions.  
>	Simple cause in the end art isn't useful.  A country like Iran
>could dump 10s of billions of dollars worth oil on the market easily however.

irrelevant. it simply doesn't matter. somebody paid $90,000 for the ball
that went through Bill Buckner's legs in the 6th game of the world series
in 1986 (sorry for bringing it up, sox fans). do you think the guy
who got $90K cares that it was only a baseball?

>>a few more things too: what happens if someone sets your oil stocks on fire?
>>or they spill out into the ground? or they decompose? or an alternative
>>energy source is discovered?
>>--
>>charles
>
>	Crude oil doesn't burn.

you obviously haven't been to kuwait recently... :^)

>However remembr this is 1992 people will
>be trading commodity options for money not actual physical oil.  We won't
>have a fort knox full of billions and billions of barrels of oil.  Just a
>shelf full of options that get traded all the time.

yet again, see my other post. if you want to have a backed currency,
you have to have the oil to back the currency. you need that to
perform market intervention to keep the price of the commodity stable.
why do you think there was a fort knox in the first place? for
yosemite sam to tunnel into?

right now oil is worth $20 a barrel. gold is worth $350 an ounce.
these are free-market values, approximately.
now, a barrel is i believe 35 US gallons, which is about 130 litres.
that means a barrel will hold 130,000 cubic centimeters.

i don't know what the density of gold is, but let's just use 2.5 times
that of water as an approximation. since 130,000 cubic centimetres
would be 130,000 grams of water, it would be 325,000 grams of gold,
using the 2.5 times approximation. this is about 10,000 troy
ounces of gold. 

so one barrel of oil = $20
one barrel of gold = $3,500,000
if you wanted to back $10,000,000,000 in currency, which would
you like to keep around (and defend!)? 2800 "barrels" of gold?
or 500,000,000 barrels of oil? even if i'm off by an order
of magnitude, there's no comparison.

and remember: you also have to defend this stuff so no-one steals it
or tampers with it.
--
charles
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