Finance and Investing
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Apparently, stocks have fallen since the dot-com bubble when measured in gold instead of dollars: https://x.com/elerianm/status/1976237139185574170
Some comments suggest measuring stocks in gold is arbitrary, others say this development is simply due to inflation.
Are they right or is this development a deeper sign that the economy is in trouble?
Measuring the stock market in fiat is more arbitrary than measuring it in gold.
A short video relating to that:
Wiener’s critique of the dollar applies to gold, too. Both fluctuate. I see no rational preference for gold following from his argument.
The value of gold is anchored, see #4155. The dollar has no such anchor.
But gold isn’t fiat. The government can’t create more gold out of thin air.
I don’t see how it matters for his argument. The value of anything fluctuates.
Wiener says the dollar can go up or down in value (usually down; prices usually rise).
He suggests that, due to this volatility, measuring the value of something in dollars is like measuring the width of a physical object using a rubber band. He implies that this measurement is unreliable and arbitrary because you can ‘stretch’ it just like a rubber band.
He concludes that we should measure the value of something in ounces of gold instead.
Am I understanding Wiener correctly?
I think it would be arbitrary to measure the value in any unit that you aren’t hoping to trade your asset for.
For example, if you eventually want to get gold in exchange for your asset, measure the number of ounces your asset is worth and sell at an opportune time.
If you want to get dollars, measure your asset in dollars. Etc.
Thinking in terms of gold is less arbitrary than thinking in dollars because gold is anchored in physical reality, whereas the dollar is anchored in political decree. When you choose to measure your wealth in a unit just because you want to trade for it later, you are prioritising the convenience of a transaction over the integrity of the measurement.
Measurement requires a constant. If you measure a table with a rubber band, the "length" of the table changes depending on how hard you pull the band. The US dollar is that rubber band. Its supply and value are subject to the whims of central bankers, interest rate policies, and the shifting needs of government deficit spending. Gold, however, is a physical element with a high stock-to-flow ratio. Its total supply grows at a very slow, predictable rate that no person can speed up by decree. Measuring in gold allows you to see the real change in an asset's value, independent of the currency’s volatility.
Gold's value is anchored by the arbitrage of mining. If the value of gold rises significantly, it becomes profitable to mine more, which eventually brings the value back into equilibrium with the cost of production. This creates a feedback loop rooted in physics, economics and labour. The dollar has no such anchor; the cost to "produce" a trillion dollars is the same as the cost to produce one dollar: a few keystrokes. Using a unit that costs nothing to create to measure things that require real work is an arbitrary standard.
But if you decided, despite the dollar’s shortcomings, that you want to trade an asset for dollars, you wouldn’t measure your asset in ounces of gold. You’d measure it in dollars, wouldn’t you?
Or are you saying one should never trade assets for dollars?
What asset you measure in and what asset you trade for don't necessarily need to be related.
There is nothing wrong with trading goods for dollars. This is more an argument against measuring the changing value of assets across time in dollars.
What asset you measure in and what asset you trade for don't necessarily need to be related.
What are some cases where they wouldn’t be related?
I don’t see how one could determine a good time to sell an asset without knowing what it’s worth in one’s target asset.
Let’s say you wanted to know if your house was gaining or losing value over time. You can do a calculation using historical gold price records to see how many gold ounces the house cost you (opportunity cost), and how many gold ounces the house is worth now.
This doesn’t mean that if you eventually go to sell it you will only accept gold ounces. You might be happy with dollars because you plan to use the dollars to buy another house.
The point is that you are thinking about the value of things in units of gold, rather than units of dollars.