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Why is the Gold Standard Urgent?
by Keith Weiner
After President Nixon’s gold default in 1971, many people advocated a return to the gold standard. One argument has been repeated: consumer prices are rising. While this is true, it wasn’t compelling in the 1970’s and it certainly doesn’t fire people up today. Rising prices—what most people think of as inflation—is a dead-end, politically. People care about rising prices, but not that much.
There is a greater danger to fixating on this one argument. What if you make a really bad prediction? The Fed did massively increase the money supply in response to the crisis of 2008. Many gold advocates predicted skyrocketing prices—even hyperinflation. Obviously, this has failed to materialize so far.
Preachers of imminent dollar collapse have lost credibility. Worse yet, they have poisoned the well. People who were once receptive to the benefits of gold have lost interest (their selling has exacerbated and extended the falling gold price trend). And why shouldn’t they walk away? They can see that some Armageddon peddlers have a conflict of interest, as they are also gold and silver bullion dealers.
The gold standard has nothing to do with buying gold in the hopes that its price will go up. It has little to do with the price of anything—gold or consumer goods.
There’s no doubt that the fiat dollar harms us in many ways. However, the chronic rise of prices is the least of the wounds it inflicts. If prices could rise for a hundred years, then there’s no reason they couldn’t go on rising for another century—or a millennium. There is no finite endpoint for rising prices.
There is a finite limit to the abuse of credit, before the dollar will fail.
The interest rate is a prime driver of systemic failure. Interest has been falling for 33 years, since its peak in 1981. What happens when it hits zero? I don’t refer to the Fed funds rate, discount rate, or any short-term rate. I mean the 10-year bond or even the 30-year bond. In the U.S., the 10-year bond pays 2.3%. In Germany, it has already fallen to 0.91% (not a typo, 91 basis points). In Japan, it’s close to half of that, at 0.5%.
Naturally, the cheaper the rate, the more it encourages borrowing. When the rate keeps falling, the borrowing keeps rising. Is there a failure point for debt?
Along with encouraging borrowing, low and falling interest discourages savings. Isn’t that perverse, to discourage saving? What happens when an entire society doesn’t save?
Our financial system has suffered an escalating series of crises. Each crisis has grown out of the fix applied to the previous one.
The crisis of 2008 was different. No matter what the Fed has attempted, they have not been able to create even the temporary appearance of recovery (other than in asset prices). It’s not merely that growth will be slow, or slower than it should be in some theoretical ideal economic world.
There will be no recovery while our monetary cancer rages, unchecked. We must rediscover the gold standard, which is the only cure.
Our ancient ancestors adopted money to enable them to coordinate their productive activities in their economies. They could only go so far using barter, but money made possible the division of labor and hence specialization. Lubricated by money, there is no limit to economic growth and the development of wondrous products. For example, today we have access to the Internet on a thin handheld device.
The dollar still does perform this function, which is why it hasn’t collapsed yet. However, it is slowly failing. It is increasingly imposing perverse incentives. The dollar is hurting us by encouraging us to destroy precious capital in numerous ways.
The Gold Standard Institute is sponsoring an event in New York City on November 1. I will be speaking about the destruction being wrought by the dollar, including a detailed discussion of the problems mentioned above. I will also propose a practical transition path to the gold standard.
You are cordially invited to join us for a presentation of ideas you won’t get anywhere else. Here is the link to the conference page and registration.
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How would you return to a gold standard?
Would the price of gold be modified to reflect the money supply at the time of gold standard resumption?
If this is the case, what money supply standard would you use? M1, M3?
If you use any standard other than M3, then there will be a MASSIVE contraction in money supply.
Less money is deflationary. The word "deflation" is spelled P-A-I-N.
Not only will people lose their jobs, they will starve and die.
So, let's say the gold standard is pegged at M3. Right now the ratio between gold and M3 is around 9:1. So, in order to make the transition, gold prices should be pegged at about 10X the curent price, or roughly 12,000/oz. This way, everyone can turn in a dollar for gold, although one dollar's worth of gold at 12 G's an oz would be extremely small.
The whole point of having a gold standard is to keep the money supply stable. But how does one do that when banks can create money, NOT BACKED BY GOLD, out of thin air through the fractional reserve banking system? In other words, how does one control the supply of money, which is the object of a gold standard?
In the day, when money WAS gold and silver, it was easy. A "bank note" was just that, a promissory note printed by a private bank. If someone gave me a note I didn't recognize, or that I had heard had no backing, I would either say I didn't want it, or that i wanted more of them, relative to gold money.
"Bank of Kirtland... Nahh, I heard this outfit was not stable. I won't take these for my corn," I'd say. Or, I'd say, "I'll take ten of these to the dollar, "cause I think this bank is risky." Then everything balances out.
But a gold standard without real gold money is trickier. In such a case, all the notes look the same, but no-one knows what they are worth, (foreign exchange is the only means of price discovery, and that is opaque at best) even though the government says they are worth 1/12,000th of an ounce. Because of promiscuous credit by banks, the actual money supply may be several times more than what the gold value is. In other words, a dollar may not be worth 1/12,000th of an oz of gold. It may only be worth 1/30,000th of an oz of gold, because banks loan money as "dollars", without any backing by anything.
This expansion and contraction of the money supply by banks is the cause of inflation and deflation, as Thomas Jefferson pointed out. This happens even when there is a gold standard.
I think the only way to solve this problem is to create a bourse where bank notes are allowed to circulate as cash independently of federal money. In fact, banks should be forbidden to make loans in government dollars. They should only be allowed to make loans in their own scrip. Then, on the bourse, that scrip can be valued on the open market. Individuals can make a living buying and selling bank scrip, just like they do buying and selling foreign currency. This way, the actual federal money supply remains stable and a consistent measure of value. This is the only way a gold standard will make sense and be relevant.
You don't need a gold standard, but you do need to eliminate the FED and fractional reserve banking. Basically, you need to do what the Nazis did in regard to a monetary system, but, if you don't like that model (you should), try the policies of the American Monetary Institute which resemble the former closely...without of course admitting this.
http://www.monetary.org/
Good well-reasoned article, with a logic failure and leap to an unsupported conclusion at the end.
Weiner writes:
"When the rate keeps falling, the borrowing keeps rising. Is there a failure point for debt?
"... What happens when an entire society doesn’t save?
"Our financial system has suffered an escalating series of crises. Each crisis has grown out of the fix applied to the previous one.
"The crisis of 2008 was different. No matter what the Fed has attempted, they have not been able to create even the temporary appearance of recovery (other than in asset prices). It’s not merely that growth will be slow, or slower than it should be in some theoretical ideal economic world.
"There will be no recovery while our monetary cancer rages, unchecked...."
Well put. Very well put. But then Weiner jumps to:
"We must rediscover the gold standard, which is the only cure."
Not so clear. I know, there are theoretical arguments that this should work, but what does the historical record show?
The founding of the Fed was not just simply a criminal conspiracy. It took place near the end of the 30-year depression that began in the 1880's, an economic and social crisis that saw the rise of populist, labor and mass socialist movements throughout the world including in the US. By the time the smoke had cleared from that crisis, most of the old Russian Empire had repudiated capitalism and Germany had nearly followed suit.
The next big lurch into fiat currency occurred during and just after the Great Depression, beginning with Roosevelt's confiscation of private gold holdings and crowned by Bretton Woods. That crisis saw the resurgence and spread of the international Communist movement, the Soviet Red Army occupying Eastern Europe and Berlin, communist-led movements overthrowing old colonial empires, and the "fall of China". By 1955 the terrified global bankers were hiding behind the threat of a world-destroying nuclear armageddon to save their system and their skins.
The final lurch into a fiat currency world began during another profound system crisis in the 1970's, at a time when world capitalism appeared to be lurching back into the depression my professors in the '60's swore could never again happen and would never again be allowed. The response was the final unpegging of the dollar from gold, followed by the unleashing, step by step, of what became today's de-regulated, financialized bubble economy - where money flows like water from the Fed, the central banks and the great banking houses, where "value" and "price" have been fully conflated.
Seen apart from this historical context, the rise of Central Banking and fiat currency can be modeled as simply a criminal conspiracy. But in historical context, it appeared as a succession of apparently successful emergency responses to emerging systems failures.
If that is how we should understand it, then it is hard to see how fiat money could be the root problem of the crisis, or how reverting to the gold standard could be the cure.
Which is not to say that gold won't play a key role in the global drama that's unfolding. I'm just saying that it's illogical to jump to the conclusion that reverting to a gold standard alone could fix a crisis that predates its abandonment.
But if we conclude that some underlying condition, problem or set of problems must have been driving the system into depression and mass unemployment over a century ago, and if we conclude that is what must have forced our grandparents' and great grandparents' generations to abandon the gold standard, then we should assume that underlying problem or condition is still there waiting for us.
The moral of your story (and I'm being somewhat facetious):
Marx was right...just not yet.
Marx was a brilliant scientist and a righteous dude, but he - like Weiner - was infatuated with the "one answer that explains everything", from which derives the idea of "the final conflict". History and economics don't work like that.
Don't you think the guys running the show also know full well how to cook the books on inflation numbers? Their is plenty of inflation if you spend a small amount of time looking for it, how about the cost of a college education, or the cost of healthcare, anyone having to support a son or daughter on that level knows full well about inflation and what is largely being hidden and suppressed by those zion guys running that show in the media. What keeps their balls in the air more than anything else are sheeple's inability to think for themselves.
Don't you think the guys running the show also know full well how to cook the books on inflation numbers? Their is plenty of inflation if you spend a small amount of time looking for it, how about the cost of a college education, or the cost of healthcare, anyone having to support a son or daughter on that level knows full well about inflation and what is largely being hidden and suppressed by those zion guys running that show in the media. What keeps their balls in the air more than anything else are sheeple's inability to think for themselves.
First, I agreed that prices are going up ($5/lb for hamburger meat). In fact, I have three teenagers, and I know what's going on with groceries, healthcare, and education expenses. The point I was making was that we have STAGFLATION...a wretched combination of price increases and income reduction (for you and I). And it is the COMBINATION of inflation/deflation - and the benefit it holds for the policymakers and the powerful - that make it unlikely that a gold-based currency will be re-introduced by the existing system.
Second, what's this "zion" bullshit? Look at the name of the guy who wrote this article. My name is similar. You want to call somebody out, call them out on their ideas, not their religion. "Oh, if only the Jews would play fairly, I'd be happier." The Guys Running The Show - who come from many different religions, races, and cultures - love guys like you. Stalin, Hitler, Mussolini, Dick Cheney (yea, I said it), Obama Running In 2008 (yea, I said that too) loved guys like you, too - whiny little assholes always ready to blame somebody from out of town for their problems.
You better back the fuck off, bitch.
Returning to the gold standard? Why would The Guys Running The Show ever allow that?
Ask yourself: why...even with all the money printing that's gone on for the past 6 years...even with all the govt deficit spending...even with currency wars...even with hamburger meat going for $5/lb....is gold not higher?
It's NOT because the market price of gold is being manipulated. Yea, there's some gamesmanship going on in the markets, but it is insignificant compared to the primary reason for gold's seeming underperformance. Gold hasn't had its moonshot because there's no inflation...but PLENTY O' STAGFLATION.
Hey, The Guys Running The Show ain't dummies. They know that inflation benefits borrowers (repay loans with less valuable currency) and reduces income inequality. They also know that deflation benefits lenders (repay loans with more valuable currency) and increases income inequality...and as much as they'd love that, they also know that deflation is uncontrollable and unpredictable.
The Guys Running The Show have figured out how to combine legal indifference, regulation, and monetary policy to create PLENTY O' STAGFLATION...they get all the benefits of deflation without the risks. So - I ask again - why would they EVER want to change the current environment? And if the Permanent Stagflation proves unsustainable, do you think The Guys Running The Show are going to just hand over their money by returning to a gold standard (and guaranteeing inflation) or take their chances with a collapsing economy (deflation)? Me...I think they roll the dice...
Bottom Line: ain't gonna see no Gold Standard because of any economic argument (no matter how sound). The only path to a gold standard meanders through deflation (economic collapse), despair (social collapse), and then - if you can get their boot off of your face - decentralization (political collapse). If you can get their boot off your face. If you can get their boot off your face.
If one poses the same question by substituting the action for which the noun represents, it can introduce the reader to view the subject from a perspective that may have otherwise gone unnoticed while at the same time clarifying the context. Therefore, the question posed by the title can be clarified as this:
Why is [ honesty ] urgent?
Could those who may have a gripe against the gold standard make the same argument against honesty?
what if honesty is in the way of... profits? Profit drives a big bus, while honesty is... pedestrian
By transitioning from an economy misguided by counterfeiting to an economy guided by productive work, then the "pedestrian" acquires the driver's seat.
As long as we are going to do a reset, let's do it right. Government should be separated from the issuance of money. No legal tender law, government should only serve to enforce contracts in money. That is, if Inglehard clams their gold rounds contain 1 troy ounce at .999 purity then the government will be there to punish them if they ever start cheating. When government itself is the issuer of money, even gold or silver money, who punishes them when they start to cheat? And history teaches us that all governments attempt to devalue their currency, even when it is backed by gold or silver, so they can issue more of it. They constantly try to escape their obligations. For more on this subject see http://www.amazon.com/Localism-Philosophy-Government-Mark-Moore/dp/06922...
"After President Nixon’s gold default in 1971 (1), many people advocated a return to the gold standard. One argument has been repeated: consumer prices are rising. While this is true, it wasn’t compelling in the 1970’s and it certainly doesn’t fire people up today. Rising prices—what most people think of as inflation—is a dead-end, politically. People care about rising prices, but not that much (2).
There is a greater danger to fixating on this one argument. What if you make a really bad prediction? The Fed did massively increase the money supply in response to the crisis of 2008. Many gold advocates predicted skyrocketing prices—even hyperinflation. Obviously, this has failed to materialize so far.
Preachers of imminent dollar collapse have lost credibility(3). Worse yet, they have poisoned the well. People who were once receptive to the benefits of gold have lost interest (their selling has exacerbated and extended the falling gold price trend). And why shouldn’t they walk away? They can see that some Armageddon peddlers (4) have a conflict of interest, as they are also gold and silver bullion dealers."
oh, there is so much to comment, here...
(1): the Nixon Shock was for shocking for foreigners, not US citizens. Because the FDR "Gold Prohibition" of 1933 ended only in 1974. Even today, "goldbug" sites utterly fail to recognize that at the moment the Greatest Buyer of Physical Gold is the Chinese Dama. When Wikipedia is capable of recognizing such an important part of the picture and "Goldbug Websites" aren't, then you really have ask yourself how narrow the point of view is
(2): Really? Depends on the income, doesn't it? At the end, globalization is about falling prices... and lack of new jobs thanks to... globalization. But prices rise depending from where and how you live. Just think about insurances. Problem is, the average family of 2014 needs a bigger basket of things then in 1914, and it's not all bread and rice in it
(3): Perhaps in the US. Elsewhere, the chance of the USD dropping into hyperinflation is computed as 5% per year. Yes, the equivalent of playing Russian Roulette every year with a revolver that has one bullet in a chamber of 20
(4): Some aren't Armageddon Peddlers with a conflict of interest. Some are purely just utterly convinced that Armageddon is either in the cards, or possible, or a certainty, or wish for a Great Upheaval, either political or monetary or other, or are part of this great army of lemmings that are convinced that you are hedged if you go long in X and short in Y. The Great Shorters had one glorious year, for example, and wish for a repeat, or even many repeats. And many financial warehouses have plenty of 'wares for the Armageddon Shorting Army, and love to scare the shit out of people in order to sell a product or two
All in all, the article postulates that there used to be a sizable portion of the American public that was interested in a gold standard. I have my doubts, there. As often, I challenge the sheer insularity of many goldbug publications. If you are truly interested in gold, you have to understand foreign interest in gold. Which is way less a "political religion" then in the US. Start with the Chinese Damas
"What happens when an entire society doesn’t save?"
a society that does not save? well, it translates in a society that consumes more then it produces
which translates in another society that has to save more, i.e. consume less then it produces. it all goes back to time preferences, i.e. a short selling of the future
A gold standard? What are we going to use to back it? Looks like they had a boating accident down to Fort KnoX.
Interest rates ...
You have a small to dwindling income so that your abilitiy to keep up with the interest on the debt falls so the interest now starts to accelerate the level of debt. Under such a scenario you can't wait or put off for another day like governments have done you must pay down debt above all else.
Game over in a zero growth world.
This confirms that capitalism cant work without capital and savings.
But TPTB dont care about capitalism. They think theyve created a new system, one you could call Defecitism. Born into debt, die in debt, your utility to the oligarchs inbetween dictates how much more or less debt you carry in the meantime
Because NOTHING else is Real?
It's all about fearmongering, IF Hank the Prick Paulson would of let the system FAIL we would all be fine now. More or less, but much better off.
You mean if Congress would of let the system shake out the dead. They (The Bought) allowed it.
...everything else is (REAL) credit. ~JPM (the man)