Guest Post: Golden Cognitive Dissonance

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Submitted by John Aziz of Azizonomics

Golden Cognitive Dissonance

Simon Jack of the BBC asks a question that many of us have already answered:

Gold v paper money: Which should we trust more?

Fortunately, this gives way to some relatively fair coverage:

Detlev Schlichter is a former banker and the author of Paper Money Collapse and he says the current system is fatally flawed.

 

“The problem is that what we use as money can be created and produced by the privileged money producers – which are the central bank and the banking system.They can produce as much of this money as they like. And so the supply of this form of money is entirely elastic, it is entirely flexible.”

 

Detlev Schlichter believes this will, ultimately, lead to people losing faith in our current system of elastic money and turning to something that does not stretch – like gold.

The key point to add to this of course is that gold is not just insurance against dilution, it is more importantly insurance against counter-party risk:

Counter-party risk is the external risk investments face. The counter-party risk to fiat currency is that the counter-party — in this case the government — will fail to deliver a system where that fiat money will be acceptable as payment for goods and services. The counter-party risk to a bond or a derivative or a swap is that the counter-party  will default on their obligations.

 

Gold — at least the physical form — has negligible counter-party risk. It’s been recognised as valuable for thousands of years.

 

Counter-party risk is a symptom of dependency. And the global financial system is a paradigm of interdependency: inter-connected leverage, soaring gross derivatives exposure, abstract securitisations.

 

When everyone in the system owes shedloads of money to everyone else the failure of one can often snowball into the failure of the many.

Unfortunately, the BBC then embarks on an inane and pointless discussion on the merits of gold as an enforced monetary standard, a completely different topic to whether or not individuals should trust paper assets or hard money.

DeAnne Julius of Chatham House is quoted as saying:

If the amount of money in the system was limited by pegging it to gold it would limit economic growth, which is the last thing we need right now.

I think to put your faith in gold as the basis of a country’s monetary system would be extremely foolish.

This is not actually true — every single historical example of the gold standard has allowed for the expansion and contraction of the money supply as per the market’s desire for money — it can be mined, it can be recirculated, it can be credited, it can be imported, it can be devalued, or it can be supplemented with silver and other substances. The “problems” with gold only really began in the 1930s when central banks started imposing policies of forced contraction over extended periods — ignoring true market preferences.

The gold exchange standard period, which followed WW2, was a period of unprecedented and unparalleled expansion, productivity growth, technological innovation, and financial stability.

The Bank of England’s recent report on the gold standard periods concluded:

Overall the gold standard appeared to perform reasonably well against its financial stability and allocative efficiency objectives.

The BBC concludes by quoting former Chancellor of the Exchequer Lord Lawson:

You can’t force a government to stay on gold, so therefore gold has no credibility.

Do you see the cognitive dissonance here? If we are to believe Lord Lawson, gold has no credibility, because governments have previously proven themselves untrue to their word. Surely the thing that has no credibility is not gold, but government promises? And that is the answer to the BBC’s initial question.