50 Years After Nixon Ended The Gold Standard One Bank Asks "Can We Continue To Do This?"

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by Tyler Durden
Friday, Aug 13, 2021 - 07:07 PM

Almost a decade ago, around the 40th anniversary of Nixon ending the gold standard, we observed that it wasn't just the dollar's convertability into gold that died - so did the prosperity of the US middle class, because while income growth for the bottom 90% had soared ever since WWII, it suddenly flatlined around Nixon's historic decision in 1971; at the same time the advent of the "fiat standard" ushered in an era of unprecedented wealth for the top 1% whose fortunes have exploded ever since. As discussed below, Nixon's decision would lead to monumental consequences for not just the US but the entire world.

Fast forwarding a decade to today, Deutsche Bank's credit strategist Jim Reid reminds us that this Sunday marks exactly fifty years since Nixon suspended the convertibility of the dollar into Gold.

This, Reid goes on, began the era of global fiat money noting that "one of the reasons it has survived so long is that at the start of this period global debt was very low" as his Chart of the Day shows.

Once the "shackles" and policy constraints of gold and sound money were lifted, countries were able to run structural deficits and increase debt to an unprecedented level. Initially, this didn’t have any major systemic implications for many as debt was still historically low. However, the Global Financial Crisis was, in the DB strategist's view, the limit to how much debt a free market could cope with: "A once-in-a-lifetime global crisis emerged, followed by a Sovereign crisis."

However, just as things looked bleak for our debt-fuelled fiat world, along came QE and central banks with the biggest can-kicking event in history. Since then, G10 central bank balance sheets have increased from just below $5 trillion in 2007 to just below $30 trillion today.

Reid correctly summarizes that "we’ve milked the flexibility of fiat money for 50 years to solve our real time problems and kick many cans down the road" and rhetorically concludes by asking "can we continue to do this?"

Finally, for those who may have missed it, here it is again: