A great quote from William Osler typifies the evolution of our current monetary system. He said: “The philosophies of one age have become the absurdities of the next, and the foolishness of yesterday has become the wisdom of tomorrow.”
Decades and centuries ago, no one would have done without a hard money standard. The founders wrote in the Constitution that only Gold and Silver could be legal tender. Today our fiat monetary system is firmly in place. Although it has wrecked a once healthy economy, you’d be considered a pagan in mainstream academia if you wanted to abolish it in favor of the gold standard.
As our monetary system has evolved, it has become ill and more ill. During the first major crisis with hard money, the government devalued paper money and raised the value of Gold. However, Roosevelt essentially suspended convertibility for citizens. International convertibility and the standard remained until the next crisis. Then the government could no longer afford the gold standard so it delinked the dollar permanently.
Note that there are three types of currency: commodity currency, representative currency and fiat currency. The western world was quite prosperous under representative currency (1800-1971). Can the same be said of fiat currency?
Under a fiat regime, the US and other governments have built up unsustainable debts. Debt has grown faster than GDP. Gross misallocations of capital have occurred. While society has prospered and standards of living have improved, more and more people are falling behind and falling into poverty.
Tell me, did this happen from 1800 to 1971? Sure, there were major bumps along the way but the reverse happened. Opportunity spread. Individuals and families were lifted out of poverty. Living standards for all were raised. The progress in the world from 0 to 1800 was nil compared to what happened over the next 170 years. Yes, this happened under a hard-money standard.
The gold and silver standards kept prices stable over the long haul. Capital was respected and deployed accordingly. When the value of money isn’t stable and/or left to a group of unelected men fixing prices, gross distortions and misallocations of capital occur with certainty.
Yet, today we constantly hear that we need central banks and that we can’t have stable prices. Prices have to go up a little bit but they can’t go down. The objective is for prices to go up 2-3% annually. Yet, if prices go up by 5%, that is too much. If prices go up by 0-1%, that is too little. And if prices fall that is the worst! Only the non-economists can see how asinine this really is.
Moreover, didn’t prices actually fall during the Industrial Revolution? The greatest economic transformation occurred because production was enhanced and prices fell.
According to Wikipedia:
The Industrial Revolution marks a major turning point in human history; almost every aspect of daily life was eventually influenced in some way. Most notably, average income and population began to exhibit unprecedented sustained growth. In the two centuries following 1800, the world’s average per capita income increased over 10-fold, while the world’s population increased over 6-fold. In the words of Nobel Prize winning Robert E. Lucas, Jr., “For the first time in history, the living standards of the masses of ordinary people have begun to undergo sustained growth. … Nothing remotely like this economic behavior has happened before.
Today we see the exact opposite. The living standards of the masses in the US are falling and have been since 1970. The cost of living has risen faster than wages, despite whatever the CPI says. One in seven Americans lives in poverty while 42 million receive food stamps. That is up 58% in just the last three years.
Meanwhile, among many others a partisan political hack masquerading as an economist thinks we are seeing a steady slide towards lower inflation. Mr. Krugman, why don’t you leave your office and do some first-hand real research? Why don’t you talk to those folks who are struggling? Do you have any idea of the cost of food? General bills? Education? Healthcare? Are you paying attention to commodity prices?
You should be disgusted with yourself for thinking deflation is the problem. I’m glad folks like you, your fluffer Brad Delong (thanks to Gonzalo Lira for the apt description) and Ben Bernanke weren’t around in the early 19th Century. You may have impeded the industrial revolution because you were worried about “falling prices.”
In the end it doesn’t matter what we think because a new monetary system and return to some form of the Gold Standard is a certainty. Policy makers have no other options this time. Back in the 1930s, they raised the price of Gold and devalued the dollar. In the 1970s, they ended convertibility entirely. Today we cannot raise interest rates sufficiently high to end this mess. There is too much debt in the system and it would bankrupt governments.
This speaks to why Gold is rising. Low interest rates and quantitative easing help the case, but sovereign debt default by western nations is a certainty. Remember, fiat currencies are tied to government finances. It may take five years or ten, but it is a certainty. There is no way these economics can grow their way out of the debt bubble.
Hence, the logical ending point of this bull market is a new currency regime and Gold will play a large role in that. Not by coincidence, the new monetary system with Gold as part will go a long way towards fixing America’s problems.
First, let me discuss why the end of the gold standard was an impetus to many of our problems. The economic effects are obvious. It set in motion constant inflation, which has continuously undermined the middle class and poor. It created inflation, which forced corporations to seek cheaper labor alternatives offshore. It removed controls and restrictions on the government, which could now easily buy votes.
As a result of the government losing its discipline, the population followed. Individuals went from earning and saving to consuming, going into debt and accumulating too many possessions. Not surprisingly, people lost their work ethic and became lazy and fat. Attitudes, morals and values have changed and for the worse in many cases.
The new monetary regime will help to reverse these trends. It will impose tight controls and restrictions on the government. Massive deficits will become a thing of the past. The populace is already getting the message and won’t have trouble following suit. Debt and consumption will be shunned. Initially, a lower standard of living will force families closer together and better values will emerge.
It may be five or ten years before we see this new monetary and currency system. In the meantime, consider where things are going and stake your claim. Gold hit $1400 but that is barely more than 5x its low. Major bull markets rise 20, 30 even 50-fold. Months ago, we repeatedly mentioned that less than 1% of global managed assets were invested in precious metals. It doesn’t take an expert to see where this is going.
Despite this we hear folks pan Gold who have never owned a single ounce or single gold stock. Simply put, these folks are trolls with an agenda of some kind. Why their thoughts are broadcast, is beyond me. In truth, we have also have an agenda. It is to make our subscribers money and help them ride the ups and downs of this bull market. We invite you to consider a free 14-day trial to our services.
Jordan Roy-Byrne, CMT