Why is the Gold Standard Urgent?
After President Nixon’s gold default in 1971, many people have 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.
It’s very hard to make a case for the success of a society where savings are discouraged, and where the borrowing of fiat dollars is encouraged. Stealing money from anyone due money and falsely rewarding borrowers. Then again, if everyone wants to save and no one wants to borrow due to the general age of the population, and a slow economy — that does result in below average interest rates. Maybe even negative ones like we have now, but long term it’s not a good way to create investment.
I suspect it’s more government printing to try to keep inflation moving that is going to happen. Which helps to lower wages that need to come down due to global competition. Wages are sticky down, and with so much global competition, real wages need to drop.
Gold and a gold standard does sound attractive, but I think we’re busy distorting things profusely in order do what no man has done before — cheat the economic cycle. As David Einhorn said, you feed the fat kid a another jelly donut and he runs a bit further, but 6 donuts into the race, and at some point he’s going to get sick. We have eaten a lot of donuts, something bad is going to happen though when isn’t clear.
Alfonso Larriva, Managing Member
http://www.atlascapitalllc.com
http://www.scottsdaleloancompany.com
Hi Keith,
Like your work!
“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.”
I have seen this argument before.
There is always going to be a swinging populas you seem to be deviating to your normal
clinical assessment?
The reason I would give is to prevent the theft by inflation and theft by inflation tax, taxing the nominal, non existent appreciation of assets. Of course the ZIRP also fits into that category and should be included when describing or explaining, to the uninformed, the different ways “they” are stealing from us. One man out of a thousand realizes what is happening, that means 999 out of a thousand needs to be educated. So whenever someone asks why we need a gold standard, tell them they are being robbed, then once you have their attention, tell them how. I would never let an opportunity get away, to describe how the gold standard prevents the theft of our labor and commerce.
Thanks for your comments.
Spanner: I don’t understand your question. I am just outlining one challenge to the gold standard, that gold standard advocates have lost some credibility. The gold and silver prices are nowhere near what they predicted.
Azycray: I agree it’s a tax. But I contend that this tax is not big enough for people to care about, too much. In most places in the US today, sales tax is 8 to 10%. In Europe, GST or VAT can be far higher. Income tax is far higher than that. What’s a little 2% or 5% per annum? Especially since those with real wealth don’t hold cash, they buy assets. Assets, they contend, are going up much faster than prices (well not today!).
The dollar standard encourages perverse behaviors. Those perverse behaviors destroy far more than the amount taken by the government via this hidden tax.
I was referring more to a longer term inflation tax. 5% a year currency devaluation from inflation adds up over a period of years where most or all of your gains are nominal. You haven’t done anything except keep pace with inflation. Although you haven’t gained any purchasing power, because of inflation, those nominal figures are taxed like real income. When you start talking about a tax rate on asset inflation of 30-40%, then your talking about a huge theft where you end up walking away with less than you started with. Even if your investments keep up with inflation, you now have to hand over a large chunk of your purchasing power to Uncle Sam because the nominal figures say you made a profit when in fact those profits are all an illusion. That’s a whole lot different than 10% sales tax on a candy bar.
>>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.<<
If more borrowing is encouraged, but savers don't want to lend at such low interest rates,
then from whom are the borrowers borrowing?
Good question, jwebbb.
Everyone who holds dollars is a creditor to the Fed, and the Fed pumps this dirt cheap credit out at high pressure.
Keith, I really appreciate your work, and please keep the thought provoking educational articles of
substance you provide coming!
I do find it disingenuous of you to lament others as being “preachers of imminent dollar collapse” when you write things like “The Fed’s monetary system is unstable and will inevitably collapse”, “It is moving inexorably towards collapse”, “One way or the other, we are going to rediscover the use of gold as money”, and “The financial system must collapse — necessarily so” You and they are not wrong, they just don’t get the timing right. Most advise staying out of paper and only purchase physical metal, and they are not wrong as for the big long term picture. The only reason they haven’t yet been proven right is because perception is winning out over mathematical reality. The sheople lack the education to see it and do the math, so therefore they continue to have faith in an unsustainable (the Fed is god) monetary system designed to slave them out. You thinking a return to the gold standard can possibly be a reality before the imminent dollar collapse happens is a Pollyanna, rose colored glasses, LaLa land waste of time to even think about in my opinion. Look at how many people (government, free shit army, bankers, and wall street elite) would be forced to innovate, produce, or create for their livelihood, rather than just enjoy grifting and grafting like the parasites they are, how could governments keep the endless unaffordable wars going, and without the current smoke and mirrors monetary system, how could they live so large at the living standard expense of future generations of debt slaves, or steal the benefits of all our productivity gains? Public education and mainstream media over the decades has dumbed down the sheople to the point of them being more than happy and willing to pay for their own slavery, and you think it possible to reverse it, returning to an honest money gold standard (without a collapse forcing it to happen first)? A far more realistic and doable approach is what Ron Paul advocates, and that is just to make the monetary metals a legal constitutional alternative currency, just like any other world currency, and over enough time we will naturally go back to a gold standard. Let governments and elite have their way with the current system, and as it fails they will surely do just like Rickards says and prolong the parasitic grift a while longer through IMF SDR money printing once the Fed maxes out, but at least the folks that educate themselves will have an alternative path, and there will be a few with real capital to rebuild with. You sir are smart and have educated yourself, and have a gift for laying out the math and why the current system will eventually fail, and unlike those others, seem to be much more right about the monetary metals not going to the moon because there is no basis evidence of a supply shortage at these prices, nor a level of public education on the matter to create any immediate demand. Folks can benefit immensely from your prognostications, and I for one read everything you write more than once, because I don’t have the brain and knowledge to figure it all out at the level you do. We working folks desperately need a path for taking care of our families before all is lost. Please help us figure it all out, especially on the timing!!!
God bless you, and thanks for all you write!
Bob October 16, 2014 at 10:41 pm #
Keith, I really appreciate your work, and please keep the thought provoking educational articles of substance you provide coming!
I do find it disingenuous of you to lament others as being “preachers of imminent dollar collapse” when you write things like “The Fed’s monetary system is unstable and will inevitably collapse”, “It is moving inexorably towards collapse”, “One way or the other, we are going to rediscover the use of gold as money”, and “The financial system must collapse — necessarily so”.
You and they are not wrong, they just don’t get the timing right. Most advise staying out of paper and only purchase physical metal, and they are not wrong as for the big long term picture. The only reason they haven’t yet been proven right is because perception is winning out over mathematical reality.
The sheople lack the education to see it and do the math, so therefore they continue to have faith in an unsustainable (the Fed is god) monetary system designed to slave them out. You thinking a return to the gold standard can possibly be a reality before the imminent dollar collapse happens is a Pollyanna, rose colored glasses, LaLa land waste of time to even think about in my opinion.
Look at how many people (government, free shit army, bankers, and wall street elite) would be forced to innovate, produce, or create for their livelihood, rather than just enjoy grifting and grafting like the parasites they are, how could governments keep the endless unaffordable wars going, and without the current smoke and mirrors monetary system, how could they live so large at the living standard expense of future generations of debt slaves, or steal the benefits of all our productivity gains?
Public education and mainstream media over the decades has dumbed down the sheople to the point of them being more than happy and willing to pay for their own slavery, and you think it possible to reverse it, returning to an honest money gold standard (without a collapse forcing it to happen first)?
A far more realistic and doable approach is what Ron Paul advocates, and that is just to make the monetary metals a legal constitutional alternative currency, just like any other world currency, and over enough time we will naturally go back to a gold standard. Let governments and elite have their way with the current system, and as it fails they will surely do just like Rickards says and prolong the parasitic grift a while longer through IMF SDR money printing once the Fed maxes out, but at least the folks that educate themselves will have an alternative path, and there will be a few with real capital to rebuild with.
You sir are smart and have educated yourself, and have a gift for laying out the math and why the current system will eventually fail, and unlike those others, seem to be much more right about the monetary metals not going to the moon because there is no basis evidence of a supply shortage at these prices, nor a level of public education on the matter to create any immediate demand.
Folks can benefit immensely from your prognostications, and I for one read everything you write more than once, because I don’t have the brain and knowledge to figure it all out at the level you do. We working folks desperately need a path for taking care of our families before all is lost. Please help us figure it all out, especially on the timing!!!
God bless you, and thanks for all you write!
My apologies to all, but I found reading an unedited Bob was more than I could take. Hopefully my editorial adjustments helped.
Keith, I, like the others, truly appreciate your clear headedness in these matters. Having followed your writing for some time, I agree with pretty much everything you say save a couple of minor points, but those will keep for now.
“Preachers of imminent dollar collapse” have lost credibility not because they were wrong, for their fundamental understanding of sound monetary principles are correct. They have lost credibility because they did not figure in the absolute corruption of US economic policy in regards to the debasement of the Dollar.
Their “imminent collapse” is still out there, bound to arrive some nightmare day, and the destruction it will sow will be beyond comprehension. I personally fear though that it will not arrive until our fiscal debasement is total and complete, at which point there will be nothing to be salvaged.
I know that you are an advocate of USD debt to gold conversion, (if I have understood your writings correctly), and I believe you are right, though I think that there is a limited window to be able to execute that plan, (before the end of deflation and the start of inflation). Converting US federal debt to a gold standard will be virtually impossible without horrific financial pain to all, Americans in particular after the onset of inflation that will be reciprocal to our debasement.
I have no experience with massive fiscal collapse. Everyone talks about the Wiemar republic, but there are few left who remember it, much fewer its brutal lessons. Also, the Deutschmark was not the world’s reserve currency. The fact that there were other currencies to run to when it collapsed mitigated the damage somewhat for those who had the means to escape its impact. When the USD collapses, the places to run will be few.
If I have understood your position correctly, you believe that the price of dollars measured in gold, (See! I am learning something from you!), is sound and has not been manipulated via the paper gold futures market by… whomever. I think it is and has been manipulated and continues to be so, but by more than the US govt. and the central banks of America and the EU. The Russian and the Chinese both have very good reasons to keep the value of the dollar denominated in gold high. It makes the continued accumulation of that “old relic” reasonably valued.
Moving the USD to a gold standard must happen. But it will not and cannot until we reign in the size of govt. expenditures. If the US govt. does not do this, it will have it forced on it when their printing presses no longer can keep pace with the falling purchasing power of their currency. The problem is, as I see it, two-fold. The system is going to crash, and to avoid calamity the government first has to acknowledge it has a problem, much like the alcoholic admitting there is a drinking problem. We’re not there yet. The second is the assumption that we will be able to do something about our problem before it’s too late, one we’ve come to terms with it. Of the first I am positive, of the second, not so much.