18 November 2011

Bring Back the Gold Standard?

Can it be done? Can we really bring back the gold standard? Many say that there simply isn’t enough gold in the world, or that the gold standard exacerbated the Great Depression. Is any of this true? I must admit that until I watched this I believed that it might be impractical to return to the gold standard myself (fast-forward to 22:22):

Yes, it does appear that the idea that we can never return to a gold standard is incorrect. James G.Rickards, the author of “Currency Wars,” stated on the Keiser Report that this can be done if you peg the price of gold high enough. It sounds so obvious doesn’t it? That’s because it is, and I must admit that it’s been on the edge of my mind as a solution too.

If you peg the price of gold high enough then the issue of the ratio of gold to fiat currency can be resolved. James Rickards also makes an excellent point about the blunder in 1925 when returning to the gold standard after World War One. The price was pegged too low, which meant that the money supply had to be reduced by 50% in the UK alone. This made the UK fall into a depression 10 years before the rest of the world because shrinking the money supply by 50% had serious deflationary consequences. The anti-gold crowd have inaccurately cited this as a reason to reject the gold standard ever since.

Why do we need a gold standard, many may ask? At the moment fractional reserve banking allows people to pluck money out of thin air ad infinitum, and if Feminist economist Susan Feiner’s views on her blog “Deficits Are A girl’s Best Friend” are anything to go by there is no debt problem when all you need to do is tap in a few numbers on a keyboard, and then, chi-ching (!), you have more money in your account!

I would add that it takes a person with the IQ of an orangutan to think such a thing given that if the money supply is too large you can get inflation, and if the money supply is too small then you can get deflation. Adding to the money supply to deal with debt is a fool’s game, and anyone who thinks that this is a solution to a debt problem, especially when their true agenda is the continuation of welfare and public services, can expect to see the world fall apart around them.

This issue is a delicate matter, and one not helped by the fact that fiat currency is a monopoly of the state that forces everyone to use it. The ones at the top (bankers, politicians, corporate elite et al) get access to new money as soon as it’s introduced, and so have the greatest buying power, while the rest of us have to suffer the consequences as our buying power erodes. Seeing as Ms Feiner seems to think that deficits and money printing aren’t a problem let’s have a laugh at her expense:

That’s it! Buy your own bonds, like a snake eating its tail. All the more laughable is the fact that Feiner suggests that because money isn’t physically created that this has some sort of negating effect on the dangers of adding to the money supply. Umm, no Ms Feiner – looks like your PhD isn’t worth the paper it’s printed on! Maybe most of her modules were in women’s studies – that would explain a lot. When will people realise that those who depend on the state for their paycheck have a vested interest in sustaining welfare and public services. Why would welfare recipients care about the harm that deficits do to an economy when they find themselves in this financial predicament?

Think I’m being harsh? Well then I think this is unrealistic. As an alternative I would like to see an economy where the vast majority can go out to work, and where money earned is not constantly under inflationary pressure. So yes, the gold standard would help to solve this problem because governments could not simply print, print, and print some more.

The purchasing power of the dollar has seriously declined since the Nixon Shock, especially when compared to gold. There is one more thing to consider though before we go rushing head first into the gold standard, relating to the timeline of gold. In 1933 President Roosevelt banned the hoarding of gold by citizens under threat of up to 10 years in prison. People were forced to hand in their gold, getting $20.67 per ounce - the inter-war gold price.

The government then pegged the price of gold $15 dollars higher and made a handsome profit. So by the time the gold standard was ended by Nixon in 1971 people were unable to make any direct profit from the ownership of gold in the US. This is important because there is no reason that this wouldn’t happen again, and there are those who believe it could. Perhaps this is what will happen when the dollar loses its world reserve currency status (which I believe will happen), and then whatever new world reserve currency is introduced will be backed by gold, raising the price of gold to as high as $7000 an ounce to compensate for the ratio of gold to fiat money.

There is no easy answer to the question of the gold standard being reintroduced. The gold standard would restrict government spending and help to reduce deficits. However, there’s always the mob to consider, and they will never let anything harm what they feel entitled to, even if people like me do want to see a sustainable economy where everyone has the opportunity to earn an honest living, as well as preserve savings.

This wont stop people burning down the house though - it would take decades to change welfare conditioning, with or without a sizeable increase in jobs. I also seriously doubt the upper echelons of society would allow people to make a handsome profit from the price of gold being pegged higher if the gold standard returns – I think they would take that for themselves. Thus I’m afraid I won’t hold my breath.

People who are fiscally conservative have to start facing the notion that any solution to deficits has two problems. On one hand you have the typical power elite who always seek to primarily benefit. On the other hand you have the socialist agenda, which perpetuates the myth that government is there to give something to society. Neither are sustainable and both will bring down the house in the due process of time. All we can hope is that whatever rises form the ashes will address the mistakes of the past.

This is RockingMrE – over and out!

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