Posts Tagged ‘fiat’

The debate between fiat and commodity monetary standards is slowly re-entering the mainstream. See here, here and here. To those new to the subject, this is simply a debate as to whether the money in your pocket is backed by nothing other than government mandate and coercion (fiat) or a by a physical commodity that has value beyond it’s use as money (usually gold or silver).

This is a debate which many had considered to be closed, an argument that only existed on the fringes of academia amongst eccentric free marketeers. Succesive rounds of quantitative easing, coupled with negative real interest rates have thrust this debate back into focus.

It is bizarre that it has taken so long for this issue to re-surface. The intellectual superiority enjoyed by paper money is based on a 42 year experiment that has seen the value of all paper monies race each other toward their intrinsic value – ZERO.

The alternative, a commodity standard based on gold or silver (or a combination) is viewed  by the mainstream as atavistic, “a barborous relic”. This completely overlooks the historical track record of commodity money as society’s choice of preferred choice of exchange media.

The majority of coverage will argue against the gold standard, no doubt citing the flawed gold bullion standard (1925-1931) and Bretton Woods system (1946-1971) as representative of the failings of commodity backed monies.  Neatly overlooking that both standards were not the product of the free market but centrally planned and enforced by government.

The establishment has good reason to fear the return of a TRUE gold standard via the free market, beyond the control and manipulation of government and central bank. Such a gold standard would enforce fiscal responsibility, removing the state’s ability to run up unsustainable debt backstopped by the printing press. The current monetary world order is a top down system, designed, implemented and controlled by state bureaucrats and apparatchiks for the benefit of the establishment and it’s chosen favourites. There are plenty of vested interests who are keen to see it remain that way.

I would encourage the reader to look beyond the standard criticisms. One thing is for certain – the gold standard is back on the radar. This can only be a postive thing, especially as the loose monetary policy pursued by central banks world over causes more people  to wake up to the reality of their savings  being stolen through central bank induced inflation.

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Last weekend I had the pleasure of meeting Kevin Dowd at Liberty League Freedom Forum 2012.  

 

Kevin’s message is chillingly clear. The shit has yet to hit the fan. All the economic stimulus, money printing and bailouts haven’t solved any of the underlying problems in the economy – they have simply made the problem worse and deferred  it to a later date. 

 

I found Kevin’s explanation about why we have not experienced higher levels of inflation yet particularly interesting (and frightening). Using the government’s own figures he showed how the monetary base of the economy has been expanded several times over since the crisis in 2008 and how this extra money has been ‘trapped’ in the banking sector. The Bank of England bought the government’s debt with the freshly printed (or ‘clicked’, if you prefer) money. This depressed the interest rate that the government borrows at but also swamped the commercial banks with huge amounts of the new money. In a business environment severely lacking  confidence the banks are holding on to this money  rather than lend it out. After all, why would they go to the bother of lending this to small and medium businesses when they run the risk of going bust in the prevailing business conditions. The problem is that this money can’t stay there forever. Kevin used the example of a huge lake hemmed in by a glacier. Just like when the Ice Age ended, the glaciers melted and released a torrent of water across the land, leading to widespread destruction. The same thing will happen once this money is released into the wider economy. And once the inflation takes hold (and it will) it will be impossible to stop. According to Kevin, even Mervin King acknowledges that there is no exit strategy for this huge experiment in monetary policy. 

 

Other things to feel optimistic about include: 

 

  • Record low interest rates can NOT stay at these levels forever and the banks are in no fit shape to survive the consequences of higher interest rates. Another banking crisis, even bigger than the last time, is just around the corner. 

  • Inter-governmental interference in the world economy has exacerbated the problems (see Basel 1 &2 which created the regulatory framework which left banks hopelessly exposed to first the subprime and then sovereign debt crises)   

  • The next crisis will be bigger. The same  policy prescriptions, having been shown to fail at every previous attempt, will be implemented again. The potential for rioting and societal breakdown is huge and Kevin is surprised it hasn’t happened already. 

 

Gloomy stuff. Apologies if I’ve got any of it wrong on here, I wasn’t taking notes during his talk so this is all just from memory. Kevin seemed like a genuinely nice guy and we should all hope and pray he is wrong with all his predictions. Unfortunately I happen to think he’s bang on the money (so to speak) and would recommend people to look at his book “Alchemists of Loss”.