Why We Don't Need a Gold Standard; There is a Better Alternative
"A highbrow is the kind of person who looks at a sausage and thinks of Picasso." ~ A. P. Herbert
The first reaction from the hard money camp would be to state we are insane or that we longer value hard money. Taking that line of thought would only set you on the wrong track; we are not against hard money or the Gold standard. However, most of those in the hard money camp have a hard time dealing with reality. The reality is that very few even understand this concept and even fewer would be willing to embrace it. In the end, it's the masses that determine whether or not a new trend, fad or rule will be embraced or not. Have the masses done anything other than occasionally complain about how prices are rising? Did they embrace the Gold bull market from 2002-2011? Most of them focussed on the crash aspect and not the fact that Gold had soared significantly higher than it was trading back in 2002 despite the strong pullback? The answer on all fronts is no; to understand why no good deed goes unpunished, or why the masses will crucify you if you try to alter their mindset, watch Plato's allegory of the cave. It provides a very simple and clear look into the mass mindset.
Naysayers and Dr's of Gloom keep chanting the same song of doom that all paper money will cease to exist one day and that everyone will revert to the gold and silver standard in the not too distant future. In a rebellious or romantic manner, this story has a nice ring to it. However, these people are about several hundred years too late and second of all; they desperately need a massive dose of reality. As we just stated, one must always pay attention to what the masses are embracing or willing to embrace. The masses are not even aware that Gold was once considered money and most of them will rebel at the notion of having to return to the Gold standard. The Gold standard did not prevent theft and outright robbery; bankers were known for shaving gold coins and other shenanigans. There is a better alternative, and we will address that shortly.
The U.S is supposed to have the largest reserves of Gold, yet no one is allowed to examine them. Many experts claim that Fort Knox is empty and that there is no Gold there. Hence, even if we did revert to a Gold standard, there would be nothing preventing the government or banks from stating there was more gold than they had. By fudging the data, they would be in a position to increase the supply of money or decrease the supply of money. Hence, the problem then is governments and bankers. Why not come with a solution that addresses those two issues and one that the masses would gladly embrace. No one wants to run around with a heavy sack of gold or silver coins to purchase the things they desire or need. We live in a world where if it's not convenient it's not embraced. The crowd rarely embraces something it does not understand, and the education system has done a marvelous job of convincing the masses that Fiat is money.
Is it not possible that some governments might embrace a hard money standard one day?
The keywords to focus on are one day and possible; the road to hell is paved with good intentions. One never knows when this day might or might not transpire. What might unfold one day is that individual governments could decide it's time to back their money with a basket of commodities say oil, gold, silver, timber, palladium, etc. From a strategic perspective, China is probably the nation best positioned to put this strategy into play. In approximately 30 years they have achieved more than most nations have in 90 years, and they continue to progress at a rapid fire rate. They understand the fact that real democracy is nothing but a fallacy whereby idiots are elected into power, and these idiots then have to cater to the morons that elected them in the first place. Thus, a perfectly prosperous country gradually becomes nothing but one huge welfare state.
China is not going to rush into the Gold Standard; if there was even a hint that they were going to back their currency with Gold bullion, what do you think would happen? Yes, that is right; their currency would soar to the moon. Remember what happened when the Franc started to rise at an incredible pace; Swiss central bankers came in and knocked it down. We are in the midst of a massive currency war; otherwise known as the 'devalue or die era.' Nations are competitively devaluing their currencies to maintain a trading edge. Despite the romantic notion that is circulating out there that China is ready to back its currency with Gold; it's more of a delusion than reality. Note, also as China and Russia are busy buying up Gold, why would they want prices to soar now? They will allow the manipulators to keep the price lower so they can purchase more of this metal.
The Fed has done the impossible; they have increased the money supply, destroyed the commodity market and at the same time managed to keep the dollar strong. Imagine that, and it's taking place right now, the dollar is getting ready to trend higher again. You still think the masses are ready to embrace a Gold or hard money standard. A full generation would have to be financially wiped out before this concept becomes embedded in the mental psyche of the masses. Until then the best way to preserve one's wealth is to invest in assets that inflate at a faster rate than the governments are inflating the money supply. One of the options, but it's not the only option is to invest in precious metals such as Gold and Silver. We cast a more favourable eye on silver also known as the poor man's Gold.
We stated earlier that there was a better solution, one that many hard money followers and the masses, in general, would find palatable. What is the problem?
- Bankers are allowed to boost the money supply due to the evils of fractional reserve banking.
- We have private entity known as the Fed controlling the money supply
- We have a government that continues to raise the debt to pay for programs it deems necessary, even though many of them are not.
The power central banks have of creating money out of thin air should be revoked permanently. The entire fractional reserve banking system should be eliminated. Via the fractional banking system, banks can create nine new dollars for every dollar of deposit they have. This outright theft, they are creating money they have and charging a fortune for it. The Federal Reserve conveniently explains this theft with the following statement.
The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business. Banks borrow funds from their depositors and in turn lend those funds to the banks' borrowers. Banks make money by charging borrowers more for a loan than is paid to depositors for use of their money. If banks did not lend out their available funds after meeting their reserve requirements, depositors might have to pay banks to provide safekeeping services for their money. For the economy and the banking system as a whole, the practice of keeping only a fraction of deposits on hand has an important cumulative effect. Referred to as the fractional reserve system, it permits the banking system to "create" money.
Governments should be banned from creating debt. If you don't have the money, then the program needs to be shelved. Billions of dollars are wasted annually on totally useless and in many cases corrupt programs, because of this ability to create new debt.
Other small refinements can be added, but with the enforcement of these two simple mandates, we won't need the Gold standard. We have inflation and artificial boom and bust cycles because bankers control the money supply. Cut their supply and the dirty game comes to an end.
The masses are a lot more likely to support something like this, and this system would essentially provide almost the same benefits as those provided by a Gold standard. In the meantime as we have to focus on reality; governments are not going to give up this tool anytime soon, and the neither are bankers.
There is a secret benefit to inflation; certain assets over compensate for the rate of inflation by a huge factor. Thus, for example, the government might inflate the money supply say by 10% a year, but certain assets could rise by 30%-100% a year. It is for this reason, we have been stating for the past several years on end, that this bull market has a lot more upside than most experts envision and that's why it's still the most hated bull market in history. Hot money is driving this bull market, and there is no sign of revolt from the masses, so the hot money will continue to flow. More importantly, the sentiment is far from bullish, and bull markets never end on uncertainty, they end when the masses are euphoric.
"I think, therefore, I am is the statement of an intellectual who underrates toothaches." ~ Milan Kundera