Wednesday, 22 February 2017

The Gold Standard is Right

  • Gold is the primary global currency that has an intrinsic value. Credit instruments and fiat currency depend on the credit worthiness and signature of a counter party. No one refuses gold as payment to discharge an obligation. It has always been that way. No one questions its value, first coined in Asia Minor in 600 BC.
  • The gold standard was operating at its peak in the late 19th and early 20th centuries, a period of extraordinary global prosperity, characterized by firming productivity growth and very little inflation. 
  • Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. That is the reason for the statists' antagonism toward the gold standard.
  • World War I disabled the fixed exchange rate parities.With different degree of war and economic destruction from country to country, the desire to return to pre-war exchange parities was wholly unrealistic. It wasn’t the gold standard that failed; it was politics.
  • As per the above chart, bottom 90% of US earners income was far more than top 1% earners until Nixon ended the US Gold Standard, in August 1971, unleashing an unprecedented increase in US debt, and the stagnation of real incomes and net worth for all but the "top 1% of earners." 
  • It is no wonder that the 1% hates the gold standard, including their protectors in the developed market central banking system, their economist lackeys, their purchased politicians and their captured media outlets, the topic of a return to a gold standard is the biggest threat conceivable.
  • Everything changed a few decades later in the late 1980s onwards, instead of applying the above wisdom, central bank intervening in every crisis, creating new currency with abandon, and debt soared. Prevention of regulation of credit default swaps and other derivatives had nearly blew up the system in 2008.
  • The growth has continued despite adversity, is due to the new financial instruments unbundling risks. These instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it. The product and asset price signals enable entrepreneurs to finely allocate real capital facilities to produce those goods and services most valued by consumers, a process that has undoubtedly improved national productivity growth and standards of living.
  • In the aftermath of the dot com crisis interest rate cuts to near-zero in the early 2000s, ignited the housing bubble, which no one at the Fed was able to detect along the way. 
  • The leveraged speculating community learned that no risk was too egregious and no profit too large, because government - that is, the Fed - had eliminated all the worst-case scenarios. Put another way, under this regime profit was privatized but loss was socialized.
  • One of the nice things about the information age is that public figures leave long paper trails and can't therefore easily escape their pasts. 
  • The risk of inflation is beginning to rise. Significant increases in inflation will ultimately increase the price of gold. Investment in gold is insurance, not for short-term gain, but for long-term protection.
  • Gold standard would have helped mitigate risks of an unstable fiscal system like the one we have today.
  • Going back on to the gold standard would be perceived as an act of desperation. But if the gold standard were in place today, we would not have reached the situation in which we now find ourselves. There is a widespread view that the 19th Century gold standard didn’t work. It wasn’t the gold standard that failed; it was politics.
  • Protracted period of stagnant productivity growth, particularly in the developed world and social benefits crowded out gross domestic savings, the primary source for funding investment. The decline in gross domestic savings has suppressed capital investment and is reflected proportionately in the people’s standard of living. 
  • As productivity growth slows down, the whole economic system slows down provoking despair and a consequent rise in economic populism from Brexit to Trump. Populism is not a philosophy or a concept, like socialism or capitalism, it is a cry of pain by the people.
  • At the same time, the risk of inflation is beginning to rise. In the United States, the unemployment rate is below 5%, putting upward pressure on wages. Demand is picking up, as manifested by broad increase in the money supply stoking inflationary pressures. Impose inflation on stagnation, you get stagflation.
  • Today, we cannot afford to spend on infrastructure in the way that we should. Much such infrastructure would have to be funded with government debt. We would never have reached this position of extreme indebtedness were we on the gold standard, because the gold standard is a way of ensuring that fiscal policy never gets out of line.
My View:
The above contents are largely the experiences of USA during the longest tenure of its Fed Reserve's Chairman Alan Greenspan (1987 thro 2006). India following the more or less same principles is also suffering with inflation, budget deficits, large borrowings, reckless spending, crony capitalists, and above all unbridled corruption by politicians, bureaucrats and businessmen, who work hand in hand, to loot the nation. While the rich & educated became super rich, poor remained poor only. Inflation and low bank interest rates hurting the savers especially old people who live on interest income on the fixed deposits. Today India ratings are just a notch above junk status and ratings upgrade in next two years is unlikely. Banking system is on the verge of collapse with NPAs trebling in the past two years. Tax evasion and black money is restricting our economical growth. Agriculture that provides livelihood for 65% of people, who are largely poor, uneducated & unskilled and rural based, has been made unprofitable by successive governments. Modi's recent demonetization, publicized as surgical strike on black money hoarders and corrupt people turned out to be least thought, politically motivated, poorly executed man made economic disaster unprecedented in independent India destroying livelihoods of poor & lower classes and recovery to its pre-demonetization levels is expected only after two years. Despite all ills, India with large masses of consumption and production has resilience to survive and grow.

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