The True Gold Standard (Second Edition)
Today’s economic conditions reflect a fiat monetary system held together by many tricks and luck over the past 40 years. The world has been awash in paper money since removal of the last vestige of the gold standard by Richard Nixon when he buried the Bretton Woods agreement — the gold exchange standard — on August 15, 1971.
Since then we’ve been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.
A paper monetary standard means there are no restraints on the printing press or on federal deficits. Since 1971, our dollar has lost almost 80% of its purchasing power. Common sense tells us that this process is not sustainable and something has to give. So far, no one in Washington seems interested.
Although dollar creation is ultimately the key to its value, many other factors play a part in its perceived value, such as: the strength of our economy, our political stability, our military power, the benefit of the dollar being the key reserve currency of the world, and the relative weakness of other nation’s economies and their currencies.
There is a fundamental incompatibility between the attainment of global economic stability and having a single national currency perform the role of the world’s reserve currency. This is hardly a new revelation. But events of the past few months have brought this topic back into the spotlight.
Belgian born American economist Robert Triffin first highlighted this incompatibility in the 1960s. He observed that having the US dollar perform the role of the world’s reserve currency created fundamental conflicts of interest between domestic and international economic objectives.
On the one hand, the international economy needed dollars for liquidity purposes and to satisfy demand for reserve assets. But this forced, or at least made it easy, for the US to run consistently large current account deficits.
One economic myth is that paper money is wealth. The proponents of big government oppose honest money for a very specific reason. Inflation, the creation of new money, is used to finance government programs not generally endorsed by the producing members of society.
It is a deceptive tool whereby a 'tax' is levied without the people as a whole being aware of it. Since the recipients of the newly created money, as well as the politicians, whose only concern is the next election, benefit from this practice, it's in their interest to perpetuate it.
For this reason, misconceptions are promulgated about the 'merits' of paper money and the 'demerits' of gold. Some of the myths are promoted deliberately, but many times they are a result of convenient rationalizations and ignorance.
Paper money managers and proponents of government intervention believe that money itself- especially if created out of thin air - is wealth. A close corollary of this myth - which they also believe - is that money supply growth is required for economic growth.
Paper money is not wealth. Wealth comes from production. There's no other way to create it. Capital comes from production in excess of consumption. This excess is either reinvested, saved, or loaned to others to be used to further produce and invest.
Duplicating paper money unites creates no wealth whatsoever, it distorts the economy, and it steals wealth from savers. It acts as capital in the early stages of inflation only because it steals real wealth from those who hold dollars or have loaned them to someone.
Japan is sinking in quicksand. The more it struggles to free itself, the faster it sinks. But that won’t stop it from trying… even if that means destroying itself.
For evidence, we turn to a bizarre question proposed in yesterday’s issue of The Atlantic:
“Is Abenomics Doomed — or Will Japan Un-Doom Itself?”
Umm… What? How does a country “un-doom” itself? Isn’t being “doomed” about as finite as it gets?
“After an amazing eight-month run,” The Atlantic continued, “where Japanese stocks went up, and up and up over 80%, the Nikkei has collapsed again, and again and again over 20% from its peak. It fell 6.4% in the early hours Thursday morning to officially enter ‘bear market’ territory.
“Nobody said it would be easy for Japan to un-doom itself.”
In fact, it’s likely impossible. Japan has existed in a sort of “economic no man’s land” for the past two decades, perpetuated by a print-first monetary policy.
Nothing in politics is new… except for the euphemisms.
Premise: In math, science and technology, learning is linear. Each idea gets built on the innovations that have gone before it. In politics and economics, as in love and war, we keep making the same dumb mistakes over again.
Exhibit A: Yesterday’s Financial Times’ spin on our favorite Pacific island experiment with Democratic capitalism: Japan’s Prime Minister Shinzo “Abe Unveils ‘Third Arrow’ Reforms of Low Tax and Deregulation.” We read the piece… so you don’t have to. We’ll do our best to spare you the cheesy archery quips replete in the article.
“Shinzo Abe, Japan’s prime minister,” the FT reported, “finished outlining his economic reform plans on Wednesday by promising to relax rules governing the sale of nonprescription drugs and allow selected cities to experiment with lower taxes and deregulation. The proposals [are] included in a broad ‘national growth strategy’ that the government plans to approve next week.”
It’s about time. Finally, somebody’s going to do something about the darn Japanese economy.