Who Likes Gold Standards ?

James Rickards, in “The Death of Money,” page 234, comments about gold standards for the economy:

Gold standards are disfavored by those who do not create wealth but instead seek to extract wealth from others through inflation, inside information, and market manipulation. The debate over gold versus fiat money is really a debate between entrepreneurs and rentiers.

Earlier in the book he also cleared up my understanding of why the U.S. Federal Reserve desires a stead 2.5-3% inflation.  With interest rates bottomed out, as they has been for a few years, control of the situation is removed from the Federal Reserve methods, and that makes the controllers uncomfortable.

On page 257, he critiques the Fed for lack of imagination seeing an impending crisis.  This crisis is expressed almost tritely as “(-1) – (-3) = 2”.  In other words, -1% nominal growth rate combined with a 3% deflationary rate yields a real growth of 2%, which has occurred in Japan during the past 25 years.  In the United States 1931-1933, the formula became “(-1) – (-4) = 3.  Looking only at the 3 makes one blind to high deflation, zero interest rates, and continuing unemployment.  What the Fed prefers is 5 – 2 = 3; 5% nominal growth, 2% inflation, giving 3% real growth.

The U.S. Treasury and the Federal Reserve fear deflation more than any other economic outcome because of loss of control.  There are 4 reasons:

  1. Inflation dissolves away government debt.  The U.S. can’t handle its current debt load unless inflation removes part of it.  Deflation makes the debt load even worse.
  2. The debt-to-GDP is at the highest level since WWII.  Debt continually increases and deflation can make GDP decrease.  Both the numerator and the denominator change to make the ratio spike uncontrollably.
  3. Deflation puts marginally solvent debtors into default and risks the health of the banking system.  Most of America is already running at this razor’s edge.  When defaults rise, the losses come back to the bankers that were enjoying their (paper potential) claims on debtors.
  4. Lastly, if individuals get more wealthy by collecting more income, the government can tax it.  If individuals get more wealthy by deflationary windfall to their budget, the government gets less taxes.  Inflation always favors the government while deflation always favors the worker.

“The Federal Reserve prefers inflation because it erases government debt, reduces the debt-to-GDP ratio, props up the banks, and can be taxed.  The consequence of deflationary dynamics is that the government must have inflation, and the Fed must cause it.”

In his conclusion chapter, Rickards highlights that social disorder due to challenging economic times when the government no longer has control ahead will unleash the fascist tendencies necessary to force order.  It’s not as much a Republican v. Democratic thing, but rather those who favor state power v. those who support liberty.  “In the ontology of state power, order comes before liberty or justice.”  Wow. 

About Brian

Engineer. Aviator. Educator. Scientist.
This entry was posted in Finance, Spirit & Heart and tagged , , , , . Bookmark the permalink.

Leave a Reply