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-- Posted Thursday, 10 April 2003 | Digg This Article
With the sound and the fury of the Iraq War hopefully fading from our TV screens, and War's most immediate effects on financial markets following, the case for hard money seems stronger now than ever. Yet, such has been the case ever since the fall of the USSR and still Gold as official monetary standard remains taboo. Perhaps the powers that be are finding that closing Pandora's Box is much more difficult than opening it. Fortunately, history suggests that while painful, a return to hard money is the best means to restore stability to a financial system and consequently durability to a political system.
One of the triumphs of economic liberalism in the 18th and 19th centuries was empirical evidence of the enormous benefits of honest weights and measures, particularly hard money, on resource allocation within a society and conversely damning evidence of the distortions caused by fiat money. As Chairman Greenspan said last year, "Although the gold standard could hardly be portrayed as having produced a period of price tranquility, it was the case that the price level in 1929 was not much different, on net, from what it had been in 1800." Sadly, those same centuries also provided evidence of the huge initial competitive advantage in mobilizing resource provided by a switch to elastic money prior to the unfortunate, but eventual collapse. The Continentals of the America Revolution, backed supposedly by the future tax revenues of the hoped for state, the Assignats (and subsequent Land Bonds) of the French Revolution and the Greenbacks of the American War between the States all gave way to honest money once the War was over, or when the inflationary pressures became too great to bear.
Perhaps one goal of those who instituted the Federal Reserve was the ability to "turn on" the credit machine if necessary, especially in the face of the then yet untested organizational skills of the communists. From that frame of reference, the collapse of the USSR should have ushered in a return to hard money and in a sense it has. Gold has, with few exceptions traded around the $300-350 level since the early 90s, using even more liberal criteria, one could say that gold has been in a reasonably tight range since the early 80s. However, due, in my view, to a reluctance to officially go back to an explicit monetary standard, credit creation has run amok making rationalization of the financial system with the production methods in use ever more difficult. In more colorful language, instead of getting back to business and heading for the warmer climes of hard money after the fall of communism, we have been rearranging the deck chairs on the Titanic.
Eventually, John Law was run out of Paris, although not until he fertilized Louis XIV's seeds of economic destruction which eventually precipitated the revolution. Our current holder of the John Law seat of Fiat-conomics, Chairman Greenspan, has thus far, used, in his words, "a prudent monetary policy maintained over a protracted period" to "contain the forces of inflation." However, the ability to contain these forces, in my view, was due in no small part to the massive reorganization of resources during the 90s, not the wisdom of Central Bankers. Not only did the USSR collapse and China opt for the free market but the Asian Tigers came on line raising global production significantly. It is difficult to imagine a greater capitulation to the American model of political economy over the next 10 years than we have already seen in the previous decade, barring a secret society of Martian socialists. To paraphrase Nixon, "we're all capitalists now". That suggests to me a painful rationalization ahead, one that will only gain impetus from further stagnation of equity values and rising raw materials prices.
This rationalization will either take the form of a debt deflation or a monetary inflation, either of which benefits the holder of Gold albeit in different ways. In the former, your assets in the from of Gold are held outside the imploding system safe from default, while the latter benefits are more easily seen as a change in price less general inflation. I suspect that international policy circle members over the past few years have been scratching their heads trying to turn Lead into Gold or more accurately, apportion the mounting debts in a way amenable to all. In that regard, the situation in Iraq bears close watch in that the financial markets have not responded positively. Without the ebullience of an economic boom to hide the debt bomb, the need for rationalization grows and the prognostications of the fiat money faithful look more and more like hot air. Now more than ever, its time to close Pandora's Box and return to hard money. The War over political economy models is over, it's time for peace.
-- Posted Thursday, 10 April 2003 | Digg This Article
- Dave Lewis
http://www.chaos-onomics.com
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