It
wouldn’t be a normal day in the life of the 24-hour news cycle if there
weren’t some type of campaign against gold and its proper role as
money. True to form, The Financial Times stepped to the plate to launch a
rather hilarious attack on gold in the context of an article which discusses
the idea that one half of our Diet Coke/Diet Pepsi political system is
contemplating adding what is the equivalent of a feasibility study on
returning to the gold standard to its political platform.
Chief
among the ‘journalistic’ arguments against the gold standard in FT’s article
are that there a) is no inflation, and that b) a return to monetary
discipline will prevent the federal reserve from properly dealing with demand
shocks. This is nothing more than typical Keynesian tripe and both arguments
are dogs that won’t hunt when it comes to even a cursory analysis of
the issues involved.
Central Banks and Inflation – Inextricably Linked
I
am quite sure that the issue of inflation doesn’t need to be proven
once again. It is a monetary event. A quick look at the various monetary
aggregates over time demonstrates the inflation. The concomitant loss of the
dollar’s purchasing power over the same period demonstrates inflation
well beyond that necessary to accommodate a growing economy (hint: fractional
reserve banking and America’s debt explosion). It is a pretty simple
logic chain. Inflation is a monetary event. Central banks are in charge of
the world’s monetary policy. Therefore, inflation is the responsibility
of central banks and is NOT
the by-product of a healthy economy, nor is inflation necessary to have a
healthy economy.
The
dirty truth is that monetary discipline vis a vis the gold standard eliminates the need for centralized
control of the monetary system and goes against every principle of both the
morally and intellectually bankrupt Keynesian doctrine and the whimsy of
power-hungry central planners around the globe.
Politicians
by general rule despise monetary discipline because it hinders their efforts
to engage in their primary business – politics via pork barrel spending
and other vote gathering spending programs. Some examples over the past
decade would be Medicare Part D, and a raft of economic ‘stimulus’
programs from direct cash handouts in 2001 and 2010 to the more recent
‘shovel ready’ make-work type projects. Note should be taken that
despite these heroic measures, the USEconomy is
still flat-lined. Job creation is minimal at best, wage growth is
nonexistent, and net worth of individuals has declined while debt levels have
skyrocketed. These are hard facts, not opinion.
Central
banks also disdain monetary discipline because such discipline is not only a
threat to their existence, but it prevents banks from enslaving countries and
citizens by using debt-driven fiat monetary systems. This is precisely the
reason that the federal reserve worked hard to incrementally remove the US
from the gold standard. The result has been an increased dependence on the
central bank: both from the standpoint of management of the USEconomy and debt ownership. While the fed’s QE
programs are lauded by the media and government as being the salvation of the
USEconomy, these same folks are largely silent when
it comes to pointing out the fact that with each QE, the bank owns more and
more of our country and its economic output.
The Politics of Poverty
It
is certainly true that both heads of America’s political hydra fully
support the politics of poverty because both have had periods of control over
enough of the political machinery in this country to strip the federal
reserve of its power or scratch it out of existence with the stroke of a pen.
Obviously that hasn’t happened. In normal media circles, this is
referred to as gridlock. However, what if the normal circles have it totally
backward – as is generally the case?
What
if the bank drove the government and not vice versa? The dog and pony show
that goes on every time a fed chair testifies before Congress is worthy of an
Oscar. Refusal to answer questions, provide information, and generally
obstructing the entire process are the order of the day whenever a fed
chairman is in town. There have certainly been enough in the way of
admissions, revelations, and the like over the past half dozen years in
particular to convince even the most naïve that the federal reserve runs
the government and not the other way around. Yet every election cycle, the
people continue to be sold a bill of goods regarding what can be done if only
x and y are elected. It is a sad shame that the vast majority of people still
fall into this simpleminded trap. This time around, there is the added
element of honey in the trap in the form of a possible return to the gold
standard. And the stakes have never been higher.
We’ve
heard everything in the way of excuses why people can’t connect the
dots. We don’t understand economics. We have lives and don’t have
the time to read and do research and all this sort of thing. We let the media
think for us. We wander around in our daily existence unable to shake the
notion that something is very wrong, yet we can’t be bothered to
attempt to think for ourselves or to seek the truth? Then shame on us; we get
what we deserve.
History Repeats?
As
odd as it may seem we’ve heard this story before. On June 22, 1981,
Treasury Secy. Donald Regan appointed the Reagan Gold Commission. This action
came after a decade of monetary turmoil following the formal and complete
disconnection from the USDollar to gold on August
15, 1971. Looking back it is should be obvious to all observers that the
final severing of the link between fiat and specie touched off the debt
spiral in which America is currently embroiled. One point of confusion among
many members of both the general public and the gold community is that Nixon
took America off the gold standard because we’d run dry. That
isn’t the case. While it is true that America’s gold stock had
been diminished by over two-thirds from 1949 levels, the Treasury had
approximately 264 million troy ounces in the gold stock as of 1982.
The
Commission’s report, issued on March 31, 1982, contained an analysis of
America’s economic picture that was almost thoroughly sanitized of
mention of a growing external debt problem and the issue of persistent
Federal budget deficits. This sanitization drew the ire of Congressman
Chalmers P. Wylie and the report is speckled with asterisked comments
containing his protests of various aspects of the Commission’s work.
While this piece is not meant to be an expose on the Commission’s report,
there are some recurring themes even today, more than 30 years after the
release of the report. To get a copy of the Commission’s report, click here.
There
was a big push from within and without the Commission to assign legal tender
status to US Mint issued gold coins, but NOT to require they be accepted as
settlement of public and private debts like the federal reserve note. This
might sound like a subtlety, but given the monopoly status of the fed and its
paper notes, it is important to note that even 30 years ago, that monopoly
was being defended after a time of high monetary inflation and economic
malaise.
Just
as today, where fears of missing gold permeate the monetary world, and where
there have been many reported instances of tungsten-salted gold bars, the
Commission mentioned as its #2 item the situation regarding the actual gold
stock of the Treasury. The Treasury maintained that it had performed an audit
over the prior ten years with annual settlements of account according to 31
U.S.C 354. Congressman Ron Paul, who served on the Commission, was the only
dissenter, stating that 31 U.S.C 354 mandated an annual rather than an
ongoing audit. The Treasury said they were within the law and the Commission
took the Treasury at its word. Some things never change.
Another
important commonality between the Commission’s report and the economic
forum of today centers around what exactly money is and how the supply
thereof affects prices (or doesn’t affect them at all). We’ve
learned absolutely nothing in 30 years. We put our best and brightest to work
and 30 years ago they couldn’t figure out that if you increase the
supply of money chasing a finite basket of goods that the prices paid for
those goods will increase. The traditional gold standard was criticized by
many on the Commission for not providing for economic growth, which is
patently false. A traditional gold standard provides that only a certain
amount of paper currency be issued for every unit of gold held in
unencumbered reserve. A healthy economy will produce trade surpluses, which
will result in additional gold being added to the reserve and thus allowing
for the creation of further paper currency to accommodate such growth. The
persistent running of trade deficits such as the US has developed a pattern
of doing, however, will result in a contraction of the gold reserve, and
therefore a concomitant contraction of the paper currency in the system.
The
production of more goods results in more money being made available with
which to purchase those goods. The result of fewer goods being produced
results in less money being available to purchase the goods. This creates an
environment of self-limiting price stability. Granted, in this regard, the
gold standard is dependent on external trade and this is where the problem
lies. The destruction of the US manufacturing base was already in the works
by the time the Commission was tasked. A gold standard simply couldn’t
be tolerated at that point since the quantity of exportable goods was going
to be diminishing over the next several decades. Add to that the growing role
of debt in driving the USEconomy and there was no
way a gold standard could be tolerated otherwise both federal reserve and USGovt policy would have been exposed as the complete
fraud that it was and remains.
A
quick take-home from the above historical summary is that even an acute
crisis in the 1970s wasn’t enough to drive America back to at least
some form of monetary discipline. Given the fact that our thinking has yet to
be elevated at both the public and private level, it is likely a fantasy to
assume that such a drastic action would have any success in gaining support
today. This is especially true given that the dollar standard era still has
yet to come to a close. Once that happens, look for gold to be used by
politicians and bankers as a way to encourage public trust in yet another
paper currency.
The European Dynamic – Sovereignty DOES Matter
What
is probably the most remarkable thing this time around is that we already
have a near perfect example of our own fate being played out just across the
Atlantic. Sure, we’re not a union of nation-states under the control of
a single central bank; we're simply a union of states under the control of a
bank. And much in the same way Europe is fracturing, so is America. Whereas
various European countries are looking at ways to regain their monetary
sovereignty, states like Utah have already passed
legislation to help its citizenry
regain some of its lost sovereignty as well. Utah isn’t alone in its
desire to circumvent the fed and its monetary monopoly.
When
you borrow money to purchase something, you give up a piece of your
sovereignty. It is an exchange. A piece of your economic freedom for whatever
you purchase with the borrowed money. You get to join the club of people who
are susceptible to loss of sleep and other dislocations in their lives if
they fail to make the payments. But it is an eyes-open transaction. Everyone
understands what comes with the territory, but few ever think of it in its
most basic terms.
Similarly,
when the Eurozone nations joined the union, they had to leave their monetary
liberty, if you will, at the door. They became beholden to the whims of a
centrally planned monetary system. And we’ve seen how that has played
out so far. Debt is used to both contain and control the members. Bailouts
created from nothing by the central bank or coerced from other nation-states
are used to cause member nations to embrace various types of reform. The fact
that reforms were necessary is obvious.
At
the end of the day it all comes down to liberty. Whenever liberty is
legislated out of existence it creates a vacuum. When sovereignty is ceded,
the ability to control one’s own economic destiny is sacrificed and it
happens in more instances than most people might care to think about. It might
be easier to just turn over control of something like the money supply to an
outside institution, but then you get to deal with the consequences –
both good and bad – of that decision.
And
if things don’t work out, you get a situation like Europe or here in
the US where the federal reserve holds the economy hostage; the carrot just
in front of the nose of the hungry rabbit, the monetary fix for the debt
addicted nation just out of reach. Maybe at the next FOMC meeting we’ll
get QEx. Maybe they’ll announce it after
Jackson Hole. Maybe they won’t. If there is no inflation and everything
is just grand, then why not print another trillion right now and hand it out?
In all seriousness, these are exactly the type of questions people need to be
asking right now regardless of how unpleasant the compilation of possible
answers might be.
Until Next Time,
Andrew W.
Sutton, MBA
Chief Market
Strategist
Sutton &
Associates, LLC
http://www.sutton-associates.net
andy@suttonfinance.net
Sutton & Associates, LLC is a Registered Investment Adviser in the
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