Friday, November 1, 2013

Why the Gold Standard won't fix the system

   Submitted as a comment to an article from the Gold Standard Institute
    Theory of Interest and Prices in Practice

I loved the “not even wrong” adage attributed to the physicist Wolfgang Pauli, and appreciated the review and application of market theory to the dollar and gold markets.

Missing from this essay, as many readers of Zero Hedge no doubt spotted, was consideration of manipulation of markets, including the gold/paper-gold market, by large players other than the Fed, which makes market analysis so difficult, and which always renders suspect the phrase "The Market decides..." or "The Market dictates..." 

There are deeper problems here however, to which the Gold Standard true believers can be expected to be blind but which many readers of Zero Hedge may recognize.  

Step by step, since the late '60's, the US Government and regulators, with the encouragement of the bankers and large investors and the other world financial capitals and banks, has moved away from a gold-anchored, well-protected and regulated financial system and economy to today's financial "fantazamagora" resting on a foundation of "transmogrification".   

The entire Economics Faculty at Wisconsin in the late '60's - and apparently most of the profession - were united in their commitment that a Great Depression would never again be allowed.  Yet step by step the dollar was cast loose from its foundations and all the checks and balances established for this purpose were dismantled.  

Was this driven just by greed, amnesia and short-sightedness?  Perhaps not; each of the major "wrong moves" since then, starting with abandoning the Gold Standard, was in the context of a crisis that threatened the stability of the economy.  

Had the US stayed on something like the Gold Standard, it seemed to me at the time that it have been inexorably driven into another deflationary spiral and depression.  At that moment of history, with the threat of communism still very real in people's minds and the New Deal still a fresh and living memory, it is easy to see how politically unacceptable such an outcome would have been, no matter how healthy for the system for "clearing the deadwood", liquidating excess capital and debt (to the advantage of the bigger fish) and restoring "labor discipline".  

Two underlying dynamics of the past 70 years that I would direct your attention to: 

1)  the inexorable buildup of debt, as lending creates money to cover the principal but not the interest, even in a gold standard financial system.  Ellen Brown and many others here have written extensively about this. 

2)  the inexorable depression of the wages of those actually engaging in production of real goods and services as a share of revenue as owners strive to lower costs, generating today's situation where consumer demand for goods and services can no longer justify further investment for profit in the real economy.  

With the advances in computer design and control, robots and 3-D printing we may even have entered a "black hole" where additional investment in the real economy almost immediately results in a net decrease in consumer purchasing power, and in which further expansion of credit can no longer generate increased demand because borrowers are tapped out.

The Gold Standard, as a formula for a stable market-driven economy emerging from the impending financial Armageddon, would then only be a temporarily fix.  Yet perhaps this cycle could repeat?  

My suspicion is that the present crisis marks the end of the road for economies driven by the pursuit of profit.  While the capitalist economy could perhaps be preserved through the crisis with massive government repression and re-started following a massive liquidation of paper and perhaps physical capital - and perhaps the mass-scale "die-off" of "useless mouths" of which some here speak - the costs would include civilization as we know it and probably destruction of the very biosphere.   

This moment rather calls for a much more profound paradigm shift, one that will no doubt be difficult for many readers of Zero Hedge to accept.  And millions understand this.  See: How Science is Telling Us All to Revolt, by Naomi Klein, NewStatesman (UK), October 29, 2013

There's an adage that roughly fits, which goes something like "they can't be expected to understand what their paychecks depend on their not understanding." (who said this?) 

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