Gold Standard is no cure

re. 

Why is the Gold Standard Urgent?  by Keith Weiner

http://www.zerohedge.com/news/2014-10-15/why-gold-standard-urgent

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This good well-reasoned article ends with a logic failure and leap to an unsupported conclusion.  

Weiner writes:

"When the rate keeps falling, the borrowing keeps rising. Is there a failure point for debt?

"... What happens when an entire society doesn’t save?

"Our financial system has suffered an escalating series of crises. Each crisis has grown out of the fix applied to the previous one.

"The crisis of 2008 was different. No matter what the Fed has attempted, they have not been able to create even the temporary appearance of recovery (other than in asset prices). It’s not merely that growth will be slow, or slower than it should be in some theoretical ideal economic world.

"There will be no recovery while our monetary cancer rages, unchecked...."

Well put. Very well put.  But then he jumps to:

"We must rediscover the gold standard, which is the only cure."

Not so clear. I know, there are theoretical arguments that this should work, but what does the historical record show?

The founding of the Fed was not just simply a criminal conspiracy.  It took place during the 30-year "Long Depression" that began in the 1880's and ended with World War I, an economic and social crisis that saw the rise of populist, labor and mass socialist movements throughout the world including in the US.  By the time the smoke had cleared from that crisis, most of the old Russian Empire had repudiated capitalism and Germany had nearly followed suit.    

The next big lurch into fiat currency occurred during and just after the Great Depression, beginning with Roosevelt's confiscation of private gold holdings and crowned by Bretton Woods.  That crisis ended with the Soviet Red Army occupying Eastern Europe and Berlin, communist-led movements overthrowing old colonial empires, and the "fall of China".  By 1955 the terrified global bankers were hiding behind the threat of a world-destroying nuclear armageddon to save their system and their skins.  

The final lurch into a fiat currency world began during another profound system crisis in the 1970's, at a time when world capitalism appeared to be lurching back into depression. A depression my professors in the '60's swore could never again happen and would never again be allowed. The response was the final unpegging of the dollar from gold, followed by the unleashing, step by step, of what became today's de-regulated, financialized bubble economy, where money flows like water from the Fed, the central banks and great banking houses, where "value" and "price" have been fully conflated. 

Seen apart from this historical context, the rise of central banking and fiat currency can be modeled as simply a criminal conspiracy.  But in historical context, it appeared as a succession of apparently successful emergency responses to emerging systems failures.  But if that is how we should understand it, then it is hard to see how fiat money could be the root problem of the crisis, or how reverting to the gold standard could be the cure.

Which is not to say that gold won't play a key role in the global drama that's unfolding.  I'm just saying that it's illogical to jump to the conclusion that reverting to a gold standard alone could fix a crisis that predates and perhaps precipitated its abandonment.  

If we conclude that some underlying condition, problem or set of problems must have been driving the system into depression and mass unemployment over a century ago, and if we conclude that is what must have forced our grandparents' and great grandparents' generations to abandon the gold standard, then we should assume this underlying problem or condition must still be there waiting for us.

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

   http://www.zerohedge.com/contributed/2013-10-31/theory-interest-and-prices-practice

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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

     http://www.newstatesman.com/2013/10/science-says-revolt

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?)