Something nasty this way cometh…. (gold)

The reason I keep yapping about gold is two fold. An unchecked fiat monetary system within a democratic environment, must inherently and by necessity lead to an inflationary blow-off phase (2003/2007) accompanied by the total debasement of the currency. This is not an opinion. If you doubt this assertion, then take a gander at the header gracing the pages of this blog. The other reason is that in an environment of floating exchange rates where despite unimaginably low yields credit creation is contracting and currencies are deliberately devalued, nothing other than gold and/or silver can help to preserve wealth.

That is because a fiat monetary system can only survive in a context of relative values, high monetary velocity and low savings. The inescapable outcome is that financial value progressively runs away from intrinsic value and nominal profits are progressively concentrated in fewer and fewer sectors till they are concentrated in the financial industry only.

Since whether our “authorities” like it or not, gold is a rare commodity and, as such, it is nobody else’s debt, gold still plays a role in state finances. However, the fiat logic dictates that gold should be devalued by any means possible or, at least, not accounted at its true value. Thus as the fiat monetary logic develops, the authorities have a vested interest in avoiding any reference to gold and certainly have an interest in discouraging the public from demanding physical gold in exchange for currency because this is tantamount to saving thus lowering the velocity of money.

Accumulating gold in an environment of low yields and cratering credit creation is the only thing that can be done to preserve wealth. Accumulating gold is direct action to signify a loss of confidence in the monetary system, the policies and the instigators of the policies.


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2 Responses to “Something nasty this way cometh…. (gold)”

  1. David W. Lincoln Says:

    Guido, if I can find the column by David Frum which dates to the time of east Asian currencies in very tough straits, roughly a year ago, I’ll post it here. It applies distinctions between central banks and currency review boards. However, Frum mentioned that it would not work in Indonesia because, at the time, the board would have been manipulated to the benefit
    of the friends, and relatives, of the one in charge.

    It would also put a very large damper on the legacy building of politicians, and force companies that receive government contracts to deliver on time and on budget. Instead of wasting ghastly sums.

    • guidoamm Says:

      No system can be full proof. Whether a review board or a fully metal based system, any system can be gamed. Ask the Romans! By the end of the empire, the currency was being deliberately debased by employing alloys that were progressively poorer in precious metal. When the USA was on a presumed “gold convertibility” standard, gold had very little to do with anything. Once again, though gold was mentioned, monetary policy was still in the hands of the Fed and government so that nobody could see how much gold really was backing the currency. One of the outcomes of deliberate debasement is, again, falling velocity of money – Gresham’s Law – (Gresham’s Law) because people will hoard the “good” money till only debased coins are left in circulation.

      Fiat money is not a new concept. It’s been tried before and we know how the dynamic develops and how it ends. Even as recently as the 1920s fiat money in the form of the US$ exhibited those characteristics that we are seeing today. We have seen this film before and we know how it ends.

      Just like Democracy is not the best political system except for all the other systems that have been tried, what matters is that the management of the currency must be taken away from the opaque world of government and banks and placed in the hands of the people. In the USA that would be Congress (remember here what Jefferson said: “If the American people ever allow the banks to control the issuance of their currency, first by inflation, and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property, until their children wake up homeless on the continent their fathers conquered. The issuing power of money should be taken from banks and restored to Congress and the people to whom it belongs. I sincerely believe that the banking institutions having the issuing power of money are more dangerous to liberty than standing armies.“).

      Money and the monetary system are at the base of any and all human endeavors bar none. The choice of a monetary system and the management of same, dictates every single social and economic choice our governments make. Constructs like insurance or pensions or scientific research are all shaped by the choice and the management of the monetary system.

      An unchecked fiat monetary system REQUIRES low savings and high velocity of circulation of money. The rationale is that in an environment of fiat money economic actors (you, me and the corporations) are supposed to use fiat money to accumulate real wealth or, wealth that has high intrinsic value and that can be sold forward. However, for whatever reason, social development drives societies to become service based. Thus, the point at which the economic output of a society is composed of 80% services, the question government should ask is:”How much real wealth is our economy generating? That is, how much intrinsic value is our economy generating?”.

      This basic fact is that an unchecked fiat monetary system can lead nowhere else but to an accelerating inflationary trajectory till inflation becomes the goal unto itself. Thus an unchecked fiat monetary system guarantees that government goes progressively from playing a role of benevolent overseer, to a role of partial (as in unfair) arbiter until towards the end of the inflationary dynamic it becomes an accomplice with intents that are contrary to the letter of the law.

      Monetary policy must be taken away from government. This is what a democratic system of government would require. The only way and, by the way, the quickest way to take away monetary policy from the state is for economic actors to accumulate gold and silver bullion.
      Gold and silver bullion are anathema to a fiat monetary system. If you jam the wheels of fiat money, you jam the wheels of government.

      Bloodless, peaceful, exceptionally powerful and effective. Accumulate gold and silver bullion.

      Of course, the downside of doing that at the end of the inflationary cycle when government is already backed into a corner and showing signs of psychopathic behavior (increased military spending, adventurism, increasingly pervasive police state tactics, gagging of the press, concentration of power, expansion of government, picking of economic champions… you get the drift… ) at that point, hording gold and silver bullion might very well precipitate matters leading to severe consequences.

      We are late. But we can still make a difference. Accumulate gold and silver.

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