I’m 100% positive that the ongoing precipitous fall in gold’s lustrous shine will not sway the belief of loyal, but simple-minded Paulites that the Gold Standard is still preferable to the current monetary mechanism of fiat currency. Neither will the believers that the moon landing was a hoax ever believe that Neil Young and Buzz Aldrin actually planted a U.S. flag on the moon.
But for the rest of the population in the land of the logical and reasonable, let’s clear up some common misconceptions.
Congressman Ron Paul—legendary herald of the omnipotent “gold god”, along with his loyal acolytes– Federal Reserve Chairman Ben Bernanke’s biggest critic, fervently believe that a return to the gold standard implies an end to monetary policy and the Federal Reserve.
Bzzzzzzz. Wrong again.
Under a Gold Standard, the U.S. Treasury would exchange dollars for bullion at a price of, say, $1,000 per ounce. In practice, that means banks would freely exchange their dollar accounts at the Fed for electronic claims to the magic money rock.
Nevertheless, the Fed would still buy government debt or other securities in exchange for newly created reserves, lend its reserves to banks, and set interest rates on its loans to banks. A Gold Standard simply would not stop the Fed from being the lender of last resort, bank regulator and financial crisis firehouse, which Paulites see as the purveyor of all things bad happening to our economy. After all, their mantra goes; gold is worth more than paper.
Just remember, in “Gold World”, Ayn Rand was a prophet, an oracle, who saw the folly in a country that helps its citizens who can’t help themselves and destroys an otherwise productive, albeit feudalistic society. The truth is, she was a crackpot who died a bitter old crone and penniless but for the safety net of US society she so publicly abhorred…welfare.
Similarly, the goldbugs actually promote the Gold Standard because the magic money rock is just so nice and shiny… and they can see it from their house!!
Gold in the Real World Economy
The sudden fall in price of magic rock- ‑which plummeted 9 percent, to $1,347.40 an ounce, last Monday, would have, in that one day, added $1.4 trillion to our debt were our currency tethered to the market value of magic rock. That’s more than the ill-fated “Super-Committee” was tasked with reducing the U.S. debt over ten YEARS—which led to The Sequestor; the pain of which we will soon begin to feel across the entire extent of the country’s economy.
This past week’s biggest two-day loss percentage since 1983 for bullion and/or contracts has put goldbugs, who are by definition pessimistic lovers of certainty, into a state of high anxiety. When the ultimate commodity of last resort so clearly fails to retain its worth, the world becomes exponentially spookier to them.
But what these lay economists- who think macroeconomics and microeconomics are simply two names for the same thing- fail to realize (and always will) is that a Gold Standard currency does nothing to eliminate debt or debt crises much less the oft-predicted but never realized debt-induced inflation. There is simply no such thing as a monetary system that can absolve a nation of its fiscal sins.
Note: Microeconomics (individuals and business economics) and Macroeconomics(governmental economics) has as much in common as Football and Futball.
And there have always been those who accept as fact, that cashing out and putting everything into krugerrands, or some such, against the day the stock market crashes is sound, sensible monetary policy. Ironically however, the number of investors who actually found refuge in the “precious metal” when the market disintegrated in 2008 is probably fewer than goldbugs would ever admit.
The flight to magic rock over the past dozen years, however, has attracted a new form of zealous absolutist who suspects the Federal Reserve and the Treasury do not know what they are doing and who believe quantitative easing to be an evil process that inexorably invites hyper- inflation. These ideologically driven, vacuous gold hoarders are closely related to, or possibly even the same people, as those who advocate the return of the dollar to the Fort Knox glory days.
These Chicken-Little, survivalist-obsessed, Hannity-admiring brainiacs, not altogether surprisingly are also convinced that FEMA trailers are our ultimate fate, and can only be reassured by the ancient belief that bullion is the ONLY “rock-solid” reserve for currency. For the past 12 years the always rising magic rock price, was proof-positive to them to substantiate their lack of confidence in Keynesian manipulations of the currency or the economy.
So What Happens When the Pretty Gold Rock Loses It’s Magical Value
Since August, however, when the magic rock started to lose its value, something has gone badly wrong for the Gold Standard bearers.
It really doesn’t matter why magic rock has lost its sparkle, whether it is because troubled banks like the Bank of Cyprus are considering selling off all their own gold to satisfy their country’s creditors– which would flood the market–or because of a general readjustment in all commodity prices.
The steady descent of the magic money rock’s value shows that it is no different from other, more mundane commodities and that its special quality, an irreproachable promise of retaining its value through even the most chaotic of markets, is a big old stinking myth.
The fact is, the market in magic rock is tossed about by the same brew of rumor, whimsy and conflicting signals as any other market. The difference is that the practical uses of gold — except as a glorified status symbol, (i.e. jewelry) and in some industrial applications — are extremely limited. I suppose one of the few qualities to extol its virtuosity is that it is easily shaped into ingots for hoarding…but hell, so is silly putty.
It originally became a commodity that operated as a currency because it was in strictly limited supply. Its scarcity, the magic-rock-lovers saying goes, is its principal allure and enhances its value. But under that theory, we should all be storing up drinking water because it’s vanishing much more rapidly than magic rock.
Gold’s lack of practical value, paradoxically, also diminishes its versatility as a tradable commodity. Why should anyone, other than a hoarder, need it? John Maynard Keynes saw little merit in the ritual of digging up inherently worthless rocks in South Africa and shipping it for perpetual safekeeping to Fort Knox.
He did observe that such absurd activities did provide a small amount of employment for the extraction, delivery and storage for the magic rocks, but did nothing else to help an economy grow. It’s scarcity is also a common reason to convince magic believers it is a safe haven in an uncertain market, but with just a modicum of reality, one can see it’s more perception than reality.
The bullion/contract market has been heading upward for so long, that it must’ve shocked the goldbugs that the price of their favorite refuge can actually go down. In fact, I’d wager that it shocked them almost as much as millions of homeowners were shocked that their $100,000 homes weren’t worth the $250,000 their real estate brokers and HGTV’s “Sell This House” celebs Tanya Memme and Roger Hazard told them it was….even with the proper staging!
It’s Time For a Goldbug Intervention
Essential to the goldbugs’ belief system is that whatever governments do to boost an economy always leads to hyper-inflation. Ever since Milton Friedman persuaded policymakers 30 years ago that the amount of money in circulation is the primary, if not entire reason for inflation, goldbugs have watched in distress as the Fed has printed billions of dollars.
In the past five years, however, despite an $800 billion stimulus and virtual waves of quantitative easing, there has been virtually non-existent inflation. The post-Great Recession readjustments are mostly being conducted not through inflation but currency fluctuations, with the dollar, the Euro and the yen, wrestling to find a sweet spot that will leave their economies, if not prosperous, at least stable.
Much of the fascination with gold is a simplistic longing for a bygone time of imaginary certainty when currencies were backed by ample gold reserves. But this romantic reminiscence is more fantasy than reality.
Michael Bordo, a distinguished professor of economics at Rutgers, who has made a study of the comparative strengths and weaknesses of the three most recent currency regimes – 1)the gold standard, 2)the system of fixed currencies established by Keynes at Bretton Woods and 3) the modern regime of floating currencies- ‑ concludes that Bretton Woods performed “by far the best on virtually all criteria.”
I’m sorry Paulites, The Gold Standard will never be revived. Moreover, those who continue to hoard gold, or simply believe that it is some sort of magical economy-savior, will be tragically deprived of their vociferously predicted Judgment Day. They might as well invest in bitcoins, another speculative commodity with limited supply that promises a false refuge from market uncertainty.
And you thought Bernie Madoff was a con man.
In the event of a widespread market crash, which is a favorite among pseudo-economists because if you say it long enough it will happen eventually due to normal economic cycles, hiding out in cash or gold will provide an artificial, temporary, and eventually belief-busting downfall for those betting on its magical healing powers of financial safety. Even if the cash is converted into magic rock as a hedge, it is the real market in goods and services where fortunes will be made and lost, even after a collapsed market like the one in 2008. I mean even though the overall economy has been as vibrant as cigarette sales in the cancer wing at Sloan-Kettering, the stock market has remarkably surpassed the level it had achieved before the crash.
Hiding out in gold is like hiding out in one of those huge 1950s nuclear fallout shelters. You might feel safe for a few extra days, but it’s not really going to save you. Eventually you have to come out. All you did was prolong the dread.
Look at it this way. If you have your fallout shelter stocked with gold bullion and your neighbor has his fallout shelter filled with 20,000 gallons of clean drinking water, a 5 TPD Sep Skid-Design Isometric Oxygen-Producing Generator, and a mountain of freeze-dried fruit, nuts and Twinkies…who is richer?
Now…let’s talk Austerity vs Stimulus.
Harvey A. Gold