The Argument for Fiat Money is the Argument for Freegold

This guy has the essence of the problem nailed down, but his solution is bunk and business as usual. Government makes laws and then changes them, or disregards them when it it becomes beneficial to do so. The author needs to discover the concept of Freegold, where gold and fiat exist side by side and serve the purposes each are best suited for. Gold serves the savers and those who eschew risk of devaluation in fiat. Fiat serves the need for a flexible money that allows for growth that people will always demand.

Many would argue that we currently have such a system, after all, those concerned with protecting their wealth from massive monetary inflation are buying gold and silver. The problem is that our current system has gold captured and restrained in price because it is used to create credit, and in doing so fictitious “paper” gold supply is created in a fractional reserve manner. The effect is to create additional supply of gold that really does not exist, just like printing in the fiat world. This increase in apparent gold supply serves to depress its price from its natural and true level corresponding to real physical ounces.

The answer is much simpler and far more sustainable than new laws that limit government. Disallow the ability to loan gold. Gold must be limited in purpose to one thing and one thing only, to store the wealth of savers. No more gold loaning through the bullion banks, no more gold swaps and loans through the central banks. No using gold gold as collateral for credit period. In this manner, gold would be used solely as a savings vehicle.

When the threat of fiat inflation is low, the market will favor fiat because it offers the potential of growth and offers the potential of return on money through such things as stocks, bonds, etc. Wealth will flow from gold in the form of savings into fiat. If inflation on the other hand starts to get out of control, savers will flow their wealth from fiat back into gold for protection with the assurance that the price of gold is free to seek true value dictated by an expanding supply of fiat.

In this way gold serves as a pressure relief valve that allows equilibrium to be achieved. The market applies the brake and the accelerator to fiat production, not a centralized authority such as our government and the Fed. Gold price would be a barometer that measures the expansion of fiat and it would read true under Freegold, quite unlike now where the barometer is “fixed” to read what a governing authority wants it to read.

MS

 

The Argument for Fiat Money

By:     Mike Endres   7/29/2011

Now that title got your attention, didn’t it?

Here in the middle of governmental chaos and confusion, political bickering and turmoil, debt through the roof with mathematical proof that there is no way to pay it back that will not result in a Depression worse than the last “Great One” (it is the opinion of many that we are now in a “Great Correction” but we’ll end up in a greater depression than the last one before we’re through, if history is a guide), and I am making a case for fiat money…

No, I’m not nuts, just a few years (maybe a decade or even two) early.

First, as we all know, the debt must be paid – all over the world. Most countries of lesser stature merely thumb their noses at creditors and default. Ireland just did that by offering (and getting ) to pay $0.10 on the dollar for the Bank of Irelands debt to the Euro-banks (which never made the Main Street Media in any form or fashion and only Reuters carried the info – to this day!). That’s the honest way out of debt. Default, bankruptcy, a few mea culpa’s, a few years of suffering from depreciated currency and, following the start of honest growth, all is well and things get better.

Not so North of the Equator so much. Oh sure, Russia did it – but they had so many natural resources nobody noticed much except the banks that got bailed out. Greece just tried to default but thanks to the EU who will nail their feet to the floor and torture them for years to come (unless they pull a typical Grecian reaction and burn the place down to stop it). For some reason they can’t bring themselves to give up the dole and work for a living.

The current not so comedic problems with debt and budget in our own battered, dinged and buried beyond neck (we’re barely breathing now!) in debt U.S.A. will progress as time passes into yet another “kick the can” attempt which will eventually (if not now) fail. I’d like for it to fail now and get it over with but who knows.

But that doesn’t address the title of this article, does it? The Austrians want to return to the gold standard. The Republicans want to stop (all of a sudden, I might add) excessive Government spending, the Democrats desperately want to “kick that can” (at least past the 2012 Presidential farce) so that things can continue as they were – which isn’t going to happen.

Well, what the Republicans and Democrats want to happen will probably both happen – one after the other – and then game over. Or maybe sooner. The world will not allow the Democratic no-plan and the American people will throw out of office every Republican in Washington if the Republican’s really cut back spending to where it matters! They won’t! Either way, we are well and truly doomed to a Depression of much greater extent than that of the 1930′s – but no one wants to admit it.

BUT – big but.. what happens then? Most likely, the pendulum will swing and inflation will (properly) get blamed for all our problems and we’ll reset the economy by going to some sort of commodity money – based on gold and silver most likely, but it could be carrots, or wheat or something else our “new” Government figures we can control. (We will never, sadly, punish the real villains, ourselves, for allowing it to happen for the umpteenth time). Let’s assume it to be bimetalism and a restating of the dollar’s worth to whatever the current world price of gold happens to be with silver priced at some fraction to that of gold.

Ah – says a large part of the audience, heaven is upon us and all will be well.

Which probably will be a truism for the first few years to a decade or two.

But then we struggle up from our debtors dungeon, climb back over the edge of the pit and wonder of wonders – start to grow economically speaking! After all, after an inflationary crash and depression, there are a lot of poor people and a little bit of growth goes a long way in that situation.

One problem. Where does the money come from to allow the growth that is so badly needed? I know the commodity money fans will say that we don’t need more money – prices will naturally fall as production rises all with the same amount of money – and that is true in the small limited sense. A fixed money supply does not, however encourage anything. Entrepreneurship is totally muzzled for lack of credit (after all, credit is just money that’s advanced on the premise that interest will be paid on it and it wil be paid back in a set period of time, right?). Credit keeps you from spending years and years saving up a stake for a new business you know will (maybe) be successful so growth in a fixed money supply economy is limited to the growth of the commodity that the money is “fixed to”. Bad idea overall. It’s been proved unworkable many times. It’s just too slooooooow.

But we’re not talking small stuff here, either. We’re talking about dragging ??? million people out of a much poorer place back up the human conditional ladder into some kind of higher location.

Voila! We need more money! More money will do it as it will encourage and allow people to buy more things and spend and increase demand for all sorts of good stuff like sofas and cars and houses and flat screens and transport and a replacement for that tent we’ve been living it and new shoes for the kids and – and – maybe with the new money we can restart the school down the road in the next town so we can stop home schooling the brats! In addition, with just a little more money to go around, Johnny Smith can borrow a little of it and start that wood cutting business he’s been wanting to do out on his property! What a wonderful idea and all it needs is more money than is allowed by locking in the supply of it to the “Cross of Gold” (and where have I heard that before?). Let’s print some!

Now we come to the crux of the problem. Commodity money doesn’t work because it limits the ability of the economy to grow by other means than technology and productivity improvements reducing the prices of goods and services. Commodity money is rigid. It doesn’t encourage anything, good or bad.

Please read that paragraph again.

Fiat money, which one gets when not using a commodity based money works fine for a little while. A little while. From the get-go the citizens get screwed because he who pockets and spends fiat currency first gets the most use out of it —– unless the issuance of said fiat currency is limited to no more than the HONEST value of the gross production of the country.

I’ll spell it out, P-R-O-D-U-C-T-I-O-N.

Not government spending (National, State or local), not welfare, not social programs of any kind, not education, not health and welfare – NOTHING but productive earnings of a country. If the country actually earns more than it consumes, then it is able to tax itself a bit to handle things like national defense, interstate and international commerce negotiations, even local police if you’ve got some problem drunks. No fair counting anything other than production of goods and services required for that production that is in demand for both domestic and international use.

Also (and this will bring some boo-blahs), so called free trade where intelligence is hauled overseas and mixed with fiat money to put people to work at 1/20th the cost of domestic labor sucks and should be discouraged. Tariff the products when they return to our shores or what you end up with eventually is what we have today: We produce next to nothing, most all important production has moved off shore and all we have is the mathematically unworkable system of buying products produced in foreign countries by selling them debt that will never be paid back to get money to buy their products – a Ponzi scheme of enormous proportions that is now coming home to roost with our unstoppable unemployment, skill loss, our manufacturing capability mostly dead, a consumer driven society dying by debt that can’t be paid and a future that will be a depression of Greater Proportion than the last one.

Now to get back on subject, a purely commodity form of money will not work for an advanced technological society. It hasn’t worked in the past (several books are listed at the end of this for you to review history to prove to yourself that this is true) and it won’t work in the future. Commodity money will arrest inflationary problems overnight once the general public believe it will arrest inflation of the money supply. True. Overnight. The human race has been there and done that a number of times.

Fiat money, unanchored to anything, on the other hand, always destroys a civilization in which it is used as over time, venial rulers, kings, despots, tribal chiefs, emperors, presidents and congressmen find that it’s so much easier to print more fiat money (in the form of cash or credit – which is the same thing in two different siren suits) than it is to explain to the citizens why they should give up their hard earned “productive” money to the government to do things they don’t care about. This way, the government (of any sort or variety) can spend more than the country can produce or give up to the government in the form of excess production (taxes). These “upper caste rulers” can then buy votes (in a democracy), fund huge police forces (in not so democratic countries), stuff the pockets of favored people including those “governing” the country and their cronies and do all manner of mischief with money they have no business having.

The result of this is a slow (don’t be greedy, now!) depreciation of the fiat money doesn’t kill the golden pig quickly as an excess of money encourages growth that is not necessarily productive, not necessarily safe (hence a percentage of the growth is false!) so standards of living usually climb for a while – sometimes a long while – thanks to technological progress and productivity gains that technology brings. This can go on for a long time – think five generations for the United States – not too shabby an effort even if it has now run off the tracks.

But sooner or later, the ruling scions, bankers, scam artists, politicians, stock sellers and check loan artists get greedy. Why? Because every time you add to the debt of the country, you cut down on the productivity of the country. The more debt you have to roll over and suffer paying the interest on, the less money is available for productive (REAL production) purposes. So the gross production (and true products) of the country starts to fall.

THIS IS A POINT WHERE WE HAVE ALREADY PASSED.. Mark that on your calendar.

Things tend to go to pot pretty fast after that happens because every fiat dollar of debt incurred beyond that point actually reduces production capability that much more and it is not linear. Mathematically, it turns out to be exponential so the curves of doom rise ever faster until they are unsustainable as they are now. So crash..

Now what do we do on the other side? What kind of money are we going to use when all the dung has been flung, the depressing future is in the past and we see the light of day and start thinking of eating more than one meal a day? (I apologize for the doomer slant – but I am not optimistic about the comfort of the coming period of time.)

First, our problem is not with start up money as we can cobble together a commodity based money to dig our way up the side of the pit. It may very well be that commodity money will be the only way we can do so. Time will tell.

Sooner or later, we will, once again, need more money than commodity money allows us to have because of the ever limited supply of the base commodity and that is the question. What can we use? History is not kind here.

Our problem is not money, you see, it is human nature. Human nature is what drives fiat money based systems into disaster, not what is used for the “money” or medium of exchange. Yes, I know the “real” requirements of money – intrinsic value, small, divisible, retains value over time, readily acceptable in trade, blah, blah, blah.…. Fiat money fills all those requirements if we would just stop printing so damn much of it in currency and issue of credit.

So, fellow voyagers, the only true long term solution to this problem is to use the law (assuming it’s available then) and limit the expansive amount of whatever we decide to use for money. I mean LIMIT it.. No political finagling or messing with formulas to higgly-piggly GDP or production figures or growth or unemployment or inflation (as is sadly done today). I mean set it in stone – perhaps the Constitution if it’s still there. Educate everyone as to what expansion of the supply of money will eventually do to them or their children and grandchildren and make it as close as we can to impossible to fiddle the numbers or the expansion of the money supply beyond the actual growth of the true productive capacity of the country.

If the government wants to go to war somewhere “to make the world a better place” or increase the police powers of an internal enforcement organization (think Homeland Security) then they have to talk the people into taxing themselves or raise tariffs to pay for it (thereby raising prices of foreign goods and then they have to convince the people to pay for them willingly!).

One exception. In the event of National Emergency (invasion or an asteroid) or someone nukes us that requires the War of Worlds to commence. Then, sadly, all bets are then off and we are in the soup again. That has happened time after time after time in history and history will always repeat – perhaps in different flavors and smells, but repeat it will.

As for today’s debt problems? Forgetaboutit. The end game is baked in the cake. We are all going to get poorer by and by and as to investments, he who looses least wins!

But we still need to think and discuss the other side of it all.

Educational List:
Inflation: R. Chris Whalen
When Money Dies: Adam Fergusson
Collapse: Jared Diamond
The Ascent of Money: Niall Ferguson
Freefall: Joseph Stiglitz
The Next Decade: George Friedman

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