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50 Years Off the Gold Standard Has Bought Us This

Few groups like timelines as much as gold investors. And how can't they? Gold is the one asset that doesn't disappoint over time. Timelines are great in general, and they can help us separate truth from falsehood.

As can be inferred from Daniel Lacalle's analysis of the 50th anniversary since Nixon suspended the convertibility of the U.S. dollar into gold, the global economy now essentially rests on falsehood. Sure, you could argue this move established the greenback as the reserve currency. Lacalle notes that other countries could compete with the dollar if their gold reserves were sufficient and their economies strong enough. That ship has sailed, however; too many nations now depend on the dollar.

That's definitely a benefit! Global reserve currencies get all kinds of benefits, as ex-currency strategist and professor Avinash Persaud points out :

If your currency is a reserve currency, you can pay for things by writing cheques, which nobody cashes. This is exactly what the U.S. has done in recent years.

So what has it cost us? A mere 3.5x more than we make…

As Lacalle points out, global debt has skyrocketed to 350% of global GDP.

An entire economy founded on debt

An economy, even a global one, supposedly derives value from the goods and services produced. Since we left the gold standard, the entire global economy is in fact powered by debt.

Nations borrow from their citizens and from one another in times of prosperity. Governments print currency by the trillions in times of peace. (Or is that the other way around?)

Regardless, issuing more IOUs does not increase wealth. It just increases the number of IOUs in circulation, diluting or devaluating all the rest. Debt is not wealth; in fact, it's the opposite.

Economic crises are more common now

Anti-gold standard economists will grudgingly admit that yes, there have been more crises, but are quick to point out paper crises are shorter in duration. Of course they are, since the money printing button is always there.

We haven't had to solve a financial crisis, not since 1971. Instead of identifying and fixing the source of the problem, we just throw money at it. Money printing and borrowingdon't actually solve the problem, but theydo have the politically palatable effect of delaying it for future generations.

Kicking the can down the road. Writing checks our grandchildren will have to cash.

And then we get to the fundamental issue of a debt-fueled economy: it's an illusion.

Ignore the man behind the curtain

Our modern debt-fueled economies provide an illusion of strength and robustness. (It's definitely better to look strong than not to, especially when you're weak). Here's the problem with keeping up appearances: governments do so at the expense of their citizens.

Look: governments don't really generate income. That's not their job. Citizens, you and me, are supposed to be the ones who start businesses and take risks and generate wealth.

So when the government needs money, it could it through taxation… That's politically very difficult. No one votes for the politician who promises to raise on their own constituents.

That's where money-printing comes in. Call it quantitative easing or overnight repos or any other Fed-speak jargon, it doesn't matter. It's functionally new money, which devalues other money, which causes inflation. And though taxes apply to everybody more or less evenly, this institutional stimulus is not. As Lacalle explains, the government and the wealthy are by and large the first recipients of newly-printed currency or ginned-up credit, which leaves the rest of us with a few scraps (if we're lucky) and inflation (regardless of luck).

Yes, wages do rise in response to inflation. After the fact. Prices of pretty much every necessity rise first, and rise faster. Sometimes employers claim they can't afford to increase wages at the same rate as inflation -- after all, they're paying higher prices, too. Sometimes this is true.

Inflation hurts the poorest citizens the most. The lower your income, the more of it you spend on necessities like food and housing. And when you're already buying the cheapest food and paying the lowest rent available, and prices go up? Congratulations, you get to choose between homelessness or starvation!

"We the rich will emerge from this crisis stronger and better"

Unfortunately, we don't have to look for a prime example of how debt "solves" a crisis. Wolf Richter summarizes the Fed's response to the Covid crash quite well:

Fed Chair Jerome Powell rationalized and defended the Fed’s ultra-radical, previously unthinkably monstrous, and super-fast bailout of asset holders starting a year ago, when within three months the Fed created $3 trillion and purchased assets with them, and created the biggest media hoopla about those purchases and many more trillions in future purchases, in order to inflate asset prices further, and make asset holders immensely rich.

It was a huge success. Asset prices nearly across the board surged way past the levels before the crisis, and those holding them got a lot richer, very fast.

So how much of that $3 trillion benefited people who might've, you know, needed it?

  • 70% of this additional wealth went to the top 10% wealthiest (and half of that, 35%, went to the 1% wealthiest)
  • 28% went to the "middle class" (50%-90% wealthiest Americans)
  • 2% went -- you guessed it -- to the bottom 50% wealthiest households

What's the takeaway here?

Debt-fueled economies are a great idea, IF you're already in the top 10% with a net worth of $1.2 million+. Then you gain more than you lose.

Unfortunately, everyone else, the other 90%, lose more than they gain.

Moving toward a personal gold standard

Even though the U.S. opted out of the gold standard in favor of the illusion of paper wealth, individuals don't have to. A lot of people who buy gold are consciously opting out of the debt economy, and putting their personal finances on the gold standard.

And it's not just individuals who make this choice.

The famous tech company Palantir celebrated its stock growth by buying $50.7 million in gold bars and storing them in vaults. They wisely bought this month, making the most of gold's flash-crash below $1,800. Palantir also noted they accepted payments made in gold, as well.

Why?

"You have to be prepared for a future with more black swan events," Palantir COO Shyam Sankar told Bloomberg.

A black swan event used to mean extreme geopolitical tensions or, in worse cases, economic crashes. Last year has certainly redefined the term, and we probably don't want to know what Palantir is preparing for.

Here's what we do know: 50 years after gold was untethered from money, it is still the most trusted form of value. Probably because no trust is required. Gold isn't a promise to pay later. Its intrinsic value isn't derived from a Black-Scholes risk model or a credit agency's guesswork.

That's why central banks around the world still own gold. That's also why we call an outstanding job, or a fantastic example "the gold standard." You don't have to follow the U.S. example of pretending a piece of paper has some kind of value somewhere, to someone.

You can start to transition to your own personal gold standard instead.

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