Sunday, February 28, 2010

Return to the Gold standard - Solution to the credit crisis?

I'm adding this one, not because I'm an expert, but because I would like some views on what went wrong with Capitalism, and how the hell it's going to be fixed. For sure we can't just carry on the way it went before. The recession is going to take decades to fix.

"Every fiat currency ever created in the history of the world has collapsed in disaster"

A fiat currency is a worthless piece of paper having no intrinsic value, since it cannot be redeemed for a tangible asset such as gold or silver. Fiat money's only intrinsic value is fuel: you cannot reuse the paper money for printing because the paper has already been spoiled with ink from the Central Bank, and you cannot use the fiat money as toilet paper because of its poor absorption.

If you cook on a wood stove or live in a cold area, at least paper money has some intrinsic value to you (energy), otherwise paper money remains trash - an expensive pollutant brought to you by your Government.

A fiat currency is money issued by a government order that it must be accepted as a means of payment by law extortion. Without the threat of using force (such as jailing or killing recalcitrant's), no fiat currency would ever come to existence. A fiat currency remains in circulation as long as its government make it illegal to its citizens to conduct business in gold or silver.

If a government would partially legalize freedom, that is, allowing people to trade in gold or silver, and the courts would be allowed to recognize and enforce a contract settlement in gold or silver, then the government's Central Bank would become useless within months.

Because a fiat currency can be printed on paper, it makes it easy for the government to spend more than they tax, thus inflating the money supply. Printing fiat money is the favorite means for politicians to buy votes. Since most people are ignorant about inflation, voters are misled to believe they are receiving more money from the government compared to what they pay in taxes.

The truth is government cannot create any wealth. All the government can do is confiscating wealth from one group and give it to another group, in exchange for a few votes. Ironically, the inflation tax affects the poorest in society, usually the very ones voting for more government.

What most people fail to realize that inflation is a tax. They know only that the cost of living has gone up, however they don't understand why. Politicians and the media use propaganda to blame the rising cost of living to greedy businesses, however the root of the problem is the printing of fiat money.

Ending inflation would cause your money to buy more and more as the economy grows, instead of less and less, as it does today. Stopping inflation would also end bubbles and booms, and the recessions they cause. Past inflations, booms, and busts were created through essentially the same process, including the recent stock market and housing bubbles. The Central Bank (or the Federal Reserve) is simply the government's latest-and-greatest tool for legalized counterfeiting...(page break)

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Inflation decreases the purchasing power of the currency, thus making goods and services more expensive. Inflation decreases the value of real wages, decreases savings and investing which is necessary to create jobs, inflation increases the interest rates and increases the production costs.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

The Founding Fathers of the United States knew that a fiat currency would create poverty, slowly increasing it until it overcomes us. All our modern presidents, Republican and Democrat, are doing is taking advantage of the ability we gave them to print money. Greed has corrupted our government. It is our own fault because we allowed it, and the longer we let it continue, the less we can do to change it without complete revolution. The shrinking middle class is only a symptom of a deeper problem, and we are perpetuating and falling victim to it by using debt as a financial tool in everyday living.

Our founding fathers debated this very issue and Thomas Payne said in 1786 that it should be considered treason for anyone to even suggest that fiat currency be allowed. John Adams said that "paper money" (meaning by fiat) is a great theft, stealing from the society where it is used. Yet the U.S. Supreme Court opened the door for congress in 1884 with the Julliard vs. Greenman case, and an amendment to the constitution was later passed making it constitutional. (See "A Plea For The Constitution" by George Bancroft.).

Over the last 230 years we have let laws accumulate on the books that are contrary to our values as a country. That has accumulated to the point that our courts are starting to use unconstitutional laws to justify decisions not directly related to the case in question, yet it goes unchallenged still because people rarely sue to change unconstitutional laws, which in effect puts the court’s stamp of approval on the law. Congress doesn't consider the constitutionality question to be its responsibility, when it passes law - that is the Court's job.

Over time, what was considered treason and punishable by death at the Constitutional Convention is now allowed and even legislated into law.

The root of the problem is the fact that we have allowed our government to violate the original intent of our constitution and pass an amendment that allows them to create a fiat currency.

Gold is money, however gold cannot be printed. Any currency backed by gold cannot be inflated without mining more gold. By contrast, a fiat currency can be printed or created out of thin airy with a few keystrokes on a computer.

Without gold as money, governments can print as much money as they want, destroying wealth through inflation

11 Opinion(s):

VI said...

A gold standard is out. There isn't enough gold.

Jim Beam said...

The gold standard is in as the value which we place on things is not its true value.

A new car in 1977 cost R5,000 what does it cost today? That considering SA left the Gold Standard in 1932 after England left it. The reason why the Nationalist Party left the GS was becuase the farmers could not service their interests on thier mortgage bonds.

The gold producers committee decided that if SA left the GS and devalued the money by 25% that it would not affect the cost of living. Go figure!

It can be done. The Swiss were the last to leave the Gold Standard and their currency had value.

Now - if a new car cost R5,000 in the 1970's and we know that they devalued the money in 1932 by 25% alone, what is the real value of the car? Maybe R3,000?

What would a doctor earn today in 'real' money - R600 per month? What would a bread cost - 5c?

VI said...

Yep, and gold isn't valued the same as back in 1932.

VI said...

Nothing went wrong with capitalism, which has as its mantra "profit maximisation".

The problem was market interference. The government compelled banks to lend to minorities (blacks and hispanics) that did not have the capacity to service their debts.

The banks saw an opportunity to make a killing. They acted as any capitalist would.


One thing is for sure: In the next couple of years i rather sit with physical gold than with paper money.
To trust paper money now means that you trust the sheysters that run the Fed and other assorted political opportunists despite their recent revealing performances.

Jim Beam said...

Gold does not have that value because of inflation. The problems do come when government puts its hand in the financial cookie jar.

Much like Mbeki in his limited wisdom wanted to force banks to lend to people in 'red zones'. Everyone knows that money into a flagged zone for property is wasted money. We could have ended up like the US.

It really pisses me off when COSATU says that inflation targeting is not important when inflation is the monster which diminishes the very wages of their members. Can't they connect the dots?

eduard said...

The problem is the goverment is controlled by forces that we do not want to admit.The answer to problem you will find here:
It is time for the sheeple to wake up and face the music.

Andrea Muhrrteyn said...

There may not be enough gold, but if you make it a basket of gold, platinum, or similar, for example; then you would be able to hold govermetns to be accountable to the amount of 'gold' they have.

And in fact if gold was valued at a free market rate, as opposed to the massive derivatives (fake fictional crap) holding it deliberately down.. then gold would probably be selling in the range of $2,000 or so, considering supply to demand.

if the price of gold was not being manipulated, there would be enough gold..., as far as I understand the issue..

see GATA for gold price manipulation...

but anyway fair to say there are more than a few factors involved.. but for sure the gold standard was a far better standard than the shit going on now.. which does not even deserve the name capitalism.. more like corporate communism...

personally when it comes to capitalism I am a Von Mises Liberatrian capitalist... of the Austrian School...

VI said...

I think we are probably in agreement that we need to attach modern day currencies to some type of assets that hold value. The governments word is no longer good enough.

Exzanian said...

VI - You said there is not enough gold, but is gold's value not in it's scarcity? What about other metals such as silver or platinum? The problem with the credit crunch (forgive my layman's view) is not that there was printing of fiat money, it was even worse! The bankers were "printing" money via interest creation, selling it to others and skimming profits (bonuses) until it became apparent that it was just another pyramid scheme that collapsed...How will that be avoided in future? I don't think the world has learnt it's lesson and we need to return to a base that is backed up with something of value, together with old fashioned work and frugality.

Jim Beam said...


"we need to return to a base that is backed up with something of value"

-- That is going to be VERY painfull.

@Andrea Muhrrteyn

-- Correct we need to move to a basket of metals. Gold, Platinum, Palladium much like the Chinese value thier currency on a basket of currencies.