Past as Playbook
At BadDaddy Publishing, we are relentless about understanding the world to provide security for our family, discipline and dishes be damned (he writes, self-importantly). We’ve found no better teacher than the pages of history. Why history?
The choice is to be a herd animal, marketed to and force-fed by bloviators, or look back on 5,000 years of history to predict where things will go, based on where they have been. There is not much new in human behavior except around the edges.
Evolution advances like a jar of honey; we are the same old monkeys with the same aspirations and foibles as the generations before us. The advantage we have is we can look back and learn from them.
Hmm… herd animal, lazy, clueless, powerless, mildly entertained to the lull of CNN, ESPN, or Bravo, an open bag of Cheetos on your lap, spread down your shirt to the floor and all the way back to the bed from the couch, a trail of breadcrumbs for toddler and dog in the fight for floor-food-supremacy…or a thinking, breathing, enlightened, contrarian? A family to raise, we choose the work (plus I’m out of Cheetos). So, join me on a brief history of recurrent human folly, and prepare for a likely fate.
A gold standard is the historical rule, not the exception. And it always returns when humans get cute and try to use paper for money. The bad news: monetary chaos is the forcing function. Crashing stock, bond, and housing markets followed by the reverse, prices soaring ($20, then $50 loaves of bread). Inflation, deflation, then more inflation.
We have only been off a gold standard since 1971. It was a panic move, not a thoughtful strategy. “Guns-and-butter” (Vietnam and LBJ’s failed Great Society) caused “Tricky Dick” (Nixon) to close the gold exchange window, blaming speculators for government’s own malfeasance. World leaders led by Charles de Gaulle (France) called the US on rampant money-printing, abusing the privilege afforded by 1944’s Bretton Woods Agreement, where a victorious (nuclear-armed), wealthy America (the only country without a flattened manufacturing base) dictated terms: All countries would peg their currency to the dollar, while the US agreed to exchange dollars for gold at $35/ounce.
By 1971, the run on the bank was on. The gold in Fort Knox was halved, as countries lined up to dump dollars. The choice: (a) live within our means (stop printing and spending), (b) continue to hemorrhage gold until the nation’s treasure ran empty, or (c) “temporarily” suspend gold convertibility. They chose (c), and since, all currencies have been free-floating, backed by nothing, a worldwide, unanchored mess of finance and debt. Ever wonder why real wages have declined exactly since then (and we had to send two spouses to work)? What about the wealth gap? Look no further: paper money unbacked by gold or silver. It amplifies the business cycle, and favors those closest to the printing (government, banks, and those with access to cheap capital, i.e. the wealthy). If you’re feeling nauseous, that’s the red pill kicking in. Welcome to the matrix.
Your faithful stewards in government and the Federal Reserve print dollars at will to pay for bombs, drones, $600 toilet seats, hookers, transfer payments (votes), and handouts for overpriced debt instruments (Treasuries and mortgage-backed securities). These programs have names like “quantitative easing”, which is fancy for printing money.
The only thing backing your dollar today is confidence. It’s a “con game”. A con game! And no, your party is not better. The whole thing is a circus, run by clowns.
Each time before without exception, it ends in hyperinflation. It is happening now in Venezuela, in Zimbabwe in 2000, and happens every 10 years in Argentina. It happened in Germany in the 1920s, and was a root cause of WWII (onerous reparations imposed on Germany after WWI led to the printing of too much currency, resulting in the rise of a fascist blaming Jews). There are many examples. Early debasement by coin clipping (replacing precious metals with base metals) was a major factor in the collapse of ancient Rome. Sound familiar? Check the change in your pocket. Nothing precious there. They took the silver out in the 1960s, replacing it with nickel. In 1982, they stopped making worthless pennies out of copper (because unlike what was left of the purchasing power of a penny, copper actually has utility). Your penny is zinc, and even it’s melt value is higher than it’s denomination. Why do they still mint them? To preserve the charade.
The Vicious Cycle
This time is not different. While the destruction will be painful, it needs to happen. The mess is already made. Consider it a cleansing; a break from the blowing of recurring, ever-larger asset bubbles, most notably the housing bubble to paper over the crashed tech bubble. Each were caused by artificially low-interest rates, money printing, and too much debt, actions not possible under a gold standard. And to “fix” the housing bust, they gave us more of the same, forcing interest rates near-zero where they have remained for almost 10 years. The money supply has quintupled since 2008.
(2021 Update: Then, COVID 19 kicked it all into HYPERDRIVE. The end is near, my friends…).
Two schools of economic thought competed in the mid-20th century. The ideas of John Maynard Keynes quickly won the Halls of Power, because they allow governments to print, borrow, and spend. This power is enormously destructive, and has mired us at the end of a 50-year credit binge, fueled by massive imbalance and mal-investment.
The other school, called Austrian Economics, doesn’t serve the elites, thus is brushed under the rug. But as Ludwig von Mises wrote in the 1940s, “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system”.
Translation: stop printing, borrowing and spending, or welcome to Zimbabwe. It won’t happen overnight, but it could be sudden. Slowly at first, then all at once.
Unlike paper, gold has intrinsic value, and cannot be conjured up by drunk powerbrokers. As history’s favored money, it remains the only proven solution to turn to when faith in paper is lost. So, in the future, like the past, your currency will be tied to gold, perhaps $5,000 – $10,000 per ounce (too early to tell). China knows this, and is dumping paper, buying gold, and moving it East, as are the Russians and a few others.
Empires rise and fall, as sure as the world turns, and the sun sets. The Egyptians, the Greeks, Romans, Ottomans, French, Spaniards, British, Russians, Americans, and the Chinese (yet again). A watchful eye follows the flows of gold.
So, open your eyes, thoughtful friends. Engage with history, and buy a few ounces of gold (or silver) to advantage those innocent, curious children. Open their minds to the predictable nature of human folly. For large quantities, use secure storage outside the banks, like BullionVault.com. And don’t put all of your eggs in one basket. Government may confiscate gold, as FDR did in 1933, reimbursing citizens at $20 per ounce (the official exchange rate), then re-valuing to $35, thus stealing 42% of all purchasing power.
If this advice could help someone in your life, someone who doesn’t understand monetary history or believes the charlatans who (wrongly) say why a gold standard is bad, don’t miss an opportunity to share it today. And as always, enjoy the ride.
It’s an exciting time to be alive, with the wisdom of history at your back. Open a cold one, and drink it outside to the tune of children laughing.
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Like this column? See the consequences of untethered money and credit by checking out the The College Debt Bubble next!