Tuesday, March 27, 2012

Lunacy and Confusion over the Gold Standard

It drives me crazy when I read stuff by “economists” that is just plain wrong. Some of them are allegedly “MBAs” and “PhDs” but I think that their common sense is actually “DOA”.

Unfortunately, millions in the public arena see their interviews and blogs and they seem to automatically swallow their commentaries… hook, line and sinker. Let’s address some of the nonsense that these pundits are expressing.

Some conventional and well-known economists have expressed the idea that a gold standard is a bad idea and that the gold standard was a major (and possibly THE major) catalyst for the Great Depression. One well-known fellow surmises that an equivalent of the gold standard is the reason why today’s European financial crisis is going on. In due course, I am sure that they will blame the gold standard for global warming and probably the heartbreak of psoriasis.

I have expressed myself on this topic in video venues such as at Preciousmetalsinvesting.com and at my Youtube channel (You can look up “PaulMlad”) but the topic deserves attention here.

The case can easily be made that most financial crises have occurred when governments didn’t use a gold standard (or any type of standard).
The point that critics make is that the gold standard “removes financial flexibility” when a system-wide financial crisis unfolds. They don’t like a gold standard because it is viewed as a “rigid constraint”.
In a monetary system that is on the gold standard, the amount of currency you can produce at will is indeed greatly constrained since the amount of currency (dollars or euros or whatever) is limited to the amount of gold that is on reserve. This condition puts the breaks on the unlimited creation of a currency.
The real problems behind today’s (and yesterday’s) financial crises and depressions have nothing to do with constraints such as a gold standard; the problems come from mismanagement of spending and debt… and governments that are too expansive in their size and scope.
Economists don’t blame governments for spending too much or creating too much debt or printing up too much of their currencies; they blame whatever may stop them from doing so (such as a gold standard). This is insane; it is like blaming the seat belt for a car crash.

Imagine for a moment if a financial planner took the same line of thinking with their client. How would that go?

“Well Mr. Smith I see that you are spending way beyond your means and you are taking on a lot of debt as a result. You are now hitting your credit limit! Well…the problem is obvious to me! Your spending and debt are not the problem…I blame the credit limit! The creditor is not letting you borrow your way out of your excessive spending and debt! Yup… I blame the credit limit.”

Could you imagine that? But that is essentially what these “educated” commentators are telling the public. The public confuses “eloquence” with common sense. They figure these guys “must know what they are talking about” since they “sound pretty smart”. Ugh…

We must remember that the gold standard was present when America had the depression of 1920-21 and we got through it and then proceeded into the roaring twenties. What’s that you say? You never heard of the depression of 1920-21? That is because the government did very little to intervene and the economy righted itself very quickly.

…But how about the Great Depression?

FDR effectively removed the constraints of the gold standard in 1933. However, the Great Depression continued… for over a decade! The Great Depression did not end until AFTER World War II ended (in 1945).

Look, we may not need a classical gold standard; but we need SOME type of standard. The essential point here is that our governments need some type of restraint… otherwise they will continue to spend and spend and create more and more debt. Standards and restraints on endless money and debt creation do not cause financial catastrophes and depressions.

But it is the lack of this constraint (gold standard or a modified version of one) that opens the door to catastrophe.

This is why I tell my students and readers to become as self-reliant as possible (financially and otherwise) since we are at risk as today’s economic ills get worse.

Unfortunately for pundits and economists, there is no “standard” to blame for the trillion-dollar disaster that is unfolding before our eyes today and in the months to come.

Be prepared…