Cryptocurrency: Celebrating 50+ years of Monetary Debasement and Debt That Politicians Put On Your Head

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The End Of The Gold Standard: Fifty Years Of Monetary Insanity

https://www.dlacalle.com/en/the-end-of-the-gold-standard-fifty-years-of-monetary-insanity/


This year marks the 50th anniversary since Nixon suspended the
convertibility of the USD into Gold. This began the era of a global
fiat money debt-fueled economy. Since then, crises are more frequent
but also shorter and always “solved” by adding more debt and more
money printing.

The suspension of the gold standard was a catalyst to trigger massive
global credit expansion and cement the position of the US dollar as
the world’s reserve currency as it de-facto substituted gold as the
reserve for the main central banks.

Thus, since the breakdown of the gold standard, financial crises are
more frequent but also shorter than before.

The level of global debt has skyrocketed to more than 350% of GDP, and
what is mistakenly called “the financial economy”, which is actually
the credit-based economy, has multiplied.

The gold standard supposed a limit to the monetary and fiscal voracity
of governments and suspending it unleashed an unprecedented push to
increase indebtedness and the perverse incentive of the states to pass
on the current imbalances to future generations.

By substituting gold for the US dollar as a global reserve, the United
States has been able to borrow and increase money supply massively
without triggering hyperinflation because it exports its monetary
imbalances to the rest of the world. Other currencies follow the same
monetary expansion without the global demand that the US dollar
enjoys, so the rising imbalances always end up making those currencies
weaker versus the greenback and the economies more dependent on the US
dollar.

This race to zero pursued by most central banks has also achieved that
there is no real alternative to the US dollar as a reserve because the
rest of the countries abandoned the monetary and fiscal orthodoxy at
the same time, weakening their ability to be a world reserve
alternative.

In the 1960s, any currency from a leading country could compete with
the dollar if its gold reserves were sufficient. Today, no one among
the fiat currencies can compete with the dollar either in financial
capacity or as a reserve. The example of the Yuan is paradigmatic. The
Chinese economy is almost 17% of the world’s GDP and its currency is
used in less than 4% of global transactions, according to the Bank Of
International Settlements.

With the suspension of the gold standard, Nixon cemented and
guaranteed the financial and monetary hegemony of the United States
for the long term while unleashing a global credit-fueled economy
where financial risk disproportionately exceeds the real economy.

The defenders of the suspension of the gold standard contend that
financial crises are shorter and that the global economy has
strengthened in the period. However, it is more than debatable to
consider that massive debt expansion is the cause of progress.

Non-productive debt has soared and the tax wedge on citizens is
elevated, while the severity of financial crises has also increased,
which are always “solved” by adding more debt and more risk-taking. A
debt-fueled economy and massive money creation disproportionately
benefit the first recipients of money and credit, which are government
and the wealthy, creating a larger problem for middle-classes and the
poor to access better standards of living when asset prices are
artificially inflated but real wages rise slower than the price of
essential expenses like housing, healthcare, and utilities, while
taxes rise.

A return to the gold standard may be unfeasible today given the size
of the global monetary imbalance versus gold, which could create a
giant financial crisis, but a Taylor-rule based system in monetary
policy that limits central bank balance sheet expansion and a strict
deficit and debt limit can be implemented if there is a political
will.