Is the gold standard the Gold Standard?

Is the gold standard the ‘Gold Standard’?

The last few weeks have been volatile, if nothing else.  Markets worldwide, currency, debt and equity alike, have been pummeled.  The only ‘winners’?  Gold, US dollars and US bonds.   There were a number of catalysts but ultimately, at its heart, what we are witnessing is a continuing currency crisis. 

The Eurozone, Japan and America all have their share of problems.  All three have currencies backed by “the full faith and credit” of their respective governments.  In other words, fiat money, backed by nothing!

Japan has massive amounts of debt, relative to their GDP, but most of it is owed to the citizens of Japan.  In contrast, much of America’s debt is held by the Japanese gov’t, the Chinese gov’t, and financial institutions all over the world.  The difference is that not only does America still currently have the world reserve currency, their debt is owed in large part to foreigners. 

Those two facts could very well create a perfect storm down the road, as foreigners liquidate their Treasuries (US gov’t debt)  and then look to buy tangible goods with the proceeds.   As America does not produce much in the way of goods they are unlikely to see much benefit.  In fact, that the US dollar still serves as reserve currency makes it more likely, IMO, that foreign dollar holders will use their dollars to buy commodities such as oil, wheat, timber, natural gas, copper, silver, and of course, gold.

As a natural consequence, the price of Treasuries would drop, and commodity prices in general would surge higher.  When, well that is any body’s guess, but it could very well occur in the next 3 years.  Europe’s problems are of a different nature, and will be discussed in full in the future.

So to the point of this article.  If we are having problems with currencies, specifically currency devaluation, then it follows  the solution will not be to do more of what we are already doing (printing money, devaluating currency), but to do something different.  The different thing to do in this case, would be to return to the Gold Standard, and forbid fractional reserve banking (along with usury, while we are at it).

Who would ‘win’?  Well, the average person, of course, as your wages and savings would not lose purchasing power.  Who would lose the most from this proposition?  Banks.  Specifically central banks, who would be severely limited in terms of their ability to manipulate the currency or the economy.  Banks in general would be forced to change their entire business model, which would undoubtedly result in a period of volatility as the business world adjusted.  Most importantly, though, money could no longer be printed out of thin air.

As always, please take up-to-date professional advice.