I will accept one thing though – it will indeed be different this time. Never has such an experiment of paper money been carried out on a global basis on such a grandiose scale. The occasional Weimar Republic or Argentina or Zimbabwe notwithstanding, the world has largely postponed the effects of monetary violations. But as Peter Schiff would say, “there’s no such thing as being a little bit pregnant” – either you are on “the Gold Standard” or on the path to hyperinflation. There is no middle-ground even if the road in itself happens to be a very long-winded one.
Never have the chairs been filled with so many who knew so little. The actions of central banks of the US, the European Union, Japan and the UK have been baffling over the last several years. For economies suffering from withdrawal symptoms after decades of loose monetary policies, their prescription has been more of the same loose – nay, reckless – monetary policies. There can be only one outcome in such a situation – and without doubt, a catastrophic one for the holders of currencies or equivalents.
“When?” is a tough question to answer, but each passing day is taking the world closer to a cul-de-sac.
Are we giving too much respect to the central bankers?
The media in general treats central bankers with far more respect than they deserve. Even more so in India. The statements of D Subbarao last week on the reasons for price increases in food commodities had “economic innocence” written all over them. Let alone Ludwig von Mises and Friedrich Hayek, even the much less venerable Milton Friedman (though much more courted by the mainstream) would have laughed their guts off on hearing such opinions. Raghuram Rajan, our Chief Economic Advisor, is no “free market” messiah, but given his Chicago School background, the least he should be doing is to correct such high school errors.
Returning to honest money. The only monetary system that is sustainable is a system of private money and banking based on “100 percent reserve” requirements. A corruption in either of those two variables (and every instance of such corruption in the last 5,000 years has invariably been backed by the rulers – kings, warlords or democratically elected representatives) eventually leads to destruction of the currency or whatever money substitutes are used in these systems.
Now we have corrupted both almost 100 years ago (with the formation of the US Federal Reserve in 1913-14). It’s been such a long time that very few people can even fathom the intrinsic bankruptcy of fractional reserve banking, let alone the concept of “private money”. The very idea that monetary policy needs to be a free market function rather than one decided by a few individuals is likely to be viewed as an outlandish idea rather as the only workable system and one that would be the ultimate solution to the economic malaise that we are living through.
Every passing event – the euro crisis, the Cyprus affair, the Japanese currency debasement and the threat of global currency wars – are all symptoms of this corruption of the monetary system. There is only one solution to the crisis – which of course is not in the realm of consideration – and barring that, we will witness one of the historic monetary revolutions over the next few years, maybe even months, ahead.
The lessons, ironically and very sadly, will be nothing new, though the current generation hasn’t experienced these issues in their lifetimes. Much like a teenager who falls in love with a neighbour and is convinced the partner will be a source of eternal happiness, so too has the world been enamoured with paper money. And all of the analysis of the problems in mainstream economic thinking does not even point in the direction of the root cause.
What’s happening to gold prices? As with love, who knows anything with certainty? Whether the two-year correction in gold prices is a result of the not-so-surreptitious manipulation by the US Fed, or a marginal deleveraging in world money supply that has happened due to the euro crisis, is irrelevant in the long term.
Offering his wisdom on the vicissitudes of life, the inimitable Ben Franklin had said: “Where there is marriage without love, there would be love without marriage”. Ben, offcourse, lived at a time when we had private money, though not 100 percent reserve banking (bankers, being bankers, have always preferred inflation). Had he been living today, I am sure he would have said “Where there is Central Banking without gold, there would be gold (i.e.money) without central banking”.
Bitcoin, a digital currency driven by peer-to-peer technology, which operates outside central control, is terribly flawed, but it is surely vastly superior to Federal Reserve currency notes. It is a start. There will be many more to come outside legal tender laws on the path to more honest money. As with any entrenched system, central bankers will resist any questions asked about their monopoly status – but the seeds of divorce have been long sown and there’s no going back. The correction in gold prices should be viewed as no more than a temporary injunction in that process.
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