Gold and Silver and Money and Credit

When Nixon defaulted on the gold obligations of the US government in 1971, he plunged the entire world into the regime of irredeemable paper currency.  As of 1944, the world’s central banks had agreed to use the US dollar as if it were gold.  It was (and is) their core asset, against which they lend to banks in their own currencies.  When the dollar’s gold redeemibility was defaulted, the result was that the entire world’s currencies and financial system became a purely debt-based system.  A positive value (gold) was replaced with a negative (debt).

Like that TV commercial coyly said, “let’s see if they notice.”

The result was market chaos.  Prices rose dramatically in the 1970’s; many thought the paper currencies were headed towards their graves right then and there.

Then along came Volcker, and under Reagan, engineered a “fix”.  He quickly brought interest rates up to nearly 16% on the 10-year bond in July of 1981.  He then began a process of forcing them ever lower and lower.  This process continues today, with the 10-year yielding around 2.5% as of this writing (Aug 2011).

This created the long boom.  It almost busted twice, on Black Monday in 1987, and again in 2001 (even before 9/11).  It finally began busting in earnest in 2008.  Thanks to stupefying amounts of money spent on bailouts and “stimulus”, the bust has been arrested.  The can has been kicked down the road. 

…

My goal for this blog is to present economics in a way that intelligent laymen can understand.  Economics is straightforward and logical.  One does not need a special background to understand it.  But one does need to get to the root; one cannot start in the middle.  One cannot assume that people are like molecules in an ideal gas, to be “modeled” with equations.  One cannot understand human action by studying aggregates.  People have two pesky characteristics: reason and volition! 

One cannot observe two things that happen at the same time and assume that one causes the other, or that their ratio will always remain constant.  For example, if Congress raised the marginal tax rate by 10% one year, and then unemployment fell by 0.1%, is that causality?  It would be absurd to say that another 25% increase in the tax rate would cause unemployment to fall by another 0.25%.

One cannot assume that relationships are linear.  For example, if M0 “money supply” went up by 10% and consumer prices went up by 5%, you can’t say that quadrupling M0 would result in doubling consumer prices.

Also, one cannot assume that markets, businesses, technology, or prices will remain static.  Entrepreneurs are constantly innovating, developing new products that obsolete old products, new means of production that lower costs of production, tastes are changing, etc.

While I will cover many topics spanning the field of economics, I want to focus on monetary science.  The world today suffers from an irrational and dishonest monetary system, which can be described as a Ponzi scheme or check-kiting scheme.   Yes, the world needs lower taxes, lower government spending, less regulation, less lawsuits, less consumer “protection”, and less welfare handouts.

But more than anything else, it needs a proper, unadulterated gold standard.  Since this is not well understood today, I plan to cover gold and gold economics extensively.

Keynesians and Monetarists think that gold is a “barbarous relic”.  The only thing worse than these sorts are conspiracy theorists, who think that the price of gold would be $50,000 per ounce if only a vast banking cartel didn’t somehow suppress it.

On this blog, I will discuss gold and the markets from a rational perspective, and in many cases show data.  Much of the data will be in a separate blog, which I am establishing to analyze the gold and silver markets and hopefully help people understand the precious metals better and learn how better to trade them too.