Sunday, April 2, 2017

The Gold Standard

The Gold Standard is a very complex issue for some to fathom. Many mainstream economists believe that reinstating this method of banking will revert us back to an outdated system that is no longer viable with the models given or the desires of the government thereof.

After contemplating the likelihood of a return to the Gold Standard, what gives me optimism is the deflationary period which would be required prior to it's arrival. This would culminate in the end of the monopoly of money (the Treasury), as well as the inessential functions of the great inflator, the central bank. Not even a public clearinghouse is needed these days with the remarkable advances in technology we lay witness to. Allow me to further elaborate.

The Fiat Dollar, which is an inconvertible money by decree, was instituted to allow for unlimited government credit expansion. This removal of the Gold reserve essentially begot what was an elastic currency and the continuous deterioration of our purchasing power. Ubiquitously evinced are the calamitous booms and busts since the introduction of government money, as well as the enhanced erosion to real wealth since the inception of the Federal Reserve Bank in 1913. There were also other forgoeing central banks along the way.

As I reviewed the common visuals provided to us on the world wide web, which to me are quite accurate in concordance with the historical data available, I found that the presumption of the manipulation of the Gold Spot Price as being very true.

A consistent announcement by the London Gold Market Fixing Ltd, of the spot price of Gold during the burgeoning years of the Fed, aided the US government in their desire to manage the world's money supply. As the above chart demonstrates, the manipulated price was fixed (constantly announced at or around a certain price) up until the peg was removed in 1971.

A Gold Peg is intended to aid a banking institution in preserving the value of it's medium. This means that with a precious metal, as aforesaid in the explanation of a medium of exchange arising on the free market, the price of the most commonly accepted unit (that of objective-use value) will tend to greatly affect the management of revenues and expenses for banks.

If one were to consider a simple example constituting ratios, the reason for the depegging of the dollar to Gold becomes more lucid. Allow me to simplify:

If the US were to peg the dollar to Gold at $1000/1oz., then issuing a Treasury would permit a person to purchase 1oz of Gold at the current spot price. If another Treasury were issued, then there would be more dollars in the system, now $2000 which would bid up the price of Gold in the open market.

For the purpose of codification in layman's terms, we can see that the issuance of more Treasuries would increase the number of dollars and reduce the purchasing power of the currency. This would in essence force up the Spot Price of Gold in the open market.

The $1000/oz Treasury needs to be paid back, but Gold is at a higher price. The further issuance of Treasuries is now needed. To pay the holder of the second Treasury that was issued, 2 must now be issued in the third round of debt issuance, since the price would be at $2000/oz. Indeed this process is much more complex.

Without a doubt it was the Bretton Woods Agreement in 1944 (which exacerbated globalism with the creation of the IMF and later the World Bank Group) that changed the monetary system the world was using. Prior to it, each country typically had a reserved currency (representing a certain weight of a commodity). Once the mainstream economists, lead by John Maynard Keynes, had their way, they finally believed that in order to control inflation (due to an ignorant perspective on money), the dollar should be the reserve currency. Every country would need to purchase Treasuries.

World currencies would then peg to the dollar, whilst the dollar continued to maintain it's conversion to Gold (Bretton Woods Gold Peg). Let us not forget that all central banks intervene in the Forex markets as well as purchase debt instruments in the same manner that the Fed does, this is global central bank manipulation. Currency pegs basically advocate this central bank manipulation.

During the years of the $35/oz Gold peg, the amount of debt issuance was excessive and therefore the denominator was much higher than the numerator. The Spot Price of Gold needed to have risen, but never did, so the central banks found themselves selling Gold and decreasing their Gold stock. The banks were attempting to remunerate the holders of claims to Gold (the dollar pegged to Gold and it's corresponding exchange). The London Gold Pool collapsed in 1968.

Due to the profound necessity of raising rates in 1961, resulting from a larger money stock, cash flows became more difficult to manage. When governments, and as well private companies, issue a frenzy of debt, it becomes difficult for them to manage the cash flows of debt instruments if there is not a sufficient Surplus (or high enough Net Income in the case of a private corporation).

In lowering the Fed Funds Rate, this debt frenzy abounds. For the government, debt issuance is already scheduled monthly. And with a lower rate the amount of debt issuance is exacerbated. Once it becomes clear that the enshrouded decrement of real profit margins (they would basically go negative) is elucidated in nominal terms, investors would pull their money out of the shrinking price spreads and move them into higher earning sectors. The need to entice investors with higher yields becomes clear for the Fed.

As the business failures amount and the dollar turnover effect manifests the rise in the money stock in market prices (by causing a shrinking of the price spreads), it becomes clear that the rate of interest must rise as Savings decreases. Indeed this process should be left to the private sector.

The Federal Reserve Bank is incapable of managing this system, and relies on its models to guide the economy. This perspective is utopian, and not at all in line with the Free Market approach of competing rates of return set contractually by private free-banks. As is noticed, the debt never disappears and the money stock grows. Lowering the rate of interest, as Socialists enjoy, is to restimulate the economy. The key question here is "How high is high, and how low is low?" Only the free market can decide.

It is essential to a Capitalist system that market prices fall to their required market level. For this to occur all government regulations must be removed, most specifically the minimum wage. Government needs to get out of the way completely.

When Corporations go bankrupt or fail, processes such as restructurings or flat out debt cancellation occurs. When a government desires perpetuating the existence of it's union or monopoly on money, the compromises end up being the iniquitous measures that constantly occur time and time again. One may now see why a Treasury is dangerous, as they are the entity that creates the government money. Extortion and currency devaluation are the confections of an economy reliant on public goods. All things should be privatized.

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