Monday, January 7, 2013

Is gold the answer?

As GASG readers know, I've been an advocate of investing in gold, basically since the beginning.  I don't think we should move to a gold standard for many reasons.  We do need monetary reform, though.

The people who are in favor of the gold standard now (or fiscal austerity) are the same people who made a fortune because of the debt-based money system.  They own debt, not wealth.  Now they want to convert that debt into wealth.  Wealth that can't be inflated away or defaulted on.  They want gold.  If they just tried to convert all of their debt based money into gold by buying gold in the market, the price of gold would go up too quickly.  They want a gold standard to guarantee them gold at the current price.  A free call option.

I read a brilliant reposte to a Paul Krugman column in which the writer "Pavlo" very eloquently describes what he calls the three phase crisis cycle.

In the first phase - The Bubble - you have  some kind of mania or boom.   In the second phase - The Stall - people realize that the mania created way more debt than it can service.  This is when the panic and bailouts happen.  Under emergency conditions, the bad debt is then transferred to, or guaranteed by, the government.  In the third phase - The Payback - the government, which also has no way of servicing this huge debt, has to deal with it through austerity, taxation, write-off, default or inflation.

The Bubble phase can only occur if debt is allowed to grow unchecked.  A debt based money system facilitates this.  A gold standard would inhibit it.  This is the time when a gold standard might be useful, but who would want to take away the punch bowl in the middle of the party?   No, it is during the third phase that the gold standard is proposed so that the claims on wealth that were accumulated during the bubble won't be inflated away.  This same wealth was protected from default when the government took it on during the panic of the second phase.  Once their purchasing power is secured,  they will advocate austerity so that the deflation it causes will allow them to scoop up assets at fire-sale prices.  Those now flush with assets will pour them into the next mania that comes along and the cycle repeats.

This is not the time for a gold standard!  That would only be rewarding the thieves (again).  I do think that monetary reform is essential to breaking this cycle.  This is not such a radical concept, in fact it's historically overdue.  The US monetary system has been reformed every 30-40 years (the last time was when we came off the gold standard in 1971)  The world reserve currency has changed every 100 years or so.  (the last time was when the British Pound fell to the Dollar after World War I)

Our paper money system is antiquated anyway.  In the information age, shouldn't we have some kind of electronic money?

In Money As Debt III, Paul Grignon proposes a self-issued digital currency where people, companies and governments pledge promises of specific goods and services.   As an interesting example, password protected cell-phone minutes credits has become the de-facto currency in Kenya and can be sent by text message.  It doesn't need to be electronic though: Canadian Tire Money is widely accepted in Canada and I used to use NYC subway tokens to buy candy in high school.

What does this mean for us?  Just like the oligarchs who made money during the bubble, you need to preserve your purchasing power.  Unlike them, you can buy gold without having to worry about pushing up the price.  Then you too will be able to scoop up assets at fire-sale prices in the near future and then enjoy the roaring 2020s

Here is a post about the three-phase crisis cycle from Pavlos' blog:

Here is an article on the Safaricom text message payment system:

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