Posted Mar 7, 2013 by Martin Armstrong
Question: Yet, in the meantime, should inflation surface, say in the latter part of the decade, (before a total collapse), wouldn’t gold be the place to be? Or perhaps I should phrase the question “will inflation precede a total collapse?”
Inflation is typically defined as the rise in prices of goods and services. This is Government shifting the blame to the private sector whereas it the proper definition should be the decline in the purchasing power of the currency. This applies to when the change in prices affects ALL sectors. Wheat prices could rise because of a isolated crop failure. That is different that the wholesale “inflation” people talk about.
The reason gold is NOT a hedge against inflation is simply the fact that it does not track prices even in the overall economy. Gold declined for 19 years between 1980 and 1999 while the national debt in 1980 was $907.7 billion and in 1999 it was $5.6 trillion. Gold declined from $875 to nearly $250 while the national debt rose 500%. The Dow Jones Industrials peaked in 1980 at 1,009.39 and in 1999 the high was 11,658.68 – that is an 1100% increase. When you look at the world as a whole, you see what is true and what is not. Gold is by NO MEANS a hedge against inflation. Even now rising to $1,700 compared to the 1980 high of $875, when compared to the rise in the national debt from almost $1 trillion to nearly $17 trillion with gold only about doubling, is certainly no a hedge.
The key is government instability. Gold pays no dividends so it is not what you would call an “investment” vehicle that produces income like stocks or real estate. What gold has been is more of an insurance policy against catastrophic collapse in government.
When gold was MONEY then the value on money declines with inflation and rises in purchasing power in deflation. We are in a free market and that means gold WILL RISE, but not because of “inflation” in the plain vanilla form. Our computer is bullish long-term because gold will play catch up as all commodities tend to do. It will blast off like a rocket ONLY when everything is set.
Further questions: had FDR devalued the the dollar openly in lieu of confiscation, would that have been better/more honest/less destructive? Had Nixon done the same, would we be in this debt mess today?
FDR confiscated gold simply because he wanted to make the profit to fund what he wanted to do. Devaluing the dollar without confiscation would have allowed the private sector to profit. He was also looking to fund the New Deal.
Nixon had no choice but to close the gold window because they printed money without any regard for the amount of gold backing the dollar. The Europeans looked at the quantity of dollars printed and the decline in the gold reserves. They rightly saw that gold had to rise. It did, it rallied to about $200. Nixon had to abandon gold or revalue gold itself and that a politicians will not do because they then have to admit what they did wrong. Nixon in reality did DEVALUE the dollar. He just said he would allow it to float to seek its own level meaning no support and let the market devalue it.
Question: As I understand those who promote a return to a gold monetary standard, they do not mean a fixed PRICE for gold against the dollar, they advocate a fixed WEIGHT. It seems your case against a gold standard always refers to a fixed price only. Can you expand your argument on the WEIGHT approach?
It simply does not matter. The assumption that MONEY should be tangible has no real historical foundation. There have been both WEIGHT standards such as the Florin (pictured here) and fixed value attempts with the dollar, pound, and franc. There is simply no system that will EVER prevail because there is a business cycle that changes everything. Nothing can be fixed be it by weight or value. This is why it is far better to have gold as a free market and you can buy it or sell it when the moment is right. Whatever you call money will always fluctuate in purchasing power because there is a business cycle. Any attempt to flat-line that will be futile for that is precisely what Marx tried to do – stop the cycle. Gold will always rise and fall if it is a free market or money fixed by weight or value. By the way, Florence had a two-tier monetary system using gold internationally and silver domestically. The two moved opposite, the workers felt cheated, they rioted and burned down the banker’s homes in Florence. It was a huge riot and that was a system based upon weight. The value still rose and fell.