Both Gold and Bitcoin have had their moves lately. Gold is more of a confidence crisis asset, while Bitcoin right now is all about China. links below if you want to know more about both of these topics.
There has always been this Gold vs Crypto debate. I think both have their uses. Human history is cycles of soft money and hard money, a battle between the classical economists (which is not really taught anymore but is about hard money and low taxes) vs the mercantile/keynesian economists (who favour big government and devaluing currency for policy which leads to more taxes). There has never been a fiat currency system that has survived, we always go back to hard money ( Gold backed).
Gold has been used as money because of its stock-to-flow ratio. Meaning: the supply of Gold (stock) increases relatively slowly (the flow) when prices of Gold go up due to its rarity and difficulty in mining Gold . When Gold prices increase a lot, Gold mining output remains around 2%.
When Copper , Silver , Seashells or beads were used as money the flow could increase due to many reasons which would then kill the currency. In Silver and Coppers case, when the prices increased, more energy went into mining more Silver and Copper for material reasons...this meant the flow increased dramatically. In the case of Beads and seashells, when the Europeans came to Africa and saw this form of money, it was easily made back in Europe so they brought this large supply of beads and seashells over and inflated the local money supply. In summary, people lose confidence in the money.
If you read the book "The Bitcoin Standard" by Saifedean Ammous, it is primarily about classical economics vs mercantile economics. Mr Ammous says in the book that Gold will have the best stock-to-flow ratio to be used for money...however Bitcoin will overtake Gold in this category around 2025.
So having this background on classical and mercantile and the stock-to-flow ratio, let us look at some solutions to how to solve our economic issues. There will be pain regardless. We should have solved all this in 2008. Quantitative Easing ( ) was sold as a one time thing to prevent another 1920's-30's like depression. There was so much debt and bad debt in the system that if people did not pay them, the whole system would have fallen. was a way to buy this bad debt to keep the system afloat. Essentially, all we did was paper over our problems with more debt. We did not solve the economic problem. Now, if you read my work, I have said that central banks are going back to . They have no choice. They will be the buyers of last resort. People will begin to understand that was not a one time desperate policy...it is the norm. Central banks and governments will get bigger. The free market will all but disappear.
Again, there will be pain. Either we solve it now with the solutions I describe below, or we inflate into a bigger problem which will cause even more damage (to be honest, we are already there, not sure how much more balance sheets can take).
1)STABLE MONEY AND HIGH (NORMALIZED) INTEREST RATES
This will change currency from being a debt instrument to that of wealth. More importantly, it will bring back confidence to the system and to money.
The two schools of economics are: classical economics and mercantile (what we call Keynesian today) economics.
Classical economics is about stable money and low taxes. The idea is imagine waking up in the morning everyday having to calculate how many metres there are in 1 kilometre today. They believe money should not fluctuate greatly, and should be kept stable, perhaps fluctuating as little as 1-2%.
The mercantilists/Keynesians believe in a floating currency because it can be devalued for political and policy purposes. Make money cheaper when required.
It is no coincidence that the Keynesians advocate government intervention and spending in the economy, their aggregate demand theory. This leads to big government, requiring more control and higher taxes to pay for all of this.
Again, it is not a coincidence that Keynesian economics is taught at post -secondary schools worldwide. It benefits the academics and the government (post-secondary having a more leftist/socialist influence but that is for another post).
Throughout history, civilizations and empires have started with classical economic principles, before reverting to mercantile principles which is near the end of their zenith, seeing a period of decadence. Collapses occur as mercantile economic principles fail.
It seems we are at that point today. The Keynesian’s today cannot admit they were wrong, and their solution is always to do more of what is not working. “Oh we did not cut rates low enough (more negative in the case of Europe). “Oh we did not print enough money and the government did not spend enough”.
No fiat currency has ever survived. Human history goes through cycles of classical economics-stable money, and mercantile economics- soft money.
Athens tested a paper currency. Once Phillip of Macedon and his son, Alexander the Great, took over Greece, they re-installed hard money.
The Roman empire saw a confidence crisis when the state began devaluing their currency. The Roman state kept raising taxes that some people began giving up their Roman citizenship because slaves did not have to pay taxes! It got so bad that Emperor Valens had to create a law stating that no Roman citizen could give up their citizenship to avoid paying taxes. Government always react the same as they hunt for money and taxes. On a quick side note, this is why Christianity gained so much popularity. It was a reactionary movement to the economic problems of the empire. Christianity condemned usury, charging high interest for money. This countered Judaism, which was the religion at the time (and still today I believe) that advocates lending on interest. A capitalist religion if you will. This is why throughout history Jews have always been the money lenders, and why throughout their history, they are blamed for economic problems.
The Roman empire split into East and West. The West maintaining a failing mercantile system, while the East reverted to classical economics, issuing the Solidus gold coin. A coin that would continue to be used for hundreds of years after the fall of the empire much like the Spanish silver currency- US Spanish dollars, and China used Spanish silver coins until the beginning of the 20th century.
So now we have to talk about Gold . Just so nations cannot print unlimited amounts of money, gold is generally used as a way to back the currency. To give the currency confidence. So if the government begins printing currency more than the people are comfortable with, they can exchange their fiat for Gold . Purely for confidence.
On this note, it is worth mentioning there has never been a 100% backed gold currency. A can easily hold a small amount of Gold , and government bonds and using the bonds to buy Gold to increase their reserves as required. Much as a currency board is run today…and even how ETF’s are managed.
Once more, if you do not like the currency you are holding, you can exchange it for Gold . It instills confidence rather than being backed by air and a corrupt, short-term thinking government.
After 1971, schools have not taught any principles of classical economics. Gold being referred to as the “barbarous relic” (was not really Gold , but the Gold standard).
The Keynesian’s believe they have created success, but in reality, there are only a handful of mercantile/keynesian success stories (maybe 2 at most really).
Classical economics has had much more success. The British empire had 100 years of economic growth with interest rates staying steady around 4% based on classical economics. Allowing Britain to be the financial capital of the world as well as prospering and creating the largest empire in history.
As nations get abundant with the classical cycle, we see decadence and leaders wanting more power and wealth…which brings about mercantile economics and money being devalued by the state.
The Dutch and the Spanish were before them.
This is generally for warfare. Under classical economics, nations cannot afford long wars. They can only pay for it by taxation. This is how the income tax got invented. During the Napoleonic wars and then World War 1, the British initially used the income tax for war, before closing the gold window to go to mercantile economics where cheap money could be printed to finance the longer wars . The income tax being phased out after the Napoleonic wars, with Britain going back to the Gold standard, only then for it to be suspended again, and the income tax and cheap money being re-introduced for WWI.
What is worth mentioning is that during times of classical economics, peace and nations working together to solve issues is the best option since nations cannot afford to go to war for very long. This is why we see ‘Golden ages’ during these times. The Napoleonic wars and WWI both displayed a more devastating type of warfare, simply because Britain and other nations could finance them with cheap money which they could keep printing, allowing wars to continue for years and years.
You can see why the income tax was kept on when Keynes introduced his idea of aggregate demand. Government having to spend more meaning they would need a form of taxation to continue to spend.
Once again, the two misconceptions are that the currency has to be backed 100% with gold , and a country with more gold can print more money.
As mentioned, no nation has had 100% backing of their currency with Gold . In fact it can be done with a 1% backing and the rest with government bonds, selling bonds to buy gold when required. Running like a currency board or .
We still have them today with Hong Kong, Singapore and many other Asian nations. There was a debate in the past about democracy being crucial for a strong economy… however we have seen this is not the case. It has been principles of classical economics-stable money and low taxes.
Whatever nation goes back to classical economics will ‘win’. It is looking likely that the East (Russia, China etc) may be going this way. They have been adding to their gold reserves, and western central banks are beginning to do so as well.
Yes, the East could be using gold to counter the US Dollar (a way to settle payments since nations do not want to hold the Ruble , Yuan, Rial, Rupee, Lira etc- settle the payments using gold which can then be converted back to the domestic currency).
Of course the US supposedly has the largest gold reserve on the planet in Fort Knox…however it has not been seen or audited for quite some time…leading to theories stating that the gold isn’t there. Could have been sold off to make money for government deficit spending as social payments go higher…this was the case for Canada which sold all her gold reserves essentially to make money for government payments and programs.
This leads to speculation that since China and Russia are buying large amounts of gold , it is really them who are shorting large paper contracts to keep prices low, and then buying the physical. Just what you would do if you want to keep stacking. You would rather pay low amounts for it.
Many people laugh at the idea of going back to classical economic principles, however human history shows we go through these cycles.
This is also why when President Trump nominated Judy Shelton to the Fed (who is a Gold standard advocate) it really got people thinking...
China has a huge debt problem. The largest debt bubble in human history. They may very well revert to classical economics. Classical principles have made China the #1 super power twice in the past, and maybe even for a third time in the future.
This is going to be very controversial, but hear me out.
If we apply the first concept, there will be problems with debt as interest rates are normalized. You can already see the affects of interest rates going to 2.50% in the US and what it does to indebted people.
If rates continued to normalize, people would not be able to afford their homes and loans etc. This is why currently, central banks are cutting interest rates once again. They are stuck, they know their policies have failed. Rates will be cut and remain low so people can access more debt to spend on things. Social inequality will continue to grow, and the real economy will not grow. Only those who understand markets will profit from this. In summary, we are just pushing the problem down the road, meaning that when it all fails, the impact and chaos will be even greater. There will be instability no matter what. Either we live with the pain now, or pay for it later.
Some sort of debt restructuring or reset would have to happen.
Martin Armstrong talks about debt-to-equity restructuring say that it can be pulled off easily. This has occurred in the past.
However, what this means, is that banks will have to take a hit on profits and miss out on money they could have made.
In today’s world, this would be an issue because banks are too big to fail. Moral hazard. Also, the Keynesian economists, who are employed by the banks, are taught that the government should take an active role and bail out the banks because it is good for the economy. The banks will not lose.
Career politicians also receive donations from banks. We know that Obama and Clinton received money from the banks, and continue to receive money from them as they speak at their conferences. Other career politicians also land roles with banks being a consultant or adviser after they leave politics…big money salaries too of course.
This means that career politicians will put the banks interest first ahead of the people. The same with corporations and the rich who donate to them. It does not matter what colour their skin is, what gender they are, how trendy they are. Career politicians are in it for the money. Many politicians retire with millions of dollars even when their salaries are around the 100k mark or less.
Everyone right now wants to see President Trump’s tax returns, but nobody wants to see the tax returns of career politicians. People will very quickly know where the problem lies if those tax returns were shown.
Many say President Trump is in it for the money (everyone before him were here to help us). I think this shows how ignorant people are when it comes to money and the markets.
President Trump could have easily made 3-6 billion in a day without working. He could have gone public with Trump International. An . Even when he leaves office, and decides to do this, he will not get nearly enough due to the way the financial media and the mainstream media would probably sabotage and portray this .
Business men do not really run for politics because they make money through the markets. They generally donate money to politicians (scratch my back, I’ll scratch yours). They do not need to run for office to get rulings or laws to benefit them.
I think this puts President Trump in a unique position, and why he can be the only one to bring upon these changes. He has a powerful stance over wall street and the banks. He did not need donations to finance his campaign. He owes nobody any favours…and I think this is why the media hates him (generally the CEO’s of media companies donate money to parties…without naming them, you can tell which media outlets have a Democratic bias vs a Republican bias). The establishment sees him as a threat.
Had Trump International been a publicly traded company, wall street and the banks would be attacking the President’s wealth by shorting the stock and other nefarious methods (downgrading it etc).
This is also why I do not believe anyone with a publicly traded company will run for office (ie: Howard Schultz). They can be controlled by the banks and wall street by having their personal wealth attacked.
3)LOW TAXES AND LESS REGULATIONS
Historically, this is the magic formula (together with stable money) that has created consistent growth. Classical economics.
It has been shown that nations with low tax rates, or even a fixed tax rate instead of a progressive tax rate, have done well and collect even more revenue for the government. In fact it was Karl Marx who stated that a way to a communist system is by implementing the progressive tax system. The rich and companies have no incentive to use tax loopholes or hide money and avoid taxes. They will pay their due.
This is how America became the greatest nation in the world. Also how Japan and Germany grew at astounding pace. Once these nations went back to mercantile/keynesian economics, taxes had to be raised in order to account for government spending, which also created more regulations as government took an active role in the economy. This is what caused their downfalls that we are seeing today, with the real economy not improving.
Companies and businesses fuel growth. They thrive in areas with less taxes and regulations. As an employee, our labour is useless without businesses, entrepeneurs, and companies/corporations.
Japan had this environment fueling her growth until they began raising taxes on everything once the Liberal Democratic party came to power. Perhaps the links between socialism and keynesian economics is for another post.
Once more, due to the aggregate demand theory, and government taking an active role in the economy, they have had to raise taxes, and also have had to get bigger. Creating more government with more regulations and bureaucracy purely to hire people.
Rent control is an example given by the Austrian school of economics. When the government installs rent controls, home builders lose out as people do not want to buy new homes for rental properties, or expect the rent to help them pay their mortgage. Also homeowners have no incentive to maintain their rental suites or even upgrading them as the cost would not be worth it.
The Keynesian solution to this is more government.
Government should subsidize home builders so they can remain employed and build homes.
Government should also install laws and regulations demanding home owners have to fix and maintain their rental suites even when it is not economically viable.
All this does is create new government departments and bureaucracies, and discourages businesses and people from taking risks and spending money on investments and other things.
This fits in with the third point just discussed. Government has been getting bigger due to the idea that they should take an active role in the economy. Government hires more people for regulation agencies which means taxes need to go up to sustain bigger and bloated governments, while regulations hamper real economic growth.
Government also are in a position now where they need to keep inflating things: real estate and goods and services need to keep increasing because this means more revenue for government through the sales tax and property tax etc.
We are now getting to a point where the government is essentially going authoritarian, as they get bigger and need more tax revenues to sustain themselves, they begin hunting for money. They also need to go authoritarian to protect themselves from the eventual rising mob and angry citizens .
On a closing note, it seems these changes will not be implemented. The keynesian’s will propose more government spending (maybe in the form of universal income or modern monetary theory). This means government will be getting larger and more authoritarian.
Digital currency will probably be introduced after the next economic crisis. People will be running to the banks for money, but banks will be closed. When they are re-opened, in order to prevent bank runs, the government will say our funds are available using the new digital money system we have.
This will be all for taxation. To track money. Tips at restaurants will be tracked and taxed, as well as you doing a private job for your neighbour or tutouring, and even selling something on ebay or craigslist can be taxed.
It really will be about going after small business income. Lot’s of small business loopholes are being closed now, but they can really be enforced once we get on a digital currency.
If we go down the MMT /universal basic income path, the socialist economists know that giving people more money to buy goods and services which have not increased will cause . The solution? Higher taxes. The government acts as the using taxation as a way to remove money supply from the system. Who knows what else will be taxed. A lot of green taxes can be imposed this way too such as a km driven tax etc.
It is likely this digital currency WILL be Gold backed and also will be universal. Since moving Gold will be cumbersome to settle balance of trade payments, the Blockchain will be used to track payments and then periodically in a year (say 2x or 4x a year) nations will settle payments on a NET basis and exchange Gold .
Unfortunately, I think we are coming to an end of a cycle in history. You can see it with the economic, social, and political issues and tensions. Wait until the US 2020 elections. Neither side will accept defeat, and what we will see on the streets will show how divided America truly is.
If we remain in this keynesian system, they will continue to devalue money, even going to zero and negative interest rates like Japan, Switzerland and Europe (who announced today that they will go even more negative).
Social issues and inequality will continue to rise and will take us to the limit. There will have to be some sort of resolution to all of this, and I think it will be an immense turning point and period of change.
As a reader of history, I can confidently say that more books will be written about the next upcoming few years than any other period in history.
If you made it to the end, I thank you for taking the time to read my post. Greatly Appreciated.
My one question always with all this is What if they just continue printing more and more and more like the daily $500 B. What prevents this continual supply of money from well...continuing to infinity?
I watch and read so many articles about the problem and I see your solution but can the problem not be perpetuated forever or what pinch does this create?
Excellent write up, and thank you again for this.