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“There is gold in them thar hills!”
Occasionally we
read in various columns of mainstream journalists that the Chinese have shot themselves
in the foot when they (in violence of Friedmanite
precepts) failed to revalue their currency upwards. The world will retaliate
by imposing punitive tariffs, creating horrible unemployment in China and
causing civil unrest.
These
journalists should be careful to make wishes, because they may just get what
they’ve wished for. One of these days China may open its Mint to gold
and silver, setting the example to Asia and the Muslim world and, possibly,
to South America. Other countries may follow suit. That will be the ultimate
revaluation that restores trade relations to normalcy, at least in that part
of the world that returns to the gold standard.
There was a
time when unemployment “insurance” and other forms of dole were
unknown in the United States. That was the time when the country was on the
gold standard and deflation meant an increase in the value (purchasing power)
of gold. Whenever this happened, the battle cry inevitably was: “There
is gold in them thar hills”, and people who
have lost their jobs typically went out prospecting and panning for gold. Pannig for gold always gave them an income and a chance
to save some capital. The country did very well, thank you very much, with
this “natural unemployment insurance”. The bottom line was: more
gold for the economy. More gold cured the disease, deflation, and soon things
were back to normal. Unemployment did not have a chance to become
“structural”.
Of course,
given the present anti-gold mindset ¾ as seen in the thinking of the
Fed and the government ¾
today large scale prospecting for gold is prevented in the name of
“protecting the environment”. Keynesian economists say that they
have the perfect substitute for more gold coming to the economy, namely,
printed paper money which also has the advantage that you can fine-tune its
creation from a central control-panel, the central bank. What they forget is
that their “ersatz” gold is highly counter-productive. Rather
than easing the debt-problem plaguing the economy, they make it worse thereby
perpetuating, even aggravating the unemployment situation.
Gold: the ultimate extinguisher of debt
By
contrast, increasing gold production ameliorates economic stress, including
unemployment and, above all, it sets a limit to the increase in total debt. Paying gold is the only ultimate
extinguisher of debt. Any other method of paying down debt leaves total
debt unchanged. It only shifts debt from one debtor to another. Total debt in
the world can only grow, never shrink. Ultimately all debt, good and bad, is
shifted to the Treasury, creating a sovereign debt crisis. The toxic debt the
Treasury has to absorb is destroying the credit of the government. When the
crunch comes and pristine credit of government would be needed to reset the
economy, it is no longer there. It has been spent. Instead, there is only
“toxic sludge”.
This is the
congenital failure of Keynesianism that cannot distinguish between capital
and credit, good credit and bad credit, and it freely shifts items from the
liability column to the asset column in the balance sheet of the government ¾
rendering the accounting system worthless.
Gold corpuscles
in the monetary bloodstream attack toxic sludge and devour it. The monetary
system has immunity-protection against bad debt. The total debt in the country
is not allowed to grow without limit, as bad debt is constantly being
eliminated. The monetary system of Keynes and Friedman has no ultimate
extinguisher of debt, which is why it has produced a runaway debt-tower,
destined to topple and bury the indifferent and unconcerned public underneath
the rubble, as the twin towers of the World Trade Center did ten years ago.
Exchange the beggar’s pan to the prospector’s pan!
Gold also has
the uncanny property that it leaves the place where it is not appreciated and
seeks out places where it is welcome. One such place in the world today is
China. China knows how to become the world’s #1 gold producer. China
knows how to double its gold reserves unobtrusively in a couple of years.
Incredibly, the Chinese government openly exhorts its people, all 1,34 billion of them, to have gold (and silver) on hand for
a rainy day. The advice is wise. There is no free lunch. Be prepared for
adversity. Be self-reliant. Have gold. Don’t count on governmentally
guaranteed unemployment “insurance” and old age
“security” payments: when you need it most, it just won’t
be there.
Before any
sizeable unemployment could develop in China, unemployed people will go
prospecting and panning for gold, scurrying ¾
like industrious ants ¾ over China’s territory, all
3.7 million square miles (9.6 million square kilometers) of it. If that
doesn’t do the trick, the Chinese have something up in their sleeves.
The Chinese
have control over the price of gold. They can raise it by marginally bidding
for more gold on the world market. The
Chinese mean to control the global gold market through their marginal control of the gold price. They
won’t allow the gold price to run away on the upside. It is not in
their interest at present. They are no gold bugs. But they have a superb
understanding of gold (and, of course, silver). By contrast, Helicopter and
Printing-press Ben has even poorer understanding of gold than his prophet,
Keynes used to have.
Many a gold bug
has the wrong strategy. He buys high and sells low. He cannot kick the bad
habit. He should buy low and sell high. He should study the gold policy of China, that uses the throttle of the gold price to control
the level of unemployment. Raising the gold price makes panning more
profitable and prospecting more attractive, thus reducing unemployment.
On the other
hand, the Chinese will stop a precipitous fall in the gold price only insofar
as it is in China’s interest, to wit: as long as it is needed to help
reduce Chinese unemployment.
U.S. ineptitude concerning gold
The U.S.
government seems to have missed an historic opportunity to win the race for
monetary supremacy in the world (that would have secured the “reserve
currency” status for the dollar for the 21st century
regardless of Chinese ambitions). The ineptitude of Fed and Treasury
officials concerning gold brings shame to a country that prides itself with
its leading position in global scientific research. The present financial crisis in the world is a gold crisis. It
cannot be properly diagnosed without an analysis of gold’s economic
role in serving as the only ultimate extinguisher of debt ¾ a
role gold has played for thousands of years, as far back as written records
exist, up to the fateful year of 1971. It was exactly forty years ago that
the U.S. defaulted on its international gold obligations. To
“stonewall” the shame following the fraudulent breach of contract
as shadow follows the thief, the U.S. government listened to the
Mephistophelian advice of Milton Friedman. It was he who suggested it to
Nixon to turn defeat into victory, and shame into triumph, by “letting
the dollar float”. The world must be told, Friedman suggested, that
this major defeat of superstition was long overdue. Gold is a make-belief
asset. Just let the world’s central banks announce that they have
stopped “supporting” gold, and may soon start selling it.
Green cheese factory on the Potomac
Then, lo and
behold, the rats will start abandoning the sinking ship. People will start
selling gold hand over fist. Just let the world’s central banks
announce that they have started accumulating U.S. government debt. Then, lo
and behold, the miracle of turning stone into bread and water into wine can
be routinely performed by monetary technicians through lowering the rate of
interest, if need be, all the way to zero. The world will forgive the
do-gooder government the technical slip of failing to meet debt-payment in
gold.
As Keynes
observed: people want the Moon. But they cannot
have the Moon. The Central Bank will have to tell people that green
cheese is just as good, and that they can
have. With that piece of advice the Central Bank can turn all its resources
to green cheese production. Never mind that green cheese may rot, especially
if it is used as a store of value.
Harakiri ¾ Western style
This kind of
thinking has animated U.S. monetary and fiscal policy for forty years. It
took that long to dissipate the credit of the U.S. government ¾ the
result of two centuries of working hard and saving hard.
There followed
a systematic persecution of those economists who warned of the danger of fiat
money ultimately losing all its value. There has never been a successful
experiment making irredeemable currency stick. All such experiments in
history have come to grief and caused excruciating economic pain to the
people. To try the experiment once more and force the rest of the world to
follow the U.S. into the abyss was harakiri ¾
Western style.
It was criminal to silence and exile critics through
official discrimination and slander. The evidence was available almost
instantly after 1971 that the U.S. was on skid row and it was going to be
very difficult if not impossible to turn it around. Foreign exchange,
commodity prices, interest rates, bond prices were promptly destabilized in
1971. The labor market started to hemorrhage jobs as high-paying
manufacturing employment migrated eastwards.
Kamikaze ¾ American style
Low wages in
China do not explain this phenomenon. Western industry could coexist with low
wages in the Orient under the gold standard. But after the fraudulent and
violent overthrow of the old monetary order, gold started migrating East,
taking those high-paying manufacturing jobs with it.
At this point
the Friedmanite bunk was announced by professors
who were the beneficiaries of the purge of old-line economists at American
universities that a “weak” currency is boon to the country. It
makes exports cheap while making imports dear. Trade deficits plague you? No
problem. Just fine-tune the value of your currency downwards. Bingo! Exports
will soar and imports will go to a trickle.
The advice that
devaluing the currency has a salutary effect of the trade balance is akin to
the advice that for the champion, to win the race, the amputation of a limb
will be salutary. The Friedmanite bunk started a
world-wide headlong rush into competitive currency devaluation (some people
aptly call it the “race to the bottom”).
The theory of
Milton Friedman, suggesting that the floating dollar system is a self-balancing
mechanism capable of rectifying trade flows: it will boost exports and rein
in imports is the most vicious theory ever concocted. It is a disgrace
besmirching American science, hurting the American public, and bankrupting
the American government. To see the Friedmanite
bunk in the true light of science we need only recall that devaluation always
makes the terms of trade of any country deteriorate. The euphoria of
exporting more will last only as long as the stockpiles of imported
ingredients used by the exporting industry last. Ever after, the country will
have to pay more for the imported
ingredients. It will also get less value for units of its exports ¾ a
double whammy that is certain to make trade imbalance deteriorate further.
This was kamikaze ¾ American style. America has
succeeded in devaluing itself to the poorhouse, destroying its once fabulous
export industry along the way.
“Après nous le déluge”
The worst
aspect of our misery is that in putting Keynesians and Friedmanites
in charge of our economy and monetary system we have condemned ourselves to
eternal slavery. Previously, elected or unelected officials could be recalled
and given a dishonorable discharge in case of failure. Not any more, not in
the realm of economic and monetary policy-making. The worse mistakes monetary
officials make, the more power they are entitled to grab. You could never make these guys admit
that they have been wrong. They know that the power they now have, the power
to print money, is unlimited power.
They will never give it up. Après
nous le deluge.
ANTAL E. FEKETE
Calendar of Events
Symposium on Gold in collaboration with the New Austrian School of Economics; University of Auckland,
Business School, Auckland, New Yealand.
November 28
– December 2, 2011
With the
participation of:
Professor Fekete, Louis Boulanger, Sandeep
Jaitly, Rudy Fritsch, Keith Weiner.
A ten-lecture
event focusing entirely on gold’s historical and future role in the
world’s monetary system. A primer on gold basis and cobasis.
For further
information, please contact Louis Boulanger at louis@lbnow.co.nz .
See also: http://lbnow.co.nz/goldsymposium .
Antal E. Fekete
Copyright
© 2002-2008 by Antal E. Fekete
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