An essay for free for all MacleodFinance Substack subscribers. It gives context to the problems we face as the fiat currency era ends and in the struggle towards solutions.
Great article. One to be reread a number of times.
What I would like to see explored are thoughts on how the transition from the end of the current fiat regime to the emergence of the next will proceed. As long as nations are inevitably ruled by the venal, FIAT will be the end state even if it's forced to pass through an era of more virtuous money.
We talk casually about the collapse of credit and FIAT and its impact on the west but such transitions rarely (ever?) happen without violence between states or within states. More thought has to be given on how individuals protect themselves. It doesnt seem enough to say, "hold gold". I want to think about what to do with it through the transition. How to survive with it in the transition. All such thinking must necessarily be speculative.
There is, under the current system, another flaw even more important than excessive government spending:
The removal of gold as money from the public consciousness led to fiat money being regarded as a means of saving. Since fiat money is created through the monetization of assets by the banking sector and results in a corresponding credit entry in the customer's account, the presence of this medium in the depositor's account leads to this form of money being retained, i.e., saved, in order to be able to cover any expenses. (Saving can also take the form of investing money in stocks, bonds, derivatives, etc., analogous to John Exter's liquidity pyramid, but not in gold.)
A savings rate of, say, 10% enabled the banking sector to expand its balance sheets by 10% as well, without money creation having any noticeable inflationary effect. (In fact, this is pent-up inflation!)
In contrast, a rate of new government borrowing of, say, 3-4% would be negligible even if the net new borrowing were financed through the banking sector as a balance sheet extension. However, if the private sector were to take on the new debt, this would not be inflationary on the one hand, and on the other hand, it would be a welcome opportunity for private individuals to invest their savings at interest, the model on which the insurance industry in particular is based. The latter serves foremost to finance the state quietly and (for the time being) without inflation until the fiat bubble bursts.
The fall from grace was therefore the abandonment of saving in gold and the belief in fiat money. I remember well how, in the early 1980s, gold prices were no longer mentioned on the radio alongside stock market prices, thus removing gold from the public consciousness. May it now return.
Excellent. Really insightful tour through gold standard history.
Hope for the future slightly tempered by the last 2 sentences, as I think most Western governments are some way from having either a level of discipline or the intellectual capacity to realize what is required in cutting spending.
Frederic Hayek favored the denationalization of money. In other words, the market would create money and Gresham'a Law would work in reverse; i.e., good money would drive out bad. Whether eliminating legal tenders laws, which require using only the national currency for settlement would lead to that end is possible, I think. I would like Alasdair to enlighten us on this subject, if he has the time and inclination.
I think that I like this Alasdair, but I have to reread it ten times over to get the total picture. My ignorance can be debilitating but you are working on solving that problem. Thanks much.
Alasdair, please could you clarify that as we are buying gold with fiat, and fiat being credit, how is it that gold has no counterparty risk? According to David Rogers Webb ‘The Great Taking’, the people who call themselves the ’Takers’ (us being ‘the givers’),have already ’taken’ all the world’s wealth, including the mines, the metals, the water, the stocks, all the instruments on the stock exchanges, our houses, cars, everything … All nations have changed their laws for this to be so according to his research. I don’t understand. How has Gold escaped?
It seems likely to me, that in the fullness of time, bankrupt issuers (aka government and associated cronies) will have a hard time maintaining their monopoly over money. Especially as they resort to using it as a weapon against the public. I have a feeling that market money (historically precious metals) will be making a comeback, despite the best efforts of the state to prevent it.
Great article. One to be reread a number of times.
What I would like to see explored are thoughts on how the transition from the end of the current fiat regime to the emergence of the next will proceed. As long as nations are inevitably ruled by the venal, FIAT will be the end state even if it's forced to pass through an era of more virtuous money.
We talk casually about the collapse of credit and FIAT and its impact on the west but such transitions rarely (ever?) happen without violence between states or within states. More thought has to be given on how individuals protect themselves. It doesnt seem enough to say, "hold gold". I want to think about what to do with it through the transition. How to survive with it in the transition. All such thinking must necessarily be speculative.
Me too
Thank you very much Alasdair, enyoyable read.
There is, under the current system, another flaw even more important than excessive government spending:
The removal of gold as money from the public consciousness led to fiat money being regarded as a means of saving. Since fiat money is created through the monetization of assets by the banking sector and results in a corresponding credit entry in the customer's account, the presence of this medium in the depositor's account leads to this form of money being retained, i.e., saved, in order to be able to cover any expenses. (Saving can also take the form of investing money in stocks, bonds, derivatives, etc., analogous to John Exter's liquidity pyramid, but not in gold.)
A savings rate of, say, 10% enabled the banking sector to expand its balance sheets by 10% as well, without money creation having any noticeable inflationary effect. (In fact, this is pent-up inflation!)
In contrast, a rate of new government borrowing of, say, 3-4% would be negligible even if the net new borrowing were financed through the banking sector as a balance sheet extension. However, if the private sector were to take on the new debt, this would not be inflationary on the one hand, and on the other hand, it would be a welcome opportunity for private individuals to invest their savings at interest, the model on which the insurance industry in particular is based. The latter serves foremost to finance the state quietly and (for the time being) without inflation until the fiat bubble bursts.
The fall from grace was therefore the abandonment of saving in gold and the belief in fiat money. I remember well how, in the early 1980s, gold prices were no longer mentioned on the radio alongside stock market prices, thus removing gold from the public consciousness. May it now return.
Excellent. Really insightful tour through gold standard history.
Hope for the future slightly tempered by the last 2 sentences, as I think most Western governments are some way from having either a level of discipline or the intellectual capacity to realize what is required in cutting spending.
This one is worth..saving...
but
You...decide if you are on a gold standard....
Spend your paper, and save in PM´s.....really that simple....
Even borrowing paper to buy Metals, looks like a NO brainer
Frederic Hayek favored the denationalization of money. In other words, the market would create money and Gresham'a Law would work in reverse; i.e., good money would drive out bad. Whether eliminating legal tenders laws, which require using only the national currency for settlement would lead to that end is possible, I think. I would like Alasdair to enlighten us on this subject, if he has the time and inclination.
I think that I like this Alasdair, but I have to reread it ten times over to get the total picture. My ignorance can be debilitating but you are working on solving that problem. Thanks much.
Alasdair, please could you clarify that as we are buying gold with fiat, and fiat being credit, how is it that gold has no counterparty risk? According to David Rogers Webb ‘The Great Taking’, the people who call themselves the ’Takers’ (us being ‘the givers’),have already ’taken’ all the world’s wealth, including the mines, the metals, the water, the stocks, all the instruments on the stock exchanges, our houses, cars, everything … All nations have changed their laws for this to be so according to his research. I don’t understand. How has Gold escaped?
It seems likely to me, that in the fullness of time, bankrupt issuers (aka government and associated cronies) will have a hard time maintaining their monopoly over money. Especially as they resort to using it as a weapon against the public. I have a feeling that market money (historically precious metals) will be making a comeback, despite the best efforts of the state to prevent it.
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