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A Large and Uncomfortable Fact

May 24, 2009 2 comments

George Orwell once noted that at any given moment there is a general tacit agreement not to discuss some large and uncomfortable fact, and the sad fact is there’s such an agreement out and about concerning a gold standard versus a paper standard. Trust me, believing in a gold standard makes me the lunatic on the trade floor.

In a recent episode of The American Conservative, Philip Delves Broughton gives a good example of this ongoing trend. In Banking on Beijing, he speaks of his opinion regarding China’s economic situation, specifically their central bank’s rather poorly diversified investing acumen, given form in their sitting on all those US dollars, I forget the number, I’ve been drinking, but it’s definitely way over $1 trillion.

Mr. Broughton (Mr. Delves Broughton?) correctly notes that “China’s huge dollar reserves are merely a symptom of an economic fix of its own making”, as China is a country, like the US, blessed with a currency backed by paper and they were creating gobs of it to keep the value of their currency artificially low compared to the US dollar, not an easy thing to do with Greenspan and then Bernanke creating US dollars like mad little hamsters.

Mr. Broughton notes that while for a time it seemed to work, it was a “Ponzi scheme” and again I agree with him. Yet, he fails to give the same compliment towards what His Country Tis Of Thee’s central bank was doing – the exact same thing. If China’s policy of creating money like mad to keep it artificially low, to create inflation per the Federal Reserve’s slogan, is a “Ponzi scheme”, what about Bernanke & Friends?

Under a gold standard, China couldn’t have been able to screw itself into the ground because you must use something, gold, as money under a gold standard, something that is not counterfeitable.

And China wouldn’t have had to create gobs of its own money under a gold standard anyway, because if the Federal Reserve had been under a gold standard, too (and adhered to it honestly) there wouldn’t have been an orgy of reckless consumer madness in the first place to give them all those US dollars.

But the thought of anything but a paper standard doesn’t exist anymore. The intellectual debate over our monetary system does not even include it. It is not even respectable, people laugh at it off the cuff. Mr. Broughton is of that mind, asking “and realistically, where else is China going to go?” So paper it is.

Ending the article with “had China pursued a different strategy over the years” Mr. Broughton goes on to list his preferred options, not one of which included stopping the political elite from counterfeiting, to put the world currencies back under gold, to put shackles on all the counterfeiting.

Whether or not being on a gold standard will bring an end to booms and busts and cheating is doubtful – history says no – but history says the same thing about paper.

So what gives gold the gold, so to speak, what puts her first in my mind?

Economic justice.

Counterfeiting is a crime for a reason – it’s flat out stealing. It makes life harder for all of us to allow stealing. So if we are going to see life’s booms and busts and greed and human flaws anyway, at the very least we can be honest as possible about it.