The Problem With Central Bank Money Printing Is A Debt Spiral, Not Runaway Consumer Inflation

by Keith Weiner

After President Nixon’s gold default in 1971, many people advocated a return to the gold standard. One argument has been repeated: consumer prices are rising. While this is true, it wasn’t compelling in the 1970’s and it certainly doesn’t fire people up today. Rising prices—what most people think of as inflation—is a dead-end, politically. People care about rising prices, but not that much.

There is a greater danger to fixating on this one argument. What if you make a really bad prediction? The Fed did massively increase the money supply in response to the crisis of 2008. Many gold advocates predicted skyrocketing prices—even hyperinflation. Obviously, this has failed to materialize so far.

Preachers of imminent dollar collapse have lost credibility. Worse yet, they have poisoned the well. People who were once receptive to the benefits of gold have lost interest (their selling has exacerbated and extended the falling gold price trend). And why shouldn’t they walk away? They can see that some Armageddon peddlers have a conflict of interest, as they are also gold and silver bullion dealers.

The gold standard has nothing to do with buying gold in the hopes that its price will go up. It has little to do with the price of anything—gold or consumer goods.

There’s no doubt that the fiat dollar harms us in many ways. However, the chronic rise of prices is the least of the wounds it inflicts. If prices could rise for a hundred years, then there’s no reason they couldn’t go on rising for another century—or a millennium. There is no finite endpoint for rising prices.

There is a finite limit to the abuse of credit, before the dollar will fail.

The interest rate is a prime driver of systemic failure. Interest has been falling for 33 years, since its peak in 1981. What happens when it hits zero? I don’t refer to the Fed funds rate, discount rate, or any short-term rate. I mean the 10-year bond or even the 30-year bond. In the U.S., the 10-year bond pays 2.3%. In Germany, it has already fallen to 0.91% (not a typo, 91 basis points). In Japan, it’s close to half of that, at 0.5%.

Naturally, the cheaper the rate, the more it encourages borrowing. When the rate keeps falling, the borrowing keeps rising. Is there a failure point for debt?

Along with encouraging borrowing, low and falling interest discourages savings. Isn’t that perverse, to discourage saving? What happens when an entire society doesn’t save?

Our financial system has suffered an escalating series of crises. Each crisis has grown out of the fix applied to the previous one.

The crisis of 2008 was different. No matter what the Fed has attempted, they have not been able to create even the temporary appearance of recovery (other than in asset prices). It’s not merely that growth will be slow, or slower than it should be in some theoretical ideal economic world.

There will be no recovery while our monetary cancer rages, unchecked. We must rediscover the gold standard, which is the only cure.

Our ancient ancestors adopted money to enable them to coordinate their productive activities in their economies. They could only go so far using barter, but money made possible the division of labor and hence specialization. Lubricated by money, there is no limit to economic growth and the development of wondrous products. For example, today we have access to the Internet on a thin handheld device.

The dollar still does perform this function, which is why it hasn’t collapsed yet. However, it is slowly failing. It is increasingly imposing perverse incentives. The dollar is hurting us by encouraging us to destroy precious capital in numerous ways.

The Gold Standard Institute is sponsoring an event in New York City on November 1. I will be speaking about the destruction being wrought by the dollar, including a detailed discussion of the problems mentioned above. I will also propose a practical transition path to the gold standard.

You are cordially invited to join us for a presentation of ideas you won’t get anywhere else. Here is the link to the conference page and registration.

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