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20 Aug, 2013 09:58

Ultimate confidence: World won’t go for gold standard anymore

Ultimate confidence: World won’t go for gold standard anymore

Some may find it hard to stomach “In God we Trust.” The truth is everybody would rather trust the government. At least fiscally...

Whatever you have in your wallet, it’s ultimately worthless. True, there may be some kind of “I promise to pay the bearer” comment on the water-marked notes, but in reality the only thing your government can give you in return is vapor. If you’re lucky!

Modern money is in fact the ultimate confidence...well, let’s call it a game. Way back when governments used to issue money in precious coins, they were worth their own weight. Alas, then along came rampant government spending and to make up for their foibles, ancient government austerity measures involved the nasty habit of devaluing coins by clipping some precious metal from around the edges. You still had the same coins but you were a few millimeters of gold or silver poorer per coin.

Now fast forward a couple of thousand years, give or take, and we meet Richard Nixon, a remarkable man in financial history, but for those who analyze the careers of elected politicians on, well governance, a somewhat controversial figure. Once upon a time, Nixon took what was regarded as the wildly controversial idea of injecting free market capitalism into the investment world and stopped the curious practice of fixed commission stockbroking. However, some years earlier, Nixon had taken an even more contentious route and abandoned any lasting pretense that money was related to and underpinned by gold. This Bretton Woods system had backed the dollar and hence the global money system since the end of World War II, in a system which was a hybrid inherited from the pre-war gold standard. In the modern era, many still view the gold standard per se with suspicion. For example, it didn’t seem to help recovery from the great depression of the 1930’s. Nowadays of course politicians are much more enlightened which is why we have Euro dogma and 50% youth unemployment in many of the old continent’s sunny spots.

Reuters / Stringer

Many world citizens are increasingly becoming more than a tad concerned about the issues of “fiat” money - aka currency with no convertible asset to back it. Again there’s no such thing as a modern coin clipper as such, but there are all manner of folk basically trying to devalue the dollar in your pocket. Like so much else in life, coin clipping has gone virtual. Central bankers currently subscribe to a collective mania called “quantitative easing” which basically means handing free money to banks in the hope that some economic growth emerges, at the end of a lot of frantic trading. This curious activity also creates vast amounts of new cash which, it is not difficult to argue, results in a devaluation of the money that most people went about earning the old fashioned and hard way.

Therefore various schools of thought, many active in the blogosphere, are calling for a return to asset backed money. This is perhaps unsurprising given how challenging it is to believe the words oozing from many a politicians’ lips. Even the elected ones who don’t indulge in rampant social media campaigning are not exactly well regarded by the electorate. Indeed, whether left or right, there seems to be a major move away from trust in government and that helps promulgate the idea of asset backed money rather than just trusting the untrustworthy.

Meanwhile there are reports the Chinese really like the idea of a new gold standard, which happens to dovetail neatly with their ownership of a great deal of gold at a time when paper-rich western nations don’t enjoy this. However, that hardly makes sense as a Chinese Yuan tied to gold would make it commensurately more expensive for China to export goods to the west. Rather, sensing the long-term decline of the US dollar as the key reserve currency, China is probably positioning itself to be part of a basket of currencies that makes up the so-called “Special Drawing Right”, which may be pushed into a more prominent position by the IMF in due course.

However, down there in the real world below the Elysium of central bankers and the political classes, the truth is that mere mortals are already demonstrating their distrust of fiat cash, whether issued by the kleptocrats of Brussels or the QE spendthrifts of the Federal Reserve. Bitcoin may be undergoing a volatile adolescence but it is already a proven instrument of value (admittedly variable value) with an underlying scarcity that ahem, “hard cash" lacks.
In cryptocurrency we trust? "

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.