Will Gold Play Role In New Monetary Order?

It seems that we are on the precipice of an imminent global race to the bottom brought about through Keynesian ideology combined with fiat paper money.  This situation has some members of the banker elite concerned. World Bank President Robert Zoellick made some comments today about how to reform the bankrupt world monetary system that is currently on its last legs. The surprising aspect of his speech was his desire to include gold as a true measure of inflation and deflation! While Mr. Zoellick stopped short of advocating a return to a gold standard, his remarks were one of the first instances in which a prominent world bank official has seriously considered the idea. For the record, Zoellick wants to see a move away from the dollar to a more diversified mix of foreign currencies to make a reserve portfolio. From the FT article:
 "The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values."

"Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today."

It is no surprise that the elite are planning a new monetary order since the current Bretton Woods agreement has failed. The main problem with Bretton Woods was that it made the dollar the reserve currency held by all countries, with the dollar backed by gold. This system only worked as long as the US was willing to run large trade deficits which led to Triffin's dilemma. The concept developed by economist Robert Triffin noted that eventually the county supplying the reserve currency would eventually go bankrupt. The US faced this threat in 1971, which is why President Nixon put an end to dollar convertibility into gold. The US dodged a real bullet because if it had continued to convert dollars into gold, the US would have lost all of its gold and forced to end convertibility at a further date anyway. By stopping gold convertibility, the US bought itself some time.  All would be well as long as countries were willing to own dollars, which were guaranteed to depreciate and invest them in US treasuries. However, at a certain point, the amount of US debt becomes so large that the US is unable to service the debt. At this time, the US will do what all countries with fiat currencies do:  print money. The problem is that holders of US dollars (Chinese, Japanese, etc) wake up and decide to ditch the dollar before it is worthless. This is the endgame to Tiffin's dilemma-- a global wholesale dumping of dollars.

The only question at this point is what the new monetary order will look like. So far we have heard from the IMF which wants a global currency backed by a world central bank (the IMF, of course). The new currency would be called Bancor in honor of John Maynard Keynes. I do not have to tell you why this is a bad idea, but the mere fact that its inspiration comes from Keynes is enough to ditch the plan considering Keynesian philosophy is the cause of our economic problems.

The second idea, mentioned by Zoellick of a basket of reserve currencies is not the solution either. The problem is that fiat paper money has no intrinsic value and can be electronically created by central banks. Any new monetary system has to be backed by something of value which can not be printed at will. The natural solution is a gold standard, where a currency is 85-90% backed by gold or some basket of commodities. This would still leave a little bit of monetary flexibility to deal with economic shocks, but not enough to destroy the currency. It would also dramatically reduce inflation and force governments to reduce spending. No longer could governments rely on inflation to reduce their debt burdens. The only problem with this solution is that it is not politically acceptable. Politicians would no longer be able to bribe the electorate with free stuff because they would have to actually be able to deliver on their promises instead of printing money. The new gold standard would also require countries to end their welfare states because they would no longer be affordable. In Europe and the US, welfare is used to pacify the public and keep them dependent on government. The current system ensures political stability as the people cannot afford to rebel against the government even if it is robbing them blind. After all, no government means no welfare. This is why a return to the gold standard will only come about when all fiat currencies collapse.    

Black Swan Insights


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