Opinion

“For in fire gold is tested”

photo_camera Lingote de oro Degussa

I will, in the first step, explain that today’s worldwide unbacked paper- or “fiat” money regime is an economically and socially destructive scheme – with far-reaching and seriously harmful consequences.

In a second step, I will argue that a free market in money – which amounts to ending the money production monopoly of states – would solve the numerous economic, social, and political problems we face today.

In a third and final step, I will address the issue of gold in today’s and tomorrow’s world of monetary turmoil. I hope that against this backdrop, you will understand why the title of my talk is “For in fire gold is tested.”

What is Fiat money, and what does it to?

Please let me begin by saying that the US dollar, the Chinese renminbi, the euro, and the British pound represent fiat money. Fiat money has three characteristics:

1 -  Fiat money is money monopolised by the state’s central bank. It is created by central banks and commercial banks, licensed by the state.
2 -  Fiat money is mostly produced through bank credit expansion; thus, it is created out of thin air.
3 - Fiat money is dematerialised money, consisting of colourful paper tickets and bits & bytes on computer hard drives.

Fiat money is by no means “harmless”. Fiat money is inflationary. Its buying power dwindles over time, and history has shown that this entropy is almost as irreversible as gravity.

Fiat money makes a select few rich at the expense of many others. The first to get new money benefit to the detriment of those on the bottom rung.

What’s more, fiat money fosters speculative bubbles and capital misallocations that culminate in crises. This is why economies go through boom and bust cycles.

Fiat money lures states, banks, consumers, and firms into the trap of excessive debt. Sooner or later, borrowers find themselves in a deep hole with no way out.

Fiat money is easy to come by, so the government can finance its adventures and misadventures. Easy money; easy come, easy go. And the government keeps growing as it keeps spending.

As the state expands and grows like weeds in an untended garden, this excessive growth strangles the free market economy, causing production and employment to suffer.

After decades of credit and money creation out of thin air, central banks have built up a colossal debt pyramid. The International Institute for Finance (IIF) estimates that global debt amounted to 331 per cent of global GDP in the first quarter of 2020.

The coronavirus crisis, in particular the politically dictated lockdown crisis, has laid bare the instability of the world’s debt-ridden fiat money regime.

Without growth, investors must fear that borrowers might no longer be able to service their debt – and so investors rush to exit the credit market. As credit supply dries up, many borrowers are not in a position to repay maturing loans, nor are they able they obtain new funds.

To prevent the fiat money regime from collapsing in the lockdown crisis, central banks have stepped in, suppressing market interest rates and printing new money to prevent financially overstretched states, banks, and firms from defaulting on their payments. Central banks monetise national debt on a grand scale, hitherto seen only in times of war.
 

Divisas
Moving towards socialism

To sit back and think “Well, monetary authorities have successfully bailed out the system, everything will be fine,” would be a grave mistake. Because more than ever, central banks are doing severe damage to what little is left of the free market economic system.

Artificially low interest rates and massive amounts of newly created money lead to malinvestment on a grand scale, and under current circumstances, they help to make government even bigger, feeding the growth of the “deep state”.

The uncomfortable truth is that the fiat money regime and all political efforts to prevent its collapse lead to semi-socialism or even outright socialism.

And from an economic and historical perspective, we know that any form of socialism does not bode well. It impoverishes people, brings chaos, oppression, and violence.

Furthermore, what should worry all of us is that the fiat money regime is instrumental for those political forces that wish to transform, to reshape the world economy. The “political establishment”, the “Davos Elite”, for instance, undoubtedly favours fiat money and the erosion of the free-market system it brings – for it increases the possibilities of the state to interfere in people’s lives.

In fact, the so-called ‘new world order’ that progressivists envision – replacing the free market system by a planned economic system, if put into practice – poses a serious threat to the freedom and prosperity of billions of people around the globe.
 

Fabrica dinero
The way out

With that in mind, I will speak an unsettling truth, which is that if people are coerced into using fiat money, the free economic and societal order will not survive.

What could be the solution? Well, a solution is at hand and, technically speaking, it is quite simple: Open a free market in money!

A free market in money means that everybody has the freedom to choose the kind of money he or she thinks is best.

And everyone has the freedom to offer his or her fellow human beings something that can serve them as money.

But wouldn’t that result in monetary chaos? Would the market be flooded with thousands of new monies?

No, it would not! For it is the demand for money, the multiplicity of individual actors, who would decide what will be used as money.

If people can choose freely, it may not take long for a good to emerge that will be used as money not only nationally but internationally – as a universally recognised medium of exchange.

Of course, we wouldn’t know what people prefer as money. However, looking into monetary history, there is reason to believe that precious metals, gold and silver, in particular, would be in the race for becoming money. Looking ahead, it could also be a crypto unit. Who knows?

Why aren’t people using gold and silver for payment purposes right now? Well, people got used to using US dollar, euro and the like as medium of exchange.

What is more, people are not yet deterred by the chronic “inflation tax” on their money balances, which means that the purchasing power of money decreases over time.

And perhaps even more important: Government taxes – namely value-added taxes and/or capital gains taxes – on precious metals make them uncompetitive against official currencies.

But change is underway. As you may know, quite a few US states (e.g., Texas, Arizona, Utah, and Wyoming, to name a few) have abolished sales taxes and capital gains taxes on precious metals, allowing for a level playing field in terms of alternative monies competing with the US dollar. 
 

Dinero
The case for gold

Whatever comes out of the current monetary mess, regardless of the twists and turns it may take from here, there is good reason to hold on to physical gold. For fiat money will inevitably bring inflation and economic hardship.

Former Federal Reserve chairman Alan Greenspan summed it up best when he said in 2014: “Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.”

Gold is not only the ultimate means of payment. It is also a line of defence against the evils of fiat money. Gold’s purchasing power cannot be debased by central banks running the printing presses.

In addition, gold does not carry a credit, or default, risk as bank deposits do.

I dare to assume that gold still represents the ultimate means of payments. For in extreme situations, fiat money might no longer be accepted as money. I believe the chances that gold will always be accepted are excellent.

There are good reasons to believe that gold, given the current state of macroeconomic factors, offers an attractive upside potential – and also provides protection against the effects of increasing turmoil in the world’s monetary and economic system.

That said, I would like to side with Ray Dalio, who recently said: “I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”

And that brings me back to the title of my talk, “For in fire gold is tested”.

We do not know what the future will bring. But we know, however, that a world of freedom and prosperity needs sound money, that it cannot possibly function without sound money.

Even if you are optimistic that we as a people will overcome current problems, that mankind has the potential to move forward and create a better world, you have good reason to hold gold rather than fiat currencies.