Inflationomics

The de facto Gold Standard

Many of today's central bankers may think they are not laboring under the constraints of a gold standard, but they are wrong—and it's just a matter of time before they realize this.  Gold has acted as money for thousands of years and continues to be recognized as such in many parts of the world.  When all else fails, people still use gold for exchange.  The Chinese government and Indian people, for example, realize this and are accumulating as much gold as they possibly can, especially when prices dip.  The Russian central bank is also accumulating gold regularly.

On the other hand, some other central banks don't have a clue.  Consider U.S. Fed Chairman Ben Bernanke, who doesn't even think that gold is money.  How can he possibly participate in the race to accumulate more gold (money)?  He can’t!  He’s totally focused on printing more paper currency in a misguided attempt to save the paper currencies of the world…and because the U.S. dollar is the world’s reserve currency, he’s been getting away with it…so far.  People around the world are still accepting ever-depreciating U.S. dollars in exchange for their goods and labor.  Yes, there has been a gradual decline in purchasing power, but so far, it’s been bearable.  But what happens when people stop accepting those U.S. dollars (which are promises to pay nothing)?

Consider for one moment what people have used for money, in the past, when a fiat currency became worthless.  They turned to another currency that is not being inflated into oblivion.  Or, they turned to gold, silver and other metals.  That's what happened in the aftermath of Zimbabwe's recent hyperinflation.  They used U.S. dollars, South African Rand, and gold that was panned from local rivers.  In some villages, gold was all that was accepted in trade.

Now imagine the U.S. dollar becoming worthless overnight.  Where would everyone turn?  What other paper currency would garner the people’s faith to hold its value?  In fact, would any other paper currencies remain intact?  Most currencies are being inflated to help the exporters of the nation using that currency, in a race to devalue the currency, thus making it easier to sell more goods for ever-cheaper paper money.  In the end, they could all become worthless.

On the other hand, let’s assume one paper currency were to survive…what paper currency could handle the demand (thus creating a need to print more) that the whole world would bring to bear on that currency if it were the only one left and everyone wanted to use it?  They couldn’t be printed fast enough and circulated around the world fast enough!

Precious metals, in contrast, are already circulating all around the world.  Just about every city/town in the world can lay claim to some gold, silver, or copper.  True, the amount of these metals may be measured in grams or ounces, but they will nevertheless be recognized as something of value and useable for trade.

Because precious metals are assets, there will be more demand for them when the paper currencies become worthless than there currently is for the paper currencies (government liabilities).  Prices will go up, unlike the paper currencies whose prices are going down.

In short, whether central bankers believe it or not, there is a de facto gold standard just waiting to spring into place whenever and wherever fiat currencies fail to act as reliable stores of value and media of exchange!  And that's why people who accumulate gold and silver now will have "money" when the fiat currencies fail.

Robert Jackson Smith

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