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10 reasons why fiat currency is superior to gold - Part II

If you missed the first part of this series, remember - take this analysis with a very festive-sized pinch of salt...

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John Butler
On 21 December 2012 19:02

Leading on from yesterday's Part I, here's the top five reasons why fiat currency beats a gold-backed system.

 

NUMBER 5: GOLD-BACKED MONEY FAVOURS THE US VERSUS THE REST OF THE WORLD

Now for those of us residing outside the USofA, we’re sometimes concerned  that the US has the largest gold reserves in the world. If the world went back on a gold  standard,  then the US would be even more powerful than it already is. It would throw its weight around even more, use that gold to pay for an even larger military and open up more bases abroad, including where they aren’t even wanted, like in Bulgaria.

The US might even start more wars, as if it hasn’t started enough already, finananced as they are with the Fed’s printing press.

Now history  does suggest that war and inflation go hand in hand. Certainly this was the case in the 20th century. The French Revolution and Napoleonic Wars were hugely inflationary  in continental Europe. The 30years’ war was hugely inflationary too, ruining the previously prosperous Habsburg economies. 

Then there  was the American Revolution, financed with those paper continentals. But today things are different. Really, they are. If the world were on a gold standard, there would be more wars, notwithstanding that these would be far more difficult to finance.

On another note, the US economy imports far more than it exports. Wonks call this a ‘trade-deficit’. Really wonkish types have a more expanded term called a ‘current-account deficit’. If the world went back onto a gold standard, then the US would need to use its gold reserves to pay for net imports, instead of just printing more dollars. And at current gold prices, the US would not even be able to cover one year of its current-account deficit!

Imagine, the US would be unable to keep importing more than it exported! It would be forced to become a more competitive economy and it would need to save and produce more and consume less! The horror! We all know that the US consumer is the only thing keeping the global economy afloat. To whom would China or others export if not to the US consumer? What a ridiculous idea!

Well, it’s just not going to happen. Keynesians like Paul Krugman know that there is just no other way to grow economies than with exponential money growth to  finance consumption. Saving is the quick road to the poor house. Borrowing your way to prosperity has worked so well in the past, why would anyone possibly want to stop now? After all, savings is the four-letter word of Keynesian economics. Let’s  just not go there.

NUMBER 4: GOLD FAVOURS GOLD-MINING COUNTRIES OVER OTHERS

Here’s another simple one: If you go back to gold- or silver-backed money, you are providing a huge subsidy for those countries producing the money. 

Why give them the printing press, when we can keep it for ourselves? Remember, the power to print exponentially rising amounts of fiat currency is the key to ecomomic prosperity. We don’t want countries rich in natural resources to benefit at our expense now, do we?

Sure, many countries rich in gold are in Africa or other underdeveloped regions. They’re poor. They’re backward.  Some are near-dictatorships. Many dictators depend on us and our foreign aid, financed as it is with our printing presses. Why, if we could no longer print that foreign aid into existence, these poor countries would have to help themselves instead! No, they’re just too backward for that.

Imagine that the value of gold and silver mines in Africa and other poor parts of the world soared as these metals were re-monetised. Why it would be like what happened to the Persian Gulf countries when oil became a highly valuable commodity back in the 1970s. They became rich. Today those economies are among the wealthiest in the world. They mostly export far more than they import and they have built up huge sovereign wealth funds for the future.

But Africa being as screwed up as it is, can’t be expected to spend its wealth responsibly. They need the US, UK, and other countries to show them how to do it. Like what gas-guzzlers to buy. Or how many flat-screen TVs per McMansion  to have. Or how to administer a post office, or a national railway system, or quality state education.

No, rebalancing global wealth toward Africa and other poor regions is bad enough. Giving them control over their own wealth is just plain irresponsible. We shouldn’t do it and so we shouldn’t return to gold-backed money. 

(Please don’t think I’m racist BTW, I promise you I have at least one black friend. Or I did once. Really. I’m sure the same is true of all those politicians and bureaucrats who believe that, without foreign aid, many African countries would end up like Argentina. Or Greece even.)

 

NUMBER 3: GOLD FAVOURS THE RICH

Notwithstanding the observation above, that goldand silver-backed money would bestow greater wealth on countries rich in those particular natural resources. The fact is, today most gold and silver privately held is in the hands of the wealthy. They’re already rich, why should we make them even more so? Wealth inequality is a serious problem, why make it worse?

We all know that exponential fiat money growth in recent decades has helped to prevent  even greater wealth disparity. Sure,  in the US,  the wealth of the top 1 percent has risen exponentially relative to the middleclass since the 1970s, when the US went off the gold standard and the age of exponential money growth began, but that is mere coincidence.

 

It is true that real wages grew quickly under the gold standard, which created the largest middle-class in history, but even then there were those nasty Robber Barons  who became far richer than they deserved. Some of them were enlightened enough to realise this, like Andrew Carnegie, who gave away most of his fortune.

Economic progress is OK as long as people don’t get too rich from it. So let’s keep creating wealth by printing money but make certain that those that get too rich give it away. Or else.

We shouldn’t be  too  concerned that the banks and owners of capital are the primary beneficiaries of money expansion, as they have first access to the new money. After all, we want our undercapitalised banks to start lending again so we can continue on our borrowing and consumption binge. How else are the banks going to lend us money if we don’t create it in the first place? Sure we have to pay them interest on it, but rates are low so we shouldn’t care.

Yes, inflation is historically associated with wealth disparity and sound money is associated with a growing middle class. But that was before we came up with the modern welfare state that  automatically transfers money from the wealthy to the poor, that is, unless the wealthy find ways around the tax code by creating trusts and endowments, purchasing taxexempt securities or acquiring assets that tend to rise in price with inflation.

But they don’t  really want  to avoid tax, do they?

Warren Buffett, for one, says he wants to pay more tax. Of course he is allowed to do that, as the IRS has a special facility for those who wish to pay more than their mandated share. Sometimes I wonder why he doesn’t. He could dump his  taxexempt munis and hold taxable bonds, for example. Or he could pay out dividends, taxed as ordinary income, rather than  purchasing outstanding shares through buy-backs. Or he could live in a state with high taxes, rather than in low-tax Nebraska.

Given the complexity of the tax codes in most developed countries, I suspect there are thousands of ways that Warren or other rich people could pay more tax if they wished. Maybe actions speak louder than words.

Of course middle-class families don’t have access to fancy tax planning, as it tends to be rather expensive. Really fancy tax planning requires writing new items into the tax code, something that tax lobbyists do full-time on behalf of  the  wealthy. No, middle-class folks just have to pay up to compensate for all those loopholes that most never hear about until the government decides that they are no longer politically expedient.

In practice, this means that the welfare state is primarily a redistribution from the middle-class to the poor. But no, I don’t think this is the reason for the shinking middle  class. I think it is because, notwithstanding clearly herioic attempts, we are still not printing enough money.

Read more on: John Butler, fiat currency, fiat systems, gold, and gold standard
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