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Why Gold is so strongly deflationary

by on February 19, 2012
deflation

You are aware that the gold standard has been the ruin of the States which adopted it, for it has not been able to satisfy the demands for money, the more so that we have removed gold from circulation as far as possible.’
Protocol 20

One of the key problems with Gold as currency is that it is strongly deflationary. Austrian Economics both denies deflation is disastrous and that Gold is deflationary and this is one of its major weaknesses.

The fact that Gold is strongly deflationary has always been one of the key issues in the debate, even in the late 1800’s.

Populists throughout the 19th and early 20th century have always fought for more plentiful money. The famous Bryant exclamation ‘you shall not crucify labor on a cross of Gold’ was not in the context of debt free money, but to allow Silver to circulate besides Gold. To improve liquidity and alleviate the scarcity in the means of exchange, depressing the economy and of course badly hurting debtors.

As mentioned earlier, Keynes wrote ‘the economic consequences of Mr. Churchill’ when Churchill put Britain back on the Gold Standard in 1925. Correctly predicting the Great Depression would result from it.

Keynes is of course the arch enemy of Austrian Economics and they have difficulty maintaining a straight face when discussing him. But it’s in an inconvenient truth for them that Keynes called this one a priori, while Austrian Economics cannot explain it away even a posteriori.

Austrians nowadays come up with the most amazing arguments to downplay the fact that the Great Depression was basically a Fed induced deflation, while on a Gold Standard. Several people have offered me this study by the Fed, ‘proving’ it was not a deflation.
How does this compare with Austrian Economics’ successful exposure of the Fed manipulation of volume of the Money Supply? Does anybody believe anything the Fed says when it comes to volume of the money supply?
Do we really need to discuss Fed studies proving it did not cause the Great Depression?

Even Bernanke himself admitted ‘we did it’ in the speech that made him famous as Helicopter Ben. Of course we don’t even believe him when he blatantly speaks truth like that, but still.

So on the one hand Austrians ‘deny’ the link between Gold and deflation. On the other hand, they try to downplay its detrimental effects. They say:’look at what happened to computers and mobile phones. Declining prices! Great right?’.

But these are examples of breakthrough technologies getting cheaper under market pressures.

Deflation has nothing to do with that. Deflation is a stagnating economy because demand is plummeting. And why is demand plummeting? Because the money supply is contracting.

For a practical example of what deflation actually really looks like we currently have Greece. But also the United States itself, with its imploding M3, exacerbated by crashing velocity,  and accompanying 20% + unemployment.

American Populists have known for ever that the only ones benefiting from declining prices are the ultra rich who use their newly found bail out riches to buy up real assets for pennies on the dollar.
Three Points
1. Populists have always maintained Gold is scarce. Ridiculous, Austrians say. We divide all the money in the world through all the Gold available and thus the right price for Gold can be established.

The problem is, the economy grows, while Gold supplies grow slower. So the money supply contracts in relative terms compared to the total amount of transactions.

The Protocols, by the way, are on the side of the Populists:
“The issue of money ought to correspond with the growth of population and thereby children also must absolutely reckoned as consumers of currency from the day of their birth. The revision of issue is material question for the whole world.

This is the most obvious problem. However, there are far more serious issues.

2. The Gold will circulate in the form of credit.

Of course, the Gold in the hands of  individuals is debt free. But once spent, it will quickly reenter the banking system, and it will only leave it in the form of credit. Thus the money supply will be interest bearing, just like with today’s Fed notes. Because of that there is never enough Gold to pay off the debts + interest. People will have to go into debt to pay the interest and every ounce of Gold will have to be relent again again and again ad infinitum. Read this article to understand the basic process.
Or read this analysis by Mike Montagne with the basic math behind it all.
What this means is, that through ever higher debt service over the same money supply, less and less liquidity is available to finance real trade.

This is also happening in our current system. But since that is paper based, the problem is solved by printing ever more money. And it is this dynamic that is driving the growing money supply, far more so than ‘irresponsible politicians’.

Under Gold this inflation is impossible. The same trade will have to be financed with ever less available Gold and this is a major deflationary trap.

This is only one problem with interest on the money supply, of course, but a very important one.

3. The final issue is that it is completely unknown where all the Gold is. It’s even an open question how much there is. Gold is tightly controlled and highly manipulated market and has been cornered by the Money Power for ever. It is easy for her to take Gold out of circulation. It’s basically always the same thing: call in loans and don’t give out new ones. Cite ‘lack of trust’ or ‘need for structural adjustments’. So Gold, like the current Fed monopoly leaves us wide open to manipulation of volume.

Once more: ‘Economic crises have been produced by us from the goyim by no other means than the withdrawal of money from circulation’

Conclusion
Deflation is a nightmare.

Gold is deflationary.

Deflation is a curse for Austrians because they have to wriggle and squirm to put up a brave face about the issue and they know it.

As long as they are rookies who have no other paradigms available than what they have been fed by the ‘Alternative Media’, it’s hard to blame them. But when dealing with generously financed think tanks/propaganda outlets who professionally make up excuses and circumvent the issue in the debate, it’s hard to swallow.

There is no need for the inflation vs. deflation dialectic Austrianism provides the Money Power with.

Interest free currencies, produced either by the State or the market or both, could reflate the economy free of cost, ending the wealth transfer through interest at the same time.

Related

Phoenix Rising, the Return of the Gold Standard
The Inflation vs Deflation Dialectic

Top Ten Lies and Mistakes of Austrian Economics
On Interest
What Gary North is not telling you about Interest

25 Comments
  1. Ron permalink

    I think, we often get emotional and discuss particular issues without larger context. As Henry Hazlitt corrected pointed out back in 1960’s, return to gold standard is impossible if you allow longing for distribution of wealth and economy planning. Return to gold standard must always include individual freedom and the latter does not limit the choice of a particular legal tender. If government enforces legal tender, then “bad money” drives “good money” out of daily circulation. If government does not enforce, then the best money wins. If a country does not have enough best money, people will use the second best they want to accept, etc. In the latter case, private exchange outlets will determine market exchange parity for international trade.

  2. Horatio Alger permalink

    Are you aware that the FED had fixed the price of gold back in the day? It’s not about gold as currency rather have your currency to be of real value, not a value that is fixed with the US military. Honest money requires it to be backed by something of value, scarcity and tangible.
    The fact that you are calling this a recession makes me question your intentions. THis is a depression.

  3. Charles Crosby permalink

    Many thanks for an easy to understand article. You have unravelled the deliberately made complicated bankster BS very well. I knew it was always simple.

    It would help if you could clarify the use of silver in this equation, it being a far more plenteous metal – hence The Pound Sterling of the 19th century.

    Government printed money and no usury is the answer to all our financial problems.

  4. Jimbo permalink

    The 19th century is the time period to study for how gold operates as a currency, particularly, in the American economy. There were numerous depressions, and, several of these were caused by withdrawing credit from the system by international bankers (the Rothchilds) all under the gold standard.

    In the first half of the 19th century, the international bankers (the Rothchilds) were fighting with President Andrew Jackson over the existence of the United States Bank (a private central bank, many historians believe controlled by Rothchild intermediaries) and, it seemed, when the Rothchilds wanted to “put the hurt” on the U. S., they were quite able to do this by withdrawing credit.

    In order for prices to remain stable (in my opinion) the money supply has to grow at the same rate as the economy. The gold supply has a hard time growing as fast as a healthy economy, unless, a hoard of gold is released or supplied (increasing the volume) into the system at the same rate as the economy grows, but that pre-supposes that somebody does control or dominate the gold supply.

    European interests (again, the Rothchilds) were constantly jolting the gold supply because they wanted to control the U. S. economy even more than they already did.

    The truth was (as Lincoln understood) that the United States had the potential to grow independently of Europe and exceed European growth because of abundant natural resources and abundant labor. The Europeans didn’t like that potential — at least if they weren’t getting a sizable “cut”.

    Under the gold standard, Europeans were constantly undercutting supposed “bubbles” (economic growth beyond anything Europe could sustain) and, then, coming in and buying physical assets, cents on the Dollar. How did the Europeans do it? Withdrawing credit causing a deflationary depression.

    How much more power would international bankers have if there was a world-wide single currency backed by the Gold Standard controlled by a PRIVATE world central bank, which was, in turn, controlled by international bankers beyond the political reach of ANY Nation-State?

    Particularly if gold was primarily owned & hoarded by those same international bankers?

    That’s how the Globalists get their World Government.

    Remember the Golden Rule: Those that own the gold make the rules.

    • hear hear!

  5. Hi Mr. Migchels,
    I enjoy reading your thought provoking articles. Could you please give your opinion on a freegold system (not traditional gold standard) as this system would not cause the deflationary effects that you mention above. Thanks!

    • Hi JL,

      Thanks!

      I intend to write on Free Gold in the future, but as I understand it now, it is about having a means of exchange on the on hand and using Gold to store wealth on the other.

      This distinction is very important and I basically go along with it.

  6. Reblogged this on Recovering Austrians.

  7. Lots of clueless bullshit again, mr. Migchels. Deflation is an effect of the free choice of people, by hoarding money (no problem – you can adjust wages and prices) and/or by increasing productivity (which proves that gold as money works and assists in improving prosperity).

    By the way. We have no gold standard now. But there is a recession in many parts of the world. The huge money printing of the last years did not work to get “the economy” running again. So you have something to explain.

    • oh yes, the ‘free choice’ thing. Whether the system and its other participants have problems with that does not matter?

      Declining wages, he? Yes…..that’s what’ it’s all about.

      • Rising purchasing power, that’s what’ it’s all about.

        • yeah, with a tanking economy and millions on the street. Rising purchasing power?

          Oh yes of course: the billionaires buying everything up for pennies on the dollar.

          They have purchasing power in deflation.

          That’s why they invented Austrianism, so that people would ask for even MORE deflation!

          • Dave permalink

            You’re a fucking Keynesian and an idiot.

            • That’s the kind of level of communication that Austrianism is famous for!

    • By the way.
      “We have no gold standard now. But there is a recession in many parts of the world. The huge money printing of the last years did not work to get “the economy” running again. So you have something to explain.”

      http://realcurrencies.wordpress.com/2012/01/12/the-inflation-vs-deflation-dialectic/

    • Let’s say you’re a musician. You want to borrow. You want a new guitar. If I have a vault full of gold, you come to me for a loan. I give you 10 coins which you in turn trade for a guitar. You agree to give me 11 coins total at the end of the month after making weekly payments. After the first payment, I give you a coin that you just gave me to play at my lavish wedding. You give me back that coin at you’re next payment to me. At the end of the month, I now have my coins, plus you played at my wedding. Why would you have to work for me when you could have used paper to acquire the guitar and not pay me anything? Times this scenario by billions.

    • Horatio Alger permalink

      Has no clue what he is talking about. These guys think that you can just trade paper for goods and services. What fools! Their hearts are in the right place but have no idea how reality works.
      We have a credit bubble right now. The dollar is credit. LOL! I think people try too hard.

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