Why Gold is so strongly deflationary
‘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.’
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.
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’
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.