Monday, July 28, 2014

The Dollar and the Gold Standard

Daily Mises interviewed Mark Thornton, senior resident fellow at the Mises Institute on the future of the dollar, inflation, deflation, gold and silver

A lot of it is rehash and reinforcement of points we've discussed before.  We can't believe the central banks have managed to carry this farce out so long.  The debt will be paid via inflation:

 ... the most likely alternative and one that looks increasingly obvious to me is that they will continue to use the printing press. They can pull back at anytime but the pain, the political pain and the economic pain in the short run is so difficult for them to accept, that it’s likely that they’re going to go down the path of printing up ever-increasing quantities of money, engaging in quantitative easing and so forth.

The people that they brought in to engineer this process are PhD economists, and PhD economists are some of the most dangerous people in the world in terms of economic policy. Right now we have a world in which many of the financial and even some of the political institutions are controlled by PhD economists, mainstream economics, Keynesian economists, many of them MIT economists.

The central banks have redefined inflation:

Well, of course the inflation-deflation debate is very important and it has been muddled by mainstream economists. The traditional notion of inflation was that inflation was the government increasing the money supply and deflation was a decrease in the money supply.

Mainstream economists have flipped that on its head so that inflation is a rise in general prices and deflation is a decrease in general prices. So, the traditional version was cause and effect where it focused in on the cause which was government increasing the money supply rather than the effect, which is an overall increase in prices.

So with that muddled definition, we entered this era of central bank manipulation to an extreme and therefore you’ve gotten this somewhat confused debate about inflation and deflation.

The way I view it is that in a policy sense, the government is going to continue to engage in a monetary inflation, but one of the deflation scenarios that I see is a deflation in asset prices because the economy is always trying to work to correct the errors that occur because of the central bank’s manipulation of interest rates and central banks have been manipulating interest rates downward. This has caused entrepreneurs to make investments in capital goods, in companies. That’s what has pushed the prices up and that’s what has pushed prices up in particular industries.

Thornton thinks that gold and silver are good investments.  If you want to buy a house or a car, gold is the way to go.  If you want to buy bread, you need some silver.  


  1. I was having this conversation with my son this morning over coffee. We are looking at a commerical building project, and pondering risk management in an economic environment where there is a liquidity buble driven by QE. Although we live in New Zealand, we are not unaffected by what happens in the USA!

    Debt is a huge issue as it has to be serviced. While interest rates are approaching zero (in your part of the world) that's fine. If they should increase a few percentage points, then the burden of repayment becomes unsustainable and 'correction' follows.

    Interest rates historically have been a measure of both the money supply and of risk. That link appears to have been broken, so now all bets are off.

    The system must eventually 'reset' but just who will be the winners and losers is unknown.

    Interesting times!

  2. Well, I'm kind of liking the low prices of gold and silver these last couple of years even though I converted some of my retirement near peak prices (ouch!). Oh well, it doesn't bother me too much. My company 401K account is just a number in a computer somewhere. Not so sure that number will be redeemable in ten plus years.