Here is the pertinent video clip of James Grant.
https://www.youtube.com/watch?v=Qwj5fx1di1I
“The 2007-2009 real estate debacle is the monetary equivalent of a chain reaction on a foggy California freeway. The trouble with our monetary mandarins is they [the Fed] believe impossible things. They have persuaded themselves that the central bank can pick the interest rate that will cause the GDP to grow, payrolls to expand, and prices to levitate by just two percent a year, as they measure it. It is impossible as experience and common sense attest. Yet, they hold it to be true. … William F. Buckley famously and persuasively said that he would rather be governed by the first 400 names in the Boston phone directory than by the faculty of Harvard. Unaccountably, this Congress has entrusted the value of the dollar that we own, that we transact to an independent committee dominated by monetary scholars. In one short generation we have moved to the PhD standard from the gold standard.“
Grant is correct. The result has been a series of economic bubbles with increasing amplitudes over time.
The Alps Precious Metals Group commented on Grant in its latest monthly letter.
We’re Smarter Now
Jim Grant is spot-on in his description of what has transpired: “We have replaced the Gold Standard with the PhD Standard.”
Consistent with our post-Modern zeitgeist, we have traded the wisdom of old for the cockiness of what I call the “We’re much smarter now” syndrome. Hence the propensity of Western governments over the last 50 years to deplete their supplies of the “barbarous relic” as Gold’s time “has passed”.
Tulips, South Sea and Florida Real Estate ventures, Roaring ‘20’s stocks bought at 10x leverage as a norm, as well as innumerable investment ideas since 1971 when Nixon closed the Gold window are all examples of investments based solely on confidence, the ebb and flow of which resulted in volatile “risk on and off” episodes.
The last material loss of confidence in the system was in 2008/early 2009; which resulted in a series of experiments whose 9-year anniversary is upon us.
What happens when Common Knowledge changes and moves over to something else that “everyone knows that everyone knows”? Not unlike the ferocious tornados which rip across the American continent when winter turns to spring, the change may be rapid and violent.
The PhD standard – that may very well bring us a round trip to the ’09 lows. In its place will be what history has defined as tangible and trusted stores of value. Investors will trade “we are smarter, see farther and can manage all outcomes” for a more historically informed “we don’t really know what the future holds, but we do know what everyone everywhere will take as tangible value no matter what comes to pass.”
To conclude, here are a series of current charts which we believe lend credence to why we suggest that a material allocation to Physical Precious Metals held OUTSIDE the status quo financial system is warranted for any investment portfolio.
2008 Lessons Not Learned
La-La Land
Here we are in equity and junk bond La-La land, with Trump starting trade wars and threatening real wars, and with the Fed hiking away, totally ignorant of the bubbles they created, just as the economy is weakening.
Good luck with those PhDs.
Mike “Mish” Shedlock
Actually the only gold standard that exists is one in which citizens can exhange currency for gold from the government at a fixed rate. This existed prior to 1932 when FDR decreed that citizens could no longer own gold. Prior to this, if you had a threshold amount of currency, I believe $10,000, you could surrender your gold certificates for gold coin or silver certificates for silver coin at the Treasury.
@Stuki Thank you for staying on point. You seem to agree that most Gold Standards tried in human history have actually been Gold Standard+Empty paper promises and not Pure Gold standards. Do you think there is a fundamental reason why it has been that way?
On the other hand I still think that Fiat compared to Fractional Reserve Lending Gold Standard is not too much different in terms where fraud can happen in the system, because:
1. With Gold Standard Federal Reserve insiders could trade physical gold before major policy annoucments. Just like today insiders can trade equities before Federal Reserve makes any announcments. Maybe announcments would be somewhat different nature, but by how much?
2. With Gold Standard Gold mining companies would suddenly own huge money supply by mining new gold. Just like today Financial institutions own huge money supply when they try to decide what to do with the money parked at Federal Reserve.
I would say that Gold mining is comparable to Bitcoin mining in sense that it wastes labor and energy. The office “finance engineers” just waste few kwh/day while being in front of computer “everything else being the same”.
P.S. I find fascinating the Khan Academy explanation on Gold Standard here – https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/banking-and-money/v/banking-17-what-happened-to-the-gold. I came to Mish’s site because of Khan Academy endorsment when Sal explained multiple “inflation” definitions. However, while reading this blog for 7 years I think that while Mish quite often brings valid points, he sometimes forgets to fill in important details. For example, Mish in one article asked “what would be Federal debt service costs if interest rates rise to 5%?”, but he never mentioned in article how much of federal debt is rolled over each year, which would help him build stronger case to support his argument.
“With Nearly every comment Whirlaway shows complete ignorance. Today we have incorrect platitudes and strawmen about what Libertarians believe. As for bubbles under gold standard…”
My comment was neither incorrect nor a strawman. We are seeing the wreckage caused by the kind of policies that neoliberals and libertarians have supported – cutting corporate taxes, gutting regulations and doing so-called free trade deals all over the place. You can try to run from the very things that you supported (and have resulted in the current disaster) but you cannot hide.
And I didn’t make any comment about bubbles under gold standard so you are at best incorrect and at worst dishonest in making it appear as if I said anything about it.
@Long Vix. The beauty of a gold standard is that a) it anchors the amount of leverage that banks can legitimately extend (it won’t stop unscrupulous dealers engaged in FRL but it’ll give pause to all large, publicly listed lending institutions) which in itself will provide a brake to the egregious leverage situation we see today, and b) it allows the public to hold the financial sector to account should they lose faith i.e. the moment there are queues of citizens at banks demanding physical gold in exchange for deposits the money creation scheme that exists today will come to a grinding halt very rapidly (for obvious reasons, which, if you can’t see why, means there is zero point continuing this discussion). No Central Bankers in a position of power today have been elected by or are accountable to the public in any way but an official gold standard would very emphatically introduce a degree of accountability and give citizens a say that they don’t have right now. If none of the above makes sense you may wish to consider sharing your views on an alternative site as you’d be wasting your time here.
Keep Gold in your savings account. Not paper emptily promised to be backed by Gold. Accept only Gold at your store, or if that’s too onerous, exchange whatever paper and bits/bytes you collect during the day, for physical Gold. Every day.
Like you state, the problem with most Gold standards, have been that they have been Gold+empty-promise standards. Not Pure Gold standards with all prices quoted in ounces of Gold (debasing the ounce is probably harder than the dollar). But, even in a Gold+empty-promise standard, the fact that prices in the short term (until next tax day, most importantly) is quoted in a simple multiple of Gold, means actors can keep their savings in physical metal. Debasing also becomes much more obvious, if everyone has access to a solid yardstick, than if some privileged hacks are entitled to go shave some centimeters off the official meter at will in the dark of night.
Whereas today, keeping savings in Gold is risky, due to fluctuations In the Gold price vs the price of everything else, in particular taxes, that people have to pay. So even if there is a Government ran Mint inserting itself as some intermediary between pure metal and transacting actors, any gold standard that allows anyone, anytime, any day anywehere, to redeem for specie at a Mint/Fed, is still a huge step up from the purely confiscatory theft and redistribution scam that is a fiat regime. Whose sole and only purpose, is facilitating those of privilege stealing what they want from productive people, to hand the loot to their idle, unproductive closest associates.
Crypto currencies do improve things slightly over Gold, in that they make it easier, hence more friction free, to transact in pure “specie” (In addition to all the potential anonymity benefits). But the same improvements in communication that allows for crypto, also makes it safer to transact and keep savings in Gold; as it makes spreading your holdings out across vaults, countries and continents more convenient for the average Joe. Hence reducing the risk of physical theft/confiscation.
I think that keeping Gold, both physical and ETFs/paper notes, is a pretty decent hedge against another financial crisis. Especially since we are ~10 years removed from the great financial crisis and U.S. markets are nearing all-time highs again. Over the last six months, Gold has moved up significantly in price. If you take a look at a longer-term chart you can see we are a decent ways removed from all time highs, and have been trading in a range over the last ~2 years. The problem with precious metals is that it is difficult to deal with. Nobody wants to carry around a scale and instruments to exchange bits/bytes.
I like that you mention digital currencies – https://www.coursehero.com/sg/introduction-to-finance/digital-currency/ because that is the more logical approach to owning/exchanging your money. Over the last two years, there has been great improvements in security, safety, and speed. Peer-to-peer cryptos such as Dash, Nano, Litecoin, Monero, and Stellar are laying the foundation for the future. It will be interesting to see what it takes for developed countries to start taking crypto more seriously.
Perfect prose. The PhD standard applies to everything now… as merit is measured by the number of [online] diplomas on one’s wall. As for the first 400 names in a phone book… absolutely. Its time to vote for the PBP… the Phone Book Party. A party uncontrolled by oligarchs, media barons or the war industry. Vote now for a fresh start, let’s make America a “democracy” again.
@TheLege
You still did not answer my main question – has gold standard ever in history prevented budget deficits that are the actual root cause for the eventual debasement? I will give a hypothetical example and you tell me where gold standard would have prevented debasement:
2019: US reintroduces gold standard. $1000 equal 1 ounce of gold (let’s assume the Federal Reserve has this much gold in it vaults). Everyone who wanted gold standard is happy now!!!
2020-2024: US gets involved in a big War and runs additional $10 Trillion Budget deficit for 4 years. To sponsor this war, US emits War Bonds maturing in 10 years in total amount of $40 Trillions.
2030-2034: US has to finally pay its lenders when these war bonds start to mature. Initially government tries to run budget surplus to pay lenders (ie think hard-core Austerity).
2031: US enters recession due to austerity attempts.
2032: US Central Bank starts QE in pretext to heat economy.
2033: The promise that $10000 US dollars are equal 1 ounce of gold is broken at this point, because Central Bank has printed too much money. Everyone who wanted gold standard is unhappy now, because they can’t redeem!!!
Thinking that Gold Standard would have prevented US from getting involved in War, which is the actual root cause for debasement, is wishful thinking. Maybe the opposite – “the pretend that we have enough gold in the vaults” strategy may have actually helped all governments in WW2 to raise more money for War than it otherwise would have been able with fiat. Perhaps that is the reason why there haven’t been any world wars while the whole world is on fiat, because the weaker opponent is more likely to capitulate early?
Feel free to replace “war” with “electing hard-core socialists”, “global natural catastrophe” etc
For your record US Federal deficit during world war 2 (when US was on Gold Standard) was more than 20% of GDP. During the World War 1 it was more than 10% of GDP.
And, yes, it is unfortunate that those who have kept dollars in their savings account for the last several years have been screwed compared to those who invested in equities. However, with perfect gold standard the roles who would get screwed and who would be winner would most likely be swapped. It is mathematically impossible to have functioning economy where both sides of the bet are doing good all the time.
Thanks @Lege for some common-sense welcome replied
@LongVix. The key with money/currency is to have some kind of claim on something ‘real’ so you could argue that the problem might be solved by simply buying yourself a house (in the absence of a gold standard and notwithstanding the fact that not everyone can afford a house) and that way you insulate yourself from the inevitable inflation that comes with an un-backed monetary system. 99.9% of people don’t understand the monetary system so how on earth could the fact that the Govt is effectively taxing its citizens in this fashion be ‘fair’? Because it’s done ‘under cover of darkness’ it is the most insidious of taxes and it’s brutal for the lower middle classes who slave away and can’t figure out why they’re not getting ahead. Wealth inequality is out of control precisely because of unhinged money-printing (everyone who understands how the monetary system works knows this to be true). A fiat money system serves the Govt and everyone who is a recipient of Govt transfer payments. No one else. Claiming that what we need is ‘good’ fiscal planning is beyond naive. We are not governed by robots, we are governed by people who invariably exercise human traits like: bad judgement, greed, stupidity, naivety, nepotism, self-interest and a host of others, along with the fact that these people are not in charge of their own finances — they are managing a taxpayer slush-fund and have little or no personal downside i.e. as Nassim Taleb correctly points out, their judgement is, on the whole, abysmal because they have no ‘skin in the game’. The US Constitution was drafted precisely because the founding fathers recognised all of what I have outlined above to be true and the Constitution was an attempt to prevent the inevitable decay that would result through successive administrations. Unfortunately, the Constitution has been slowly dismantled over the years to serve the interests of various parties so we will descend into the mire irrespective. You can print all the money in the world but you cannot print gold and this is what protects (to some degree) the citizens from Govt mismanagement of finances and theft via inflation. Sorry, I have come this far in life and NOTHING will persuade me that there is anything good about a fiat money system. We are not far off a crisis for the ages and the fault of that will lying squarely with the existing monetary system. Hoping that positive change can come about through producing ‘better humans’ is hubris of the highest order.
@TheLege So isn’t the gold standard actually the problem and not the solution to what you described? I.e. what you are saying that sometime before 1971 when US **did** have gold standard, then government still somehow “painted itself in corner” by printing huge gobs of money. And then in 1971 government had to unpeg dollar from gold because it did not have any other choice?
With Fiat currency everyone knows that it is not backed by anything concrete, like gold or silver. But with Gold backed currency people were involuntary forced to pretend that currency is backed by gold, while actually it wasn’t. I find Fiat more fair in this sense because no false promises are made that you can redeem your dollars for something concrete.
The actual root cause is bad fiscal planning and not Fiat, because Gold Standard alone does not prevent “clever/sneaky governments” from printing unlimited gobs of money. Or, if you think about it, the reason why government eventually had to print gobs of money under gold standard was because sometime before that government had to borrow; And government had to borrow because of budget deficits.
So unless someone can tell me how gold standard can prevent politicians from making budget deficits (through entering War or promising lavish standards to voters or just blatant corruption) I really don’t see how Gold Standard solves any debasement problems. It just creates promises that can be broken.
The debasement has repeatedly happened also under Gold standard throughout the history and not only just before 1971. And both world wars that caused huge budget deficits happened under Gold Standard.
Under a gold standard, if you print huge gobs of money as the US did in the lead up to 1971 you get found out when people realise what’s going on and demand gold in exchange for their paper notes. This acts as a brake on the currency debasement scam and is precisely why the gold window was shut altogether. Under the current system banks and Govts are free to create all the money their hearts desire with no natural barriers. So which system, as a citizen, do you prefer?
I have been an admirer of James Grant and Grant’s Interest Rate Observer for over twenty years now. Read his book ‘The Trouble With Prosperity”. It is worth reading.
“What will happen with gold prices if the gold standard is not reintroduced any time soon?” – I do not expect that to happen. I expect them to debase money instead. One of these times, gold, not the stock market, will be the beneficiary. This could be the time.
I would argue that back in 1544, when England officially had Gold Standard, there were Monarchs (if you will – read as “PhD”) that also debased your currency. For example, Henry VIII.
Nothing has changed under Fiat. Your government will come up with “clever ways” to debase your currency in “national interests” whether there is gold standard or not.
Also, something to point out. It is “chart watching science” to claim that economic crises nowadays are more severe because we are off the gold standard. Just like blaming human CO2 emissions for Global Warming is based on “chart watching science”. Either of theories could be true, but how can you be 100% certain that there are no other new variables that have come into play only recently in the system that you are trying to model? For example, maybe we are at a period right now when sun for the last several decades has become hotter and it is not human-caused CO2 that causes global warming. Or, that technology only recently has created too competitive environment that is too disruptive and causes investors to take bigger losses when the companies they have invested in go technologically obsolete (read bankrupt) or people simply lose their jobs and can’t relearn any new skills and end up being the new world serfs fighting for the minimum wage and doing miserable jobs?
I think the bigger question is – what will happen with gold prices if gold standard will not be reintroduced any time soon? Will gold prices plummet? Or you see it as something inevitable that gold standard will come back soon?
With Nearly every comment Whirlaway shows complete ignorance. Today we have incorrect platitudes and strawmen about what Libertarians believe. As for bubbles under gold standard – much was due to FRL – lending out more gold than the banks had followed by run on banks. There were other factors. We have had three consecutive major bubbles, Fed-sponsored (Congress Fueled) or vice versa – Take your pick but debt exploded after Nixon
“Consequences of Replacing the Gold Standard with the PhD Standard” The gold standard did not prevent the roaring 20’s debt bubble and Great Depression. The gold standard did not prevent the profligate guns and butter spending of the Great Society and Vietnam War, which lead to closing the gold window in 1971. Financial cycles always end in a crisis when the virtuous cycle down phases into the vicious cycle.
What’s old is new again. The Irish know it all too well, it was known as the Workhouse…
‘The workhouse has been described as “the most feared and hated institution ever established in Ireland.”
… The workhouse was an institution which operated in Ireland for a period of some 80 years, from the early 1840s to the early 1920s. If people could not support themselves, they could come into the workhouse. Here they would do some work in return for food. People had to stay and live in the workhouse and so the system was known as indoor relief.
The whole family had to enter together. This was a way for the landlords to clear the land of tenants who could not pay rent. Life in the workhouse was meant to be harsh so as not to encourage people to stay. One of the cruelest aspects of the workhouse was that family members were split up into separate quarters. Children aged two or less could stay with their mothers. Sometimes, family members never saw each other again…’
http://irishworkhousecentre.ie/the-workhouse-story/
“2008 Lessons Not Learned” The lessons are actually well known. Every congress person knew why Glass Steagall existed. Yet they dismantled it anyway. When Greenspan took the lending standard to ZERO, he knew exactly what he was doing- promoting a housing bubble. Bush’s Ownership Society was all about creating a housing bubble. Everyone knows about the rise and fall of the Roman Empire, yet empires have continued to rise and fall since then, as the cycles of human nature, continue to follow the same path over and over again. The plethora of knowledge about the Great Depression has not prevented one from occurring again.
I can fix a bad bond with a good bond, just give me a keyboard and I will type in the cusip number
Sounds familiar? “It turned out that Japan’s massive economic boom had been fueled by years of unsustainable monetary policy– the central bank simply conjuring trillions of currency units out of thin air.” https://www.sovereignman.com/trends/japan-is-so-broke-that-its-prisons-are-full-of-80-year-old-felons-23163/
Libertarians cannot understand how the economy really works because they still go by the Ayn Rand books which, frankly, they should have thrown in the garbage by the time they were old enough to stop hiding their “Playboy” magazines under the mattress!
There were worse and more bubbles under the gold standard. And, believe it or not, every entity on earth is free to lend at whatever interest rate they choose. The Fed can only attempt to set the inter-bank lending rate. It does not require anyone to lend at that rate. It just attempts to make it in their best interest to do so. The problem is not whether we use the gold standard or a fiat standard. the problem is fractional reserve lending against assets. It drives up asset prices, which drives up creditworthiness. The solution is to break up large banks and heavily regulate lending and banks ability to fund congressional campaigns. But that can’t happen because libertarians can’t come to grips with the truth about how the economy really works.
Yes, it would be better. Much better.
“Is it better to grow our food in a simple and old fashioned organic way, on small plots of land, in the back yard or a small farm, without machines, chemicals, genetic modifications etc. In other words, like we did in simpler times.”
the gold standard acted as a governor/throttle but more control was desired so it was “replaced” allowing full throttle which eventually led to 2007 (when a bearing or two spun). at present, near full throttle is required to keep the engine running but there’s a terrible knocking sound…please don’t panic, all is well…although, the next sound you may hear is a rod breaching the block
I just don’t understand why the nostalgia for the gold standard. Did we not have economic disfunctions on the gold standard, maybe more so? Didn’t the general public suffer economic hardships under the gold standard? Look, the fiat currency train has left the station, there is no going back. Learn to play by the new rules and do the best you can.
Just before sentiment changes, a lot of real estate sellers put off selling to entertain price rises (thus thinning the market) just as interested and sufficiently wealthy buyers all rush in to buy the market before prices rise further still. When that game is done and the market flattens and the procrastinating sellers then unload on the market just as all the buyers have been exhausted.
Thus you get a situation where prices start falling just as fast as they have been rising, and people get scared. So then most property owners at various stages try to dump their property while they still can, buyers are apathetic to buy until a plummet is safely over.
Thus you get a situation like in Sydney now where 50% of all properties aren’t selling at auction. Once the banks & mortgage brokers get scared it’s game over.
As Mish says, sentiment can change just like THAT.
It’s true, most real estate is in its euphoria stage. Prices aren’t just expanding, they are soaring (whilst sales volume is getting thinner in most places). That’s the major reason why central banks are pressing on with rate hikes ahead of stock market turbulence. But keep an eye on Sydney, London and Auckland. They’re three canaries in a coal mine.
Obviously not a regular or longtime reader. I have been reading Mish daily since 2009 or so. I would not describe his writings as alarmist nor desperate.
Real wages show a weak economy, not a strengthening economy. Indicators showed similar patterns before 2008 even while we slid into crisis late 2007. The reason people cannot see the true economic conditions before a downturn is they expect a linear progression in an economy. Projecting linear growth from past and current indicators is how people get crushed in a downturn. Personally, my wife and I sidestepped (and made money) before the crash of 2008 by deleveraging and cashing out in Nov 2007. Some people I knew laughed because their indicators told them things were going well. A year later they were no longer laughing. They laughed when
How is the economy weakening ?, forward indicators reveal expansion. ie kansas city fed manufacturing , commercial real estate along with others, yet you blow a trumpet of despair.
My only question is will we go after these PhDs after this bubble bursts or do we allow them to come up with all their wily tricks like acronym money, QE, TARP, bailout on the sly with their money spigot, NIRP etc. All done for the main street you know lest they suffer more. In short will we at least get rid of these guys after this burst. We have had it with these stuffed up and strutting a@#holes.