The Only Part of the Equation that Ron Paul is Missing

Ron Paul is correct that gold is important. It’s very important. The only part of the equation that Ron Paul is missing is the demand for money. Inflation is caused by two factors: how much money is printed and how much demand there is for money (growth increases the demand) If you had enough growth it would soak up the excess liquidity and there wouldn’t be inflation.

The reason Gold is so important to this picture is because it’s intrinsic value (for a variety of factors) is the most resistant or stable to economic or political factors. So what we need is not necessarily a “Gold Standard” but rather a de facto gold standard that uses the price of gold to indicate how much cash to print. In another words, the Fed’s policy should be to keep gold in a very tight trading range. When the price of gold goes above that range, that indicates that there is more cash in the system than the system can handle or demands (like now!) and the fed should sell bonds to soak it up. If and when the price of Gold goes below the target, that’s when they should print, because that indicates the economy is demanding more liquidity.

When the fed does the opposite, which it usually does, because it ignores the gold signal, then you get the worst of both worlds: too much liquidity and no demand for it, which equals “stagflation”

Growth is stimulated through fiscal policy (lower taxes, regulation) and inflation could be controlled through a correct monetary policy, which would be to target gold. So there is no reason at all for inflation, even during tough economic times. You can’t print your way to prosperity. You have to increase productivity and add real value.

A “De Facto” gold standard would not deprive the economy of the liquidity it needs to grow, as the the opponents of such a policy argue as a scare tactic against it. Instead, it would give the economy exactly the amount of liquidity it needs to grow without any inflation. So, in a sense we could get rid of the Fed, or at least downsize it. (No more billion dollar Fed buildings needed!) Because basically it would only take one guy and a computer to effectively execute and maintain such a monetary policy.