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Tag: Gold

  • 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.

  • The Unnatural Phenomenon of Inflation

    Today on CNBC they said one could make a pile of money if one could guess when they would raise rates again. This highlights one of the biggest atrocities in the World’s economic system. Trillions of dollars are tied up in the currency futures, hedging the wild swings in the value of currency, trillions that could be invested in productive activities, if only the world had a stable unit of account. The price of commodities didn’t budge an inch from 1920-1971, 51 years of the greatest economic growth in world history. Then in 1971, at the urging of the monetarists, Nixon closed the London Gold window. Gold was $35 an ounce then, and oil was $3.50 a barrel. Inflation is not a natural occurring phenomenon, and especially not due to growth and prosperity. The only thing that causes inflation and deflation is an imbalance in the amount of liquidity in the system, a balance that is the single and only charter of the Federal Reserve. It is a failure of epic proportions.