A friend of mine, who was struggling with the idea of buying gold, lamented that gold only had any value if someone else perceived it to. Yes that’s true. As it is for everything, whether you’re talking about a share of Apple stock or a 1977 Chevy Malibu.
But perception is of particular concern for gold. To understand why the dollar price of gold languishes from time to time, you really have to step back and take a look at the larger picture.
Understand that we now live in a world where almost every trader and investor today has lived their entire adult lives in a global system of fiat money. That almost every living person who has a degree in economics, finance, or business, has spent years having the false ideas of Keynesian promises drilled into their collective consciousness. That generations of the public have been told – and believe – that central banks notes are the ultimate arbiter of value for everything.
Combine this overwhelming consensus with the emotional need for humans to have approval from the herd, and you are left with an incredibly powerful system of perception. One which will not change easily.
However, the reality is simply this: you cannot continue to accumulate debt forever. Eventually something must give way. Our public leaders are not only unprepared to deal with this, but most will not even acknowledge it as a possibility.
Take Nobel Prize winning economist Paul Krugman. In his recent Bloomberg debate with Ron Paul (see video below), he was asked, with the current debt to GDP number around 100%, how much more debt would he be willing to incur in order to stimulate the economy? His answer was that he would be comfortable with an immediate increase in debt to GDP to 130%.
But how can this go on ad infinitum? Can an individual live beyond his means forever by accumulating credit card debt or is there eventually a day of reckoning? How is it any different for a government? Yes there is the additional wrinkle that they can print new money to pay for things, but there are limits to that as well. Then what?
Krugman and his Keynesian ilk would have you believe that we will grow into our debt. Jump start the economy with some additional debt and soon enough additional tax revenues will be flowing in to cover it. Unfortunately that doesn’t happen. If that were the case, how did we get to 100% debt to GDP in the first place? How do we have any debt at all? By any metric you care to look at, the total debt of the United States continues to grow beyond its ability to pay for it.
Yes the current perception will not change easily. There are simply too many who profit from it to let it go without a fight. The role of economics in modern society is not to spread understanding and offer solutions, but rather to obfuscate truth. The role of economic policy in politics is to convince the majority to support programs that are contrary to their own self interest.
The harsh lesson of life is that you are on your own and always have been. You simply cannot blindly follow those who are presented as experts. You must become your own expert. You must ask the tough questions and put emotion aside as you analyze the answers – remembering that the truth is often not what you want to hear.
To clarify the debate between Ron Paul and Paul Krugman, the way to reduce the extreme cycles the economy experiences is to first reduce the debt by reducing government spending as proposed by Ron Paul. Second, to not devalue the currency, which is required to pay back the debt. The latter is a losing proposition, since instead of paying off the debt we are racing to pay it off as the currency devalues. Consider the negative feedback mechanism in control theory.
If the economy starts to get out of control, feedback a negative effect that reduces that extreme condition. One approach is to reduce the debt, by decreasing government spending. A second approach is to not print more money to compensate for the loss of control of the economy. Third, the Federal Reserve is limited to prevent inflationary, or deflationary cycles by raising or lowering the interest rates.
However, how much would the interest rates be lowered to attempt to control the deflationary cycle, as bank account savings disappear? People, have less money to spend, and add unemployment to that picture. An additional solution as suggested by Ron Paul is to bolster the dollar with a silver standard. This would increase the value of the dollar, which would increase buying power by the populace, which would increase spending by the average citizen. Eventually, bailouts, and printing more fiat money would be eliminated. Consider the crises in the European economies, since their debt is out of control!