US Inflation And The Gold Standard - 0319

The Mogambo Guru - Wed 04 Jul, 2007

A gold standard also constrains fiscal policy of the government, too, as they don't dare just spend and spend, because borrowed money has to be paid back by raising taxes! And the spending had better be good, too, because if it isn't then the gold will actually flow out of the country as foreigners get scared of our idiocy and take their money away, actually shrinking our money supply! Therefore, under a gold standard, the government and the banks had to be smart and act smart. Now they don't. And obviously aren't...

TheStreet.com reports that "Paul (R., Texas) is so
disgusted with the Fed and its role in failing to stem
inflation that he wants to eliminate the entire
institution, including its army of economics Ph.D.s and
other money wizards", which refers to a bill that he
filed in Congress, HR2755, that would do just that.
As Junior Mogambo Ranger H.H.H. puts it, this shows that
"Ron Paul will go to his grave with his honou and dignity
intact, which is far more than I can say for most members
of our government."

Why does Rep. Paul want to eliminate the Fed? Well,
according to me at my loudmouth, know-it-all, arrogant
best, it is because the Federal Reserve has been a
complete, dismal failure in every freaking respect,
and especially in their duty to protect the value of
the dollar.

Well, nobody ever wants to hear what I think, and so I am
happy that the question is admirably answered by the epic
truth revealed by Antony Mueller at Mises.org and handily
posted at Agora Financial's 5-Minute Forecast. "Central
bankers," he writes, "sometimes describe their activity
as 'more art than science', which is implicit recognition
of their ignorance. The 'art of central banking' is the
art of pretending to know what one does not know. Not
only is it not a science; it is not even an art. At best,
it is alchemy; at worst, it is a gigantic cheat."

Or as the Law of Logical Argument puts it, "Anything is
possible if you don't know what you are talking about".
This leads to the Law of Lying and Statistical
Manipulation, which I just made up, which is, "If you
have a willing, co-conspirator like Congress, then the
Federal Reserve can do and say anything it wants, whether
it knows what it is talking about or not, and nobody will
try to stop them, and the Fed will create so much money
and credit that price inflation will destroy us all,
which it will, and we are freaking doomed, doomed, doomed
as a result."

Vaclav Klaus is Professor of Finance at the Prague School
of Economics and is a former Minister of Finance, and is
quoted in the Financial Times as saying (although
originally in reference to something else), "I am not
ashamed of this ignorance of mine. On the contrary, I am
ashamed of the confidence of those who claim to know the
answer. I see a big difference between science and
'national scientific establishments'. To believe in
scientific establishment is impossible, this is just
another powerful rent-seeking group."

In short, being just as disrespectful as I can muster,
the Fed and the Congress are two symbiotic parasites
guaranteeing their own free ride by telling and believing
lies, which is only possible under a fiat-money standard,
as under the gold standard, "you have fixed exchange
rates and free mobility of capital, but you give up
domestic monetary policy," says Robert Wright, who is a
professor of economic history at New York University's
Stern School of Business.

Perhaps because he is at a university that receives huge
amounts of government money, he forgets to mention that a
gold standard also constrains fiscal policy of the
government, too, as they don't dare just spend and spend,
because borrowed money has to be paid back by raising
taxes! And the spending had better be good, too, because
if it isn't (like spending tax money for stupid crap like
creating huge entitlement programs and, ummm, funding
universities), then the gold will actually flow out of
the country as foreigners get scared of our idiocy and
take their money away, actually shrinking our money
supply!

Therefore, under a gold standard, the government and the
banks had to be smart and act smart. Now they don't. And
obviously aren't.

If you want to see the real beauty of "gold as money" and
the wonderful economic bliss that comes from it, then it
is inferred when Mr. Wright brings up "the phenomenon of
falling nominal wages."

Note the use of the word "nominal" wages, which merely
means wages expressed as a strict dollar amount (such as
dollars per hour). "Real" wages, on the other hand, means
nominal wages expressed in terms of inflation-adjusted
buying power, which is experienced as rising prices.
I mean, if your income doubles, but all prices double,
too, then you are not better off, are you? No.
But if your income stays the same and prices go down,
then you ARE better off, right? Of course you are!
Welcome to the gold standard!

The "problem" Mr. Wright refers to is that the gold
standard was so successful that "Many of the conflicts
between labour and factory owners in the 1800s had more
to do with adjusting workers' wages downward in line with
the overall price level than they did with owner-inspired
greed, as is popularly perceived."

Aha! In short, thanks to our money being gold, the
standard of living of the country was increasing!
People's lives were getting better! And they had more!
And they bought more, although their nominal wages were
exactly the same! And in fact, things were so good that
the workers were becoming overpaid! Overpaid labour! What
a Utopia!

And so who is so evil, so dastardly, so despicable as to
screw with such a successful system?

Note the dark and gloomy soundtrack of wolves howling and
the distant screams of people being eaten alive. The
banks and the government! It's always the damned banks
and the damned government!

Regards

The Mogambo Guru
For The Daily Reckoning 

P.S. to get The Daily Reckoning direct to your inbox sign up to our free e-letter!