Monday, November 24, 2008
It does seem rather obvious, doesn't it?
The fallout from another burst asset bubble following years of virtually unlimited creation of money and credit aided by the complete failure of regulation of financial industry could have been avoided if only there were inherent limits on the creation of money and credit.
Without such restraint, greedy financiers aided by dimwitted economists and naive politicians, most of whom seek only short-term solutions to complex problems in order to ensure their re-election, will always produce the same result.
Is there any hope for a longer lasting solution to our current problems?
Well, the sharply increased volume of editorials in the Wall Street Journal calling for a new monetary order is a hopeful sign that the message is getting out.
Whether or not anyone is listening is another question, but you gotta start somewhere.
To wit, another WSJ editorial calling for a new gold standard, this one by Christoper Wood,
the author of "The Bubble Economy: Japan's Extraordinary Speculative Boom of the '80s and the Dramatic Bust of the '90s":
There are no easy policy answers to the current credit convulsion and intensifying financial panic -- not as long as politicians and central bankers are determined not to let financial institutions fail, and so prevent the market from correcting the excesses.The flight to gold appears to already be underway with the some of the largest international dollar holders - the Saudis and the Chinese - either talking about buying lots more gold or already doing so.
What happens next? With a fed-funds rate at 0.5% or lower in coming months, it is fast becoming time for investors to read again Mr. Bernanke's speeches in 2002 and 2003 on the subject of combating falling inflation. In these speeches, the Fed chairman outlined how policy could evolve once short-term interest rates get to near zero. A key focus in such an environment will be to bring down long-term interest rates, which help determine the rates of mortgages and other debt instruments. This would likely involve in practice the Fed buying longer-term Treasury bonds.
It would seem fair to conclude that a Bernanke-led Fed will follow through on such policies in coming months if, as is likely, the U.S. economy continues to suffer and if inflationary pressures continue to collapse. Such actions will not solve the problem but will merely compound it, by adding debt to debt.
In this respect the present crisis in the West will ultimately end up discrediting mechanical monetarism -- and with it the fiat paper-money system in general -- as the U.S. paper-dollar standard, in place since Richard Nixon broke the link with gold in 1971, finally disintegrates.
The catalyst will be foreign creditors fleeing the dollar for gold. That will in turn lead to global recognition of the need for a vastly more disciplined global financial system and one where gold, the "barbarous relic" scorned by most modern central bankers, may well play a part.