Consequences of Replacing the Gold Standard with the PhD Standard

In 2011, Jim Grant chastised the Fed about replacing the Gold Standard with the PhD Standard. Our "reward" is coming up.

Here is the pertinent video clip of James Grant.

"The 2007-2009 real estate debacle is the monetary equivalent of a chain reaction on a foggy California freeway. The trouble with our monetary mandarins is they [the Fed] believe impossible things. They have persuaded themselves that the central bank can pick the interest rate that will cause the GDP to grow, payrolls to expand, and prices to levitate by just two percent a year, as they measure it. It is impossible as experience and common sense attest. Yet, they hold it to be true. ... William F. Buckley famously and persuasively said that he would rather be governed by the first 400 names in the Boston phone directory than by the faculty of Harvard. Unaccountably, this Congress has entrusted the value of the dollar that we own, that we transact to an independent committee dominated by monetary scholars. In one short generation we have moved to the PhD standard from the gold standard."

Grant is correct. The result has been a series of economic bubbles with increasing amplitudes over time.

The Alps Precious Metals Group commented on Grant in its latest monthly letter.

We're Smarter Now

​Jim Grant is spot-on in his description of what has transpired: “We have replaced the Gold Standard with the PhD Standard."

Consistent with our post-Modern zeitgeist, we have traded the wisdom of old for the cockiness of what I call the “We’re much smarter now” syndrome. Hence the propensity of Western governments over the last 50 years to deplete their supplies of the “barbarous relic” as Gold’s time “has passed”.

Tulips, South Sea and Florida Real Estate ventures, Roaring ‘20’s stocks bought at 10x leverage as a norm, as well as innumerable investment ideas since 1971 when Nixon closed the Gold window are all examples of investments based solely on confidence, the ebb and flow of which resulted in volatile “risk on and off” episodes.

The last material loss of confidence in the system was in 2008/early 2009; which resulted in a series of experiments whose 9-year anniversary is upon us.

What happens when Common Knowledge changes and moves over to something else that “everyone knows that everyone knows”? Not unlike the ferocious tornados which rip across the American continent when winter turns to spring, the change may be rapid and violent.

The PhD standard - that may very well bring us a round trip to the ’09 lows. In its place will be what history has defined as tangible and trusted stores of value. Investors will trade “we are smarter, see farther and can manage all outcomes” for a more historically informed “we don’t really know what the future holds, but we do know what everyone everywhere will take as tangible value no matter what comes to pass.”

To conclude, here are a series of current charts which we believe lend credence to why we suggest that a material allocation to Physical Precious Metals held OUTSIDE the status quo financial system is warranted for any investment portfolio.

2008 Lessons Not Learned

La-La Land

Here we are in equity and junk bond La-La land, with Trump starting trade wars and threatening real wars, and with the Fed hiking away, totally ignorant of the bubbles they created, just as the economy is weakening.

Good luck with those PhDs.

Mike "Mish" Shedlock

Comments
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asforecasts
asforecasts

Actually the only gold standard that exists is one in which citizens can exhange currency for gold from the government at a fixed rate. This existed prior to 1932 when FDR decreed that citizens could no longer own gold. Prior to this, if you had a threshold amount of currency, I believe $10,000, you could surrender your gold certificates for gold coin or silver certificates for silver coin at the Treasury.

Long VIX
Long VIX

@Stuki Thank you for staying on point. You seem to agree that most Gold Standards tried in human history have actually been Gold Standard+Empty paper promises and not Pure Gold standards. Do you think there is a fundamental reason why it has been that way?

On the other hand I still think that Fiat compared to Fractional Reserve Lending Gold Standard is not too much different in terms where fraud can happen in the system, because:

  1. With Gold Standard Federal Reserve insiders could trade physical gold before major policy annoucments. Just like today insiders can trade equities before Federal Reserve makes any announcments. Maybe announcments would be somewhat different nature, but by how much?
  2. With Gold Standard Gold mining companies would suddenly own huge money supply by mining new gold. Just like today Financial institutions own huge money supply when they try to decide what to do with the money parked at Federal Reserve.

I would say that Gold mining is comparable to Bitcoin mining in sense that it wastes labor and energy. The office "finance engineers" just waste few kwh/day while being in front of computer "everything else being the same".

P.S. I find fascinating the Khan Academy explanation on Gold Standard here - https://www.khanacademy.org/economics-finance-domain/core-finance/money-and-banking/banking-and-money/v/banking-17-what-happened-to-the-gold. I came to Mish's site because of Khan Academy endorsment when Sal explained multiple "inflation" definitions. However, while reading this blog for 7 years I think that while Mish quite often brings valid points, he sometimes forgets to fill in important details. For example, Mish in one article asked "what would be Federal debt service costs if interest rates rise to 5%?", but he never mentioned in article how much of federal debt is rolled over each year, which would help him build stronger case to support his argument.

whirlaway
whirlaway

"With Nearly every comment Whirlaway shows complete ignorance. Today we have incorrect platitudes and strawmen about what Libertarians believe. As for bubbles under gold standard..."

My comment was neither incorrect nor a strawman. We are seeing the wreckage caused by the kind of policies that neoliberals and libertarians have supported - cutting corporate taxes, gutting regulations and doing so-called free trade deals all over the place. You can try to run from the very things that you supported (and have resulted in the current disaster) but you cannot hide.

And I didn't make any comment about bubbles under gold standard so you are at best incorrect and at worst dishonest in making it appear as if I said anything about it.

TheLege
TheLege
Long VIX
Long VIX said (edited): @TheLege You still did not answer my main question - has gold standard ever in history prevented budget deficits that are the actual root cause for the eventual debasement? I will give a hypothetical example and you tell me where gold standard would have prevented debasement: 2019: US reintroduces gold standard. $1000 equal 1 ounce of gold (let's assume the Federal Reserve has this much gold in it vaults). Everyone who wanted gold standard is happy now!!! 2020-2024: US gets involved in a big War and runs additional $10 Trillion Budget deficit for 4 years. To sponsor this war, US emits War Bonds maturing in 10 years in total amount of $40 Trillions. 2030-2034: US has to finally pay its lenders when these war bonds start to mature. Initially government tries to run budget surplus to pay lenders (ie think hard-core Austerity). 2031: US enters recession due to austerity attempts. 2032: US Central Bank starts QE in pretext to heat economy. 2033: The promise that $10000 US dollars are equal 1 ounce of gold is broken at this point, because Central Bank has printed too much money. Everyone who wanted gold standard is unhappy now, because they can't redeem!!! Thinking that Gold Standard would have prevented US from getting involved in War, which is the actual root cause for debasement, is wishful thinking. Maybe the opposite - "the pretend that we have enough gold in the vaults" strategy may have actually helped all governments in WW2 to raise more money for War than it otherwise would have been able with fiat. Perhaps that is the reason why there haven't been any world wars while the whole world is on fiat, because the weaker opponent is more likely to capitulate early? Feel free to replace "war" with "electing hard-core socialists", "global natural catastrophe" etc For your record US Federal deficit during world war 2 (when US was on Gold Standard) was more than 20% of GDP. During the World War 1 it was more than 10% of GDP. And, yes, it is unfortunate that those who have kept dollars in their savings account for the last several years have been screwed compared to those who invested in equities. However, with perfect gold standard the roles who would get screwed and who would be winner would most likely be swapped. It is mathematically impossible to have functioning economy where both sides of the bet are doing good all the time.

@Long Vix. The beauty of a gold standard is that a) it anchors the amount of leverage that banks can legitimately extend (it won't stop unscrupulous dealers engaged in FRL but it'll give pause to all large, publicly listed lending institutions) which in itself will provide a brake to the egregious leverage situation we see today, and b) it allows the public to hold the financial sector to account should they lose faith i.e. the moment there are queues of citizens at banks demanding physical gold in exchange for deposits the money creation scheme that exists today will come to a grinding halt very rapidly (for obvious reasons, which, if you can't see why, means there is zero point continuing this discussion). No Central Bankers in a position of power today have been elected by or are accountable to the public in any way but an official gold standard would very emphatically introduce a degree of accountability and give citizens a say that they don't have right now. If none of the above makes sense you may wish to consider sharing your views on an alternative site as you'd be wasting your time here.

Stuki
Stuki

@long VIX Keep Gold in your savings account. Not paper emptily promised to be backed by Gold. Accept only Gold at your store, or if that’s too onerous, exchange whatever paper and bits/bytes you collect during the day, for physical Gold. Every day.

Like you state, the problem with most Gold standards, have been that they have been Gold+empty-promise standards. Not Pure Gold standards with all prices quoted in ounces of Gold (debasing the ounce is probably harder than the dollar). But, even in a Gold+empty-promise standard, the fact that prices in the short term (until next tax day, most importantly) is quoted in a simple multiple of Gold, means actors can keep their savings in physical metal. Debasing also becomes much more obvious, if everyone has access to a solid yardstick, than if some privileged hacks are entitled to go shave some centimeters off the official meter at will in the dark of night.

Whereas today, keeping savings in Gold is risky, due to fluctuations In the Gold price vs the price of everything else, in particular taxes, that people have to pay. So even if there is a Government ran Mint inserting itself as some intermediary between pure metal and transacting actors, any gold standard that allows anyone, anytime, any day anywehere, to redeem for specie at a Mint/Fed, is still a huge step up from the purely confiscatory theft and redistribution scam that is a fiat regime. Whose sole and only purpose, is facilitating those of privilege stealing what they want from productive people, to hand the loot to their idle, unproductive closest associates.

Crypto currencies do improve things slightly over Gold, in that they make it easier, hence more friction free, to transact in pure “specie” (In addition to all the potential anonymity benefits). But the same improvements in communication that allows for crypto, also makes it safer to transact and keep savings in Gold; as it makes spreading your holdings out across vaults, countries and continents more convenient for the average Joe. Hence reducing the risk of physical theft/confiscation.