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 (40)
No. 1-25
killben
killben

My only question is will we go after these PhDs after this bubble bursts or do we allow them to come up with all their wily tricks like acronym money, QE, TARP, bailout on the sly with their money spigot, NIRP etc. All done for the main street you know lest they suffer more. In short will we at least get rid of these guys after this burst. We have had it with these stuffed up and strutting a@#holes.

klausmkl
klausmkl

How is the economy weakening ?, forward indicators reveal expansion. ie kansas city fed manufacturing , commercial real estate along with others, yet you blow a trumpet of despair.

MorrisWR
MorrisWR

Real wages show a weak economy, not a strengthening economy. Indicators showed similar patterns before 2008 even while we slid into crisis late 2007. The reason people cannot see the true economic conditions before a downturn is they expect a linear progression in an economy. Projecting linear growth from past and current indicators is how people get crushed in a downturn. Personally, my wife and I sidestepped (and made money) before the crash of 2008 by deleveraging and cashing out in Nov 2007. Some people I knew laughed because their indicators told them things were going well. A year later they were no longer laughing. They laughed when

Zamboni
Zamboni

Obviously not a regular or longtime reader. I have been reading Mish daily since 2009 or so. I would not describe his writings as alarmist nor desperate.

Rayner-Hilles
Rayner-Hilles

It's true, most real estate is in its euphoria stage. Prices aren't just expanding, they are soaring (whilst sales volume is getting thinner in most places). That's the major reason why central banks are pressing on with rate hikes ahead of stock market turbulence. But keep an eye on Sydney, London and Auckland. They're three canaries in a coal mine.