Monday, August 15, 2011

It was 40 years ago today...

On August 15, 1971, President Nixon went on television to announce 3 dramatic changes in economic policy.

He imposed a wage-price freeze. He ended the Bretton Woods international monetary system. And he imposed a temporary surcharge (tariff) on all imports.

The Bretton Woods system was created towards the end of World War II and involved fixed exchange rates with the U.S. dollar as the key currency - but also a role for gold linked to the dollar at $35/ounce.

The system began to falter in the 1960s because of an excess of dollars flowing out of the U.S. which foreign central banks had to absorb. A run on gold in 1968 was stemmed by a patch on Bretton Woods known as the two-tier gold system.

All of this was ended unilaterally 40 years ago today by Nixon.

The end of the Gold Standard and the end of the Bretton Woods international monetary system was one of the most important decisions in modern financial, economic and monetary history and is a seminal moment in the creation of the global debt crisis confronting the U.S., Europe and the world today.

Nixon ushered in an era of floating fiat currencies not backed by gold but rather deriving value through government “fiat”.

An editorial in the UK newspaper, The Telegraph, describes the action as a seminal moment, and one we're now all paying for.

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  1. Never in History a gold back money has ever worked, why would it work today?

    The problem is not what backs the money but who controls its quantity. With a very limited existing quantity of gold, it will be very easy for speculators and banks to interfere with the value of the currencies.

    The real problem is fractional reserve lending, aka the power of the banks to lend more money than they have in reserve, aka the possibility they have to create money out of nothing. If you remove that ability to the banks, and give the power to issue money only to the central bank or the government, you will remove all the financial instability we have know for years (no more leverage!).

    Inflation and deflation are created by the increase or contraction of the money supply. If you have only one entity responsible for the creation of the money, it becomes much easier to control the quantity of money in circulation in the economy.

    Everyone who owns gold would love to see the gold standard coming back. What's good for gold owners is not necessarily good for the rest of the economy...

  2. As I have said before, I don't believe a return to the Gold Standard is the answer. However, the sov. debt crisis will precipitate a massive move into Gold/Silver and thus represents a huge opportunity.

  3. Just like with any other fin. instrument, be it currency, derivatives etc... Unless we have strict, transparent and self balancing mechanisms, going back to gold will not change anything.

    Just like 100% of the banks hide what they have on their books, same will happen with 'gold currency'. No one will know what gold holdings each entity has... hence,"gold backed" securities will be emitted just like fiat now...


  4. "However, the sov. debt crisis will precipitate a massive move into Gold/Silver and thus represents a huge opportunity."

    That's absolutely correct. However, I would be careful about buying gold at this point (silver being a better opportunity). With such a huge increase of the gold price, massive profit taking are going to happen sometime soon.

    Somebody said one day that if your taxi driver starts talking to you about a buying opportunity in the stock market or real estate, it's time to get out, so is the situation with Gold today. Buy low, sell high is the mantra of smart investors. The price is objectively high right now and I'd rather sell and buy stuff that is considered cheap (don't know what is cheap nowadays though... apart from RE in the US that should continue its down spiral).

  5. Well, sure, gold has had 'huge' increases in nominal terms, but percentage wise it is not as high as silver. Even looking at the rump up graphs over the past 2 years, slv looks clearly more bubbly.