Economists around the world are in a quandary; despite massive stimulation programs, the world economy is losing steam.
Many governments are trying to overcome the current problems of economic slowdowns by trying to stimulate economic growth through “printing money”. Unfortunately, creating more “money” (of the paper kind) out of thin air (that is printing it faster than the expansion of the economy would allow) does not solve the crisis. In fact, it only compounds the problems.
Spending more than you actually take in (in the case of governments, in the form of actual tax receipts) does not create any guarantee that your enterprise will ever become viable and sustainable; more likely than not, the opposite is true. Huge government subsidies for “green energy” and the like, or the lavish benefits for some companies’ senior officers, when paid for from future rather than past or current income, are liabilities. Even children receiving a small allowance understand that they can only spend what they actually have. There are few corner stores willing to sell their candies on credit.
Despite this well-known truth, many countries are now so deeply indebted that it will be impossible for them to ever pay back these borrowings, by either their current or future citizens. Some cannot even pay the carrying cost of their accumulated debt; they need to borrow more just to pay the interest.
How have we come to this state of affairs?
The answer is simple. By relying on the economic model pronounced by John Maynard Keynes, which is a modified Marxist idea and which is wrong. In simple terms, Keynes’ economic model claims that the value of an economy is defined by its consumption. In contrast, the economic model by Ludwig von Mises says the value of an economy is defined by its production of (internally or externally) desirable goods and services.
What is the solution to the current problem?
Actually, it does not even depend on which one of these economic models you may think is the better or correct one. The solution is very simply to use an internationally accepted and historically proven medium of exchange, such as gold, both within and between countries and their currencies. Of course, one additional, but also crucial requirement is that any so-called value-gain (increase in the price of the medium, expressed in paper currency terms) would not being taxed.
Such a solution will immediately make people want to exchange their paper money for actual physical medium, if and when they feel that inflation is greater than the (paper-based) value increase of any of their savings lent to a bank or a government in return for an interest payment. Such a system would make institutions such as the Federal Reserve Bank of the United States or the European Central Bank essentially superfluous. Simultaneously, it would allow anyone to borrow (or lend) with a guarantee of receiving (or having to repay) the full value (that is the identical amount of physical medium, or THEN an equivalent amount of paper money, if desired) upon redemption of the debt, plus any accrued interest in the same form.
There are already several banks, primarily in the Near East, operating on this principle. For example, their credit/debit cards, charge you in (weight) units of the medium gold, not any paper-based currency. To top up your account with them, you just deposit some physical medium or paper currency at the current rate of exchange of that paper to the medium.
What would be drawbacks of such a system?
There really is only one drawback (and most people would consider that a benefit). It would prevent governments around the world from inflating their currencies (i.e. “printing money”) without impunity, as is the case right now. “Credit default swaps” and other financial convolutions, largely designed by the banking systems for their own benefit, would also become irrelevant. If the buying power of a currency were to fall faster than the true return (purchasing power of the principal plus interest upon maturity of a loan, after tax and increase/decrease in value of the medium expressed in paper currency), people would quickly exchange that currency for the real stuff (i.e., the medium), and vice versa.
Naturally, the governments which have run up large deficits over recent decades, with the promise of paying it back (from the income of future generations), are not happy about this suggestion. It would become immediately apparent to their citizens when the government’s borrowing became too large, unsustainable, or undesirable for the populace.
Several countries are already well on their way to such a new medium of exchange. Others are watching closely. It is the only way out of the current situation of profligate spending by entities which do not deserve the trust currently placed in their paper-based currencies. As a corollary of a medium of exchange like gold, many developing countries in the Americas or in Africa would find themselves sitting on large (in some areas yet to be developed) stashes of internationally accepted “currency.”
Some bankers will tell you that gold is an anachronism. If that were true, and the (reputed) contents of Fort Knox (some 8,000 tons of gold) are indeed there, then why not distribute its contents to the people and close it down? It would save a few dollars spent on the Fort’s upkeep.
The Future
In any event, whether you like it or not, such a new system appears to be just around the corner. China, Russia, and other countries, as well as many people around the world recognize its inevitable arrival and are in the process of building up stashes of gold. It is just a matter of time, when they will demand payment for their products in such terms. The world used to have such a system; its time has come again.
