It’s time to get back to reality.
If we step back and look at our world objectively, the age of central banking and fiat money perpetuated a fantasy world. Interests rates always went down, stocks almost always went up, and the government could print money for any and all manner of bone-headed and sometimes evil programs.
With the tie to gold severed in 1971, our dollar became a floating abstraction – something that could be created ex nihilo, nihil fit. That’s Latin for nothing comes from nothing.
If we look at the chart, interest rates fell consistently from 1982 until 2008. Then they hit the floor, seemingly lifeless.
In 2008, Federal Reserve (the Fed) Chair Ben Bernanke announced that the age of global central bank coordination had begun. Their plan was to fix interest rates at zero and leave them there for the foreseeable future.
There are two things to note here…
First, it took globally coordinated policy to push rates to zero and keep them there. No single central bank could have pulled that off on their own… because market forces always work towards equilibrium.
Perhaps more importantly, interest rates are by definition the price of money. They are the cost of borrowing money.
When interest rates are zero – what does that say about the money?
What goes either unnoticed or underappreciated is that the fabric of our society is tied to the quality of our money. We’ve seen this across various civilizations throughout history.
When the money is honest, society tends to be honest as well. This is painting with a broad brush… and there are always bad apples, of course. But we can see this dynamic rather clearly in history.
Classical Athens… the Roman Republic (before empire)… the early Byzantine Empire… Medieval Venice… the Dutch Golden Age… late 19th century America – history paints each of these civilizations as generally honest and innovative. And while they are each drastically different in terms of culture and lifestyle, they have one thing in common: they used gold or silver as money.
Now if we look at our world today – have people become more or less honest and respectful over the last 20 years? It’s anecdotal, but my observation says less.
Then if we look at our major societal problems here in the US…
Drug addiction and rampant homelessness… the chronic disease epidemic… the opioid crisis… rising rates of depression, anxiety, and suicide… rising poverty levels – if we drilled into each, I think we would find that the degradation of our money is one of the root causes. It all comes down to the principle of maximization.
In the fiat money era that we’ve lived through, our money’s value has constantly been inflated away from us. We work hard for money… but then the money loses its value. It can’t buy as much for us in the future.
This makes it hard to save money… and it destroys the incentive to save in the first place.
That forces us to adopt the maximization mindset without realizing it. We instinctively know that we need to get as much money from each job, deal, or investment as we possibly can… because we know that money will be devalued over time.
This instituted the rat race and distorted our economy in countless ways. Because it shifted everyone’s time preference to the present.
In other words, we now tend to make decisions with immediate considerations in mind rather than planning for the future… because that future is uncertain in a world where our money constantly degrades. And because for many people, just getting through the month is a challenge.
This is why the moral fabric of society always degrades when it adopts fiat money. The two go hand-in-hand.
Getting back to our discussion this week…
I mentioned yesterday that my grandfather raised five kids on a railroad salary. He was able to do that because the dollar was still partially tied to gold until all but his last child had entered adulthood. We hadn’t entered the fantasy world of purely fiat money yet.
The good news is that we’re now exiting that fantasy world. That’s what the market is telling us right now. Gold’s price is surging alongside a rising dollar… and major US banks are scrambling to warehouse physical gold.
The Age of Paper Wealth is over. Let’s explore what that could mean tomorrow…
-Joe Withrow
P.S. We cover the best ways to invest in gold in our monthly newsletter The Phoenician. You can find it right here: https://membership.phoenicianleague.com/courses/phoenician