Butchering the Sacred Keynesian Cow

There is a critical topic that has been inadequately addressed to date in the media and blogsphere. It is the root of the issue. That there has NEVER been a season of Economic Winter with a fiat currency!

James Turk writes about economic collapse of the Roman Empire in his book "The Coming Collapse of the Dollar and how to Profit from it." He notes that the Emporer Diocletian debased the silver and gold coins by adding copper to them so he could increase the money supply to pay for his wars.

Now, worldwide, we have the same thing happening except with Fiat Currencies.

Ashraf Laidi, chief market strategist at CMC Markets in London had the following to say in a March 4, 2009 interview with the Financial Post. “If there’s one singular reason gold is unlikely to repeat the October selloff is that today central banks are either at or on their way to quantitative easing (Fed, BoE, BoJ & BoC), followed closely by the SNB,” the strategist said.

The article continued:

Since China’s trillion dollar cash hoard is largely made up of U.S. Treasuries, John Ing, CEO of Maison Placements Canada, suggested it could protect its reserve position by buying gold with some of its U.S. dollars.
“Gold is denominated in dollars and such purchases would protect China against a declining dollar,” he said.
Mr. Ing also thinks President Obama will be good for gold but bad for the greenback as he “inflates the costs of debt away.”“We continue to believe gold is the antidote to our problems,” he said in a recent report. “Gold will continue to rise in value as long as the United States keeps printing more money than the economy can use.”
Calling gold the new currency and predicting prices will hit US$2000 in 2009, Mr. Ing suggested that with the U.S. holding 261 million ounces of gold, the Federal Reserve could issue gold-backed debentures as a means to create liquidity and trust in its troubled financial system.
(emphasis mine)

The real issue here is that we know from the past that tough times come during the economic winter cycle.

The problem is that we don't know what we can expect when ALL the world's currencies have the potential to collapse under the weight of government and private debt! We no longer have a gold standard or silver standard or anything to restrain government's production of currency. Furthermore, the officials in charge of the money supply continue to cling to the madness of Keynesian thought that we can print our way to prosperity. They are using the wrong tools to resolve the crisis.

In a future post we will examine some ways for individuals to insulate themselves from a future crisis.