If you want to see how a gold
standard would work in practice, look no further
than the famous board game, Monopoly. I got the
idea for this from Junior Mogambo Ranger (JMR)
Rebecca H, who sent an unattributed quote that
ran, "Which paper money held up the longest? Don't
know. But the one paper money that held its value
the BEST, I believe, is the monopoly money"
because "You can still buy Boardwalk and the
railroads for the same amount. No inflation with
monopoly money."
And that is exactly the
way it would work in real life, too, with gold
money; under a fixed money supply there is never
any inflation in the general level of prices! In
fact, most prices would tend to drift down, down,
down over time while quality would drift up, up,
up, as that is what competition in the marketplace
does when paid for
by
competition between producers to borrow scarce
savings, mediated by the banks, which makes only
the best projects get funding.
But, I
regret to say, we have squandered it all in favor
of another of history's ludicrous experiments in
Big Government Through Deficit Spending; in this
case the federal government borrowed gobs and gobs
of money by issuing more bonds for sale, and the
Federal Reserve (like the obedient little traitor
that it is), created the money so that investors
and pension funds and insurance companies could
borrow it to buy all the government debt! On
margin! Hahahaha! We're freaking doomed!
And it is not just us Americans that are
being eaten alive with more and more, and
ever-more expensive, governments in the thrall of
Marxist stupidities, as we learn when Joel Bowman
"reporting from the Persian Gulf" here at The
Daily Reckoning writes, "I found it interesting to
note that the Saudis, perhaps the most expansive
central planners in terms of intervening in
individual's lives, now spend US$55 of every
barrel of oil sold just to provide welfare for
their citizens. This is a country with the largest
reserves of the hottest export around and it
requires a price seen less than two years ago just
to balance the books! The only thing outpacing the
rise in crude price, it would seem, is the
over-reaching arm of the planners."
I note
from The Economist magazine that year-over-year
inflation in consumer prices in Saudi Arabia is
running at 7%. Oops!
This brings up Junior
Mogambo Ranger (JMR) Patrick, who writes that
inflation is hitting the people pretty hard. He
writes, "I'm working on the edge of the Sahara
desert on a gas processing plant in Tunisia. And
whuddya know ... People are selling their cars
because they cannot afford the petrol, while food
and fuel prices have risen dramatically even with
government subsidies. The government is really
stretching itself to pay for all its subsidies and
will soon have to allow prices to rise at a faster
rate. I don't think it'll be too long before food
riots start breaking out." Yikes!
And to
show that it can get worse than that, Mr Bowman
adds that "Venezuela, according to a report
someone forwarded me recently, needs an
astonishing $97 per barrel of oil to meet Hugo's
financial obligations ... Iran and Nigeria require
something like $75."
Currently, consumer
prices in Venezuela are rising at 25% a year, Iran
about 8% and Nigeria probably 15%. Oops!
In short, apparently these countries need
the price of oil to stay high to pay for their
welfare expenses as he notes that "the margin
between profit and just covering their expanding
welfare buttocks is getting rather thin", which
means that they will necessarily be raising oil
prices again pretty soon, as inflation in prices
is making these government welfare costs go up,
which means that oil will be going up in price!
This investing stuff is easy!
And if it is
welfare that they are providing, then the news
couldn't be worse when The Economist magazine
reports, "Soaring prices for products like rice
and wheat are causing headaches for aid agencies
and politicians."
And it will soon get
really bad for Mexicans, as if it wasn't bad
enough as it is, as Petroleos Mexicanos (PEMEX),
Mexico's state-owned oil conglomerate, has
admitted to a 6.4% decline in oil production
during just the first two months of 2008! Yikes!
You will understand the significance of
the seemingly gratuitous use of the word "Yikes!"
when you learn that this is the same oil field
that reportedly provides the vast majority of
Mexico's revenue! And production has been going
down and down for years already. But not - Yikes!
- at this terrifying rate!
And lest you
think that we Americans are going to escape the
carnage, think again, as from the
Independent.co.uk we get the headline "USA 2008:
The Great Depression" with the subhead, "Food
stamps are the symbol of poverty in the US. In the
era of the credit crunch, a record 28 million
Americans are now relying on them to survive - a
sure sign the world's richest country faces
economic crisis."
So one in 10 Americans
is already on food stamps, one in eight residents
of Michigan is on food stamps, "double the level
in 2000", and it is all getting worse, as "At
least six states, including Florida, Arizona and
Maryland, have had a 10% increase in the past
year."
And with the monetary spigots wide
open in response to the terrible consequences of
the fatal failures of the Federal Reserve
descending on us, taking the concept of "deluge of
money" to whole new realms, it will just keep on
getting worse. And worse. And worse.
Which
brings us to gold and silver. Ahhhh! I feel
better!
Richard Daughty
is general partner and COO for Smith Consultant
Group, serving the financial and medical
communities, and the editor of The Mogambo Guru
economic newsletter - an avocational exercise to
heap disrespect on those who desperately deserve
it.
(Republished with permission from
The Daily
Reckoning .
Copyright 2008, The Daily
Reckoning.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
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