That’s $15 trillion — the size of the US debt — stacked up in $100 bills. How the hell did it get this way?
After all, American national debt didn’t hit $1 trillion until the 1980s. Before 1971 — the year that the debt began to grow and grow and grow — there wasn’t even a trillion dollars in circulation. And why 1971? That’s the year America decided that dollars would no longer be convertible into gold at a fixed rate, and would just float on the global market against other currencies. That was the year that the American government decided that the Federal Reserve — America’s private central bank — could print as much money as it wanted, whenever it wanted. As Ben Bernanke, the Fed Chairman, put it:
A helicopter drop of money.
Bernanke’s view is informed by his view of money. His career as an academic economist was defined by his theory that deflation fuelled and worsened the Great Depression. The collapse of banks, he believes, led to a severe drop in the supply of money, which led to a severe drop in economic activity as individuals and businesses assumed that more deflation would occur, raising the expected future value of the money they were holding, preventing them from spending it, and preventing further productivity from taking place. And this may well all be true.
But constantly inflating the money supply distorts everything, without necessarily doing the economy any good. It means that growth can happen without any real underlying productivity gains. It means that bad systems and bad companies can produce profits and can survive. And it leads to malinvestment — with a lot of cash floating around in the system, bubbles form as money floods into places it might otherwise not. And, as the influential British economist John Maynard Keynes put it:
By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
The problem is that printing money allows governments and societies to carry on in the face of problems without ever really addressing the underlying causes — loss of productivity, bubbles, poor infrastructure, expensive wars and empires. And of course, those problems will rear their ugly head again, unless they are properly addressed.
Gold’s power, and genius is that it holds its value. When a currency is tied to it, it prevents the government from just printing more, and encourages them to address the underlying issues. It cannot easily be inflated away. It is true that societies obsessed with it may dig up too much, and waste productivity that might go towards industry or infrastructure. But by a quirk, gold is very often found alongside industrial metals like nickel or tin, and can be mined secondarily. Because gold holds its value, it is a great measure of whether an economy is really moving forward — in terms of productivity, industry and investment — or not. Falling or stable gold prices suggest progress. Rising gold prices suggest regress. Here is the Dow Jones Industrial Average priced in gold:
Gold flashed past $1800 an ounce today. But it has not gained any value: it is America and the West that has lost it. The real question is not how high gold will go, but how low America and the dollar will.