Deflation: Not That Bad, Gold Standard: Excellent

Common rhetoric of the state-sponsored economist is that deflation is pretty much on par with satanic rituals and clubbing seals. Why is that? First, let’s define deflation.

Deflation could be the result of a couple things, the reduction or contraction of the money supply, or the increase in demand for the same amount of money. An example would be increased productivity resulting in a surplus of goods. The end result and how we define deflation is the general lowering of prices.

Now, this works because the world operates on a supply and demand logic. Money is the supply in this case and goods are the demand, more or less. In a normal, commodity-backed currency, like a gold standard, inflation and deflation of the money supply is quite gentle. This is because gold requires work  or capital to mine or buy. 

Because their is labor or investment involved, the amount of gold and thus money, is self-regulating. As gold becomes more valuable, mining or investment increases  until an equilibrium is met, as gold devalues, mining  or investment slows until again, an equilibrium is met. So far alchemists have yet to discover how to make gold out of lead, so counterfeiting the commodity is impossible. This is in stark contrast to a fiat money, like we have that is backed by nothing and printed as needed.

In the case of our economy, where central banks manipulate the amount of money in existence, invariably by increasing it, we are constantly experiencing inflation. Our currency devalues as more money is printed.

However, in the particularly bad crash we just experienced, the banking system’s previous machinations failed and debt was consolidated and in general the money supply contracted. This was in concert with an increased demand for dollars globally for the purpose of buying treasuries, thought to be a safe haven for investment. The result of these to related situations resulted in our currently stronger dollar.

A gold or commodity backed currency (essentially the currency is a commodity) prices remain quite stable and inflation or deflation is contained and gentle.

Disregard any claims that a modern society requires it’s currency to be ‘elastic’ or any other weird metaphor. That only means that bankers and politicians prefer a currency they can devalue to consolidate their own power.

Irresponsible spending, unjust wars, ludicrous forays into manipulating the free market via enormous bailouts are impossible under a gold standard. A government is held responsible for what it spends. Debts cannot be accrued and rolled-over indefinitely to be paid off by a devalued dollar in the future.

Responsibility, frugality, restraint… these would be words used to describe the financial nature of a government whose currency is backed by a commodity.

A Christmas Bubble

With retail numbers so low, unemployment growing and recession well underway, even in the light of the holiday (see: shopping) season, where do we go from here? What happens once the craze of gift giving falls off and winter sets in?

Isn’t every holiday season an annual retail bubble? Any business that projected it’s sales figures based on research done between Thanksgiving and Christmas would find itself shit out of luck come march. We are currently in an elevated, artificial state of retail demand right now. Yet we are still in a recession.

What happens when people stop buying gifts and refocus their efforts on the day to day grind, i.e. survival? Retail figures will drop. Further insolvency will ensue, and the recession will deepen. For this reason, among others… this is far from over.

Despite my prediction that sales will drop further in the coming months, I do not advocate any measures taken to ’stimulate’ spending. If people don’t want to spend, that’s there prerogative. It’s up to businesses to figure out what people want and give it to them. It’s not up to the government to make people spend when they can’t or shouldn’t.

Remember we’re not in a financial crisis because theirs not enough to lend or because consumers aren’t buying enough. We’re in a crisis because of years of excess at the hands of our banking system and now they are clamouring because some got caught without a chair when the music stopped.

A Feeling of Doubt

Mainstream media, which generally follows the status quo without question, is beginning to question the moves made recently. Even if a bit misguided, a la Jubak, at least it will draw people to spend a little bit more time wondering who is manipulating our economy. This excellent Wall Street Journal article and this Bloomberg article display a wide range of opinions and degrees of distrust, but the general theme remains. Hopefully this can only mean more awareness and more oversight by the public in general.