[This post was written on Sunday, I am currently away until Wednesday, the 23rd.]
Around 20 years ago, I fell in love with the Austrian School of Economics. Everything seemed so logical; it seemed like a much fairer system than the system in place. It rewarded people who showed discipline with their money, for example, savers. It flushed bad investments or unprofitable businesses out of the system. It calls for a small government and a free market. A more generic term to describe the above would be libertarian economics.
I have always been someone with a high passion for my interests, so next came dozens of books and hundreds of hours of listening to the brilliant lectures on mises.org. I remain a libertarian, but I have had to learn to temper my idealism with the wisdom of age. Just because an outcome is inevitable, according to logic, doesn’t mean that it will happen. The world is a big, bad, ugly, and beautiful place where bad behaviour is often rewarded and good behaviour punished, due to forces of nature, power and self-interest.
There was one character that stood out within the Austrian School: an American by the name of Murray Rothbard (1926–1995). I found his books less dense, and the English was much easier to read and understand. I loved the fact that the only place Rothbard could find tenure as a professor was the University of Nevada. If you look him up online, you will find that he was one of the main economic thinkers in the libertarian space of the last century. His main books were “Man, Economy and State,” “Power and Market,” and “The Ethics of Liberty.”
Rothbard wrote one of my favourites, “The Case for a 100 Percent Gold Dollar,” where he delves deep into the idea of gold as money. In this work, he argues for eliminating central banks’ ability to issue money not backed by gold, proposing instead that all money be backed by gold at all times. This, he claims, would stabilise the economy by preventing the kind of discretionary monetary policy that can lead to economic cycles of boom and bust.
These writings are part of Rothbard’s broader critique of fiat currency and central banking, and they showcase his commitment to a libertarian approach to monetary policy, rooted in classical Austrian economic theory.
The reason I am writing about this today is because gold is currently trading at all-time highs, and I am hearing well-respected market strategists touting the idea of gold-backed dollars. I personally don’t think that is going to happen by way of legislation. I do, however, believe there will be a trend towards owning gold as a substitute for depreciating assets like the dollar when adjusting for inflation.
The obvious question is: why is gold making new highs? The simple answer is that the government has built up a mountain of debt—almost $35 trillion. The government has been involved in one bailout after another. I still cannot forgive the moral hazard, caused by the government bailouts from the global financial crisis, which saw the bankers responsible for the mess, walk away with giant bonuses from juiced-up financial balance sheets, courtesy of the tax payer.
It seemed that all was fine and that the government and central banks had discovered a way to print money without consequences. Deep down, we all knew/know that it is too good to be true. To quote another famous economic saying, “there is no such thing as a free lunch.”
In such an environment, inflation and currency devaluation are usually the economic stabilisers. Miraculously, it seemed that inflation was absent. For those paying close attention, inflation was popping up everywhere, just in a different form. There was asset inflation of every persuasion. Art, NFTs (nobody mentions them anymore), meme coins, meme stocks, real estate, etc, etc. All the “haves” were making money, plus the asset inflation was creating a wealth effect that was making people spend more. This all helped create even more wealth with liquidity in abundance through low interest rates.
The policy makers will try and blame the inflation on COVID supply chain bottlenecks. They will be partly correct as it did play a role, but we know inflation is one of the ways government can affectively dilute the total debt burden. So while they will say on the one hand they have to get rid of it the temptation will be to allow it to remain. The biggest issue with an economy losing purchasing power through inflation is that it causes major socio-economic effects to those who are not asset holders. History has shown that these kinds of environments are very prone to wars and societal discord.
Coming back to the question whether the US dollar would return to the gold standard. I don’t think so in the short to medium term. Gold is currently around a $16 trillion sector (my numbers may be out a little) and the total US money supply is around $40 trillion. The US gold reserves are currently less than 3% of the money supply so golds price would need to go up a lot to make the US dollar gold backed.
I can’t believe I am saying it but I will just throw it in the ring. Many believe that Bitcoin is a gold and dollar alternative. We have just witnessed over the weekend Bitcoins 4th halving. This means the supply of bitcoin coming into existence drops by half. We also know that around 94% of the total amount of bitcoin that will ever exist has been mined already. This means Bitcoin certainly has the scarcity factor, it also has the ability to be used effectively as a medium of exchange. It has all the characteristics to be considered sound money that is not subject to government manipulation.
Throughout 2022 on a weekly podcast I argued the case for gold I also tentatively called Bitcoin an interesting alternative. My biggest concern is that Bitcoin trades too much like a speculative penny stock. Having said that it still has the potential to become a much bigger factor. Bitcoin currently has a market capitalisation of around $1.3 trillion. With both Gold and Bitcoin making new all-time highs, I am still a believer in having them part of a balanced investment portfolio.