EC Global Inflation Watch

The requirements for monetary flexibility

The argument promoted by bitcoin hodlers is that its future issuance is firmly capped at 21 million, and that with about 18.5 million already issued, of these many have been irretrievably lost. It is simply a supply argument, and if bitcoin replaces failing fiat the price will be sky-high.

This reasoning ignores the fact that a rigid quantity of money in circulation is an unworkable proposition. Prices of consumer items will lack the stability that sound money contributes to transactions. It would become impossible to do the business calculations required for capital investment, because assumptions about future values for both the repayment of debt and the eventual value of the business investment cannot be reasonably assessed. And we must remember that we are moving from a fiat world where through inflation value is transferred from saver to borrower. A significant value-transfer to the saver from the borrower, which would be the inevitable outcome of using bitcoin as the money, would therefore severely restrict entrepreneurial activity and hamper economic progress.

Gold is far more flexible, which is why it has always returned to be the peoples’ money when government money fails. In general terms, mine supply has always increase the level of above-ground stocks at a rate similar to the world’s population growth, leading to long-term stability in the general level of prices. Furthermore, a large quantity of gold is not mobilized as money, but for other purposes, mainly jewelry. If the free market demand for monetary gold increases, scrap supply is there to augment gold used for monetary purposes, and if monetary demand diminishes relative to other uses, then scrap supply simply declines.

With gold, there is minimal transfer of value over time from savers to borrowers or vice-versa. The increase in purchasing power that gold-backed savings have enjoyed in the past has come not because of supply constraints of gold, but through competition and innovation of production methods and technology. This certainty always led to savings being protected and available for personal emergencies, retirement, and to pass on to families. And as well as funding personal and family welfare, therefore rendering state welfare provision virtually unnecessary, personal savings provided the monetary capital for businesses and entrepreneurs, who could reasonably calculate the profits from their investment, the money being sound.

Society under a gold standard enables its users to accumulate wealth, because its government, being generally unproductive by virtue of its bureaucracy and monopoly, would have to radically alter its expenditure commitments in order to discard inflationism. In the absence of this source of funding, the cost of government becomes fully exposed, and the tax burden cannot be increased sufficiently to replace it. With sound money, the state has no option but to cut its spending, and to reduce its interventionist roles.

Properly understood by the state authorities, the route to maximizing their own power is to let free markets flourish with sound money. This was the wisdom of Britain’s leaders in the nineteenth century, which made this small nation the most powerful on earth. It was also understood by America’s Founding Fathers and America similarly became the most powerful nation after Britain’s decline.

But after decades of fiat money inflation, it is difficult for those steeped in macroeconomics to envisage a world where gold and fully backed gold substitutes are the only money. Much of the paraphernalia of risk management, derivatives and forward markets will no longer be needed and will disappear. Debt can only be taken out on the basis it is repaid when due, and assumptions that it can always be rolled over, or perhaps that the state will come to the rescue must be banished.

Other than the residual role of issuing gold substitutes, of maintaining gold reserves and overseeing the production and free circulation of gold coins, there will be no role for central banks and their planners. Stemming from the UK’s Bank Charter Act of 1844, the laws and regulations that permit the creation of unbacked bank credit should be revised either to make it a criminal offence in line with natural law, or to permit free banking with the removal of limited liability for the managers and shareholders. Only then can the expansion of unbacked money, the origin of which is credit expansion, be reined in. Crony capitalism, whereby an entity gains government support for its operations or to the disadvantage of its competitors, must also cease.

It must be admitted that politicians are unlike to benefit from a sudden Damascene conversion. The only thing that will be clear to them is the need to stabilize the currency, which they will probably have to fight against their own establishments to achieve. There will remain the considerable risk of political anarchy if wise leaders fail to take the public and their administrations with them, raising the prospect of Hayek’s Road to Serfdom.

All that is for the future — perhaps not so distant as we might think — for which cryptocurrencies and central bank digital currencies are not equipped. But today, while there is incontrovertible evidence that some economic actors are beginning to understand that hyperinflation of the money supply is taking hold, the modest performance of the gold price tells us that for the broader public this realization is still in its early stages.

[i] Figures derived from Congressional Budget Office An update to the Budget Outlook: 2020 to 2030

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William K. 3 months ago Member's comment

Interesting while also quite depressing. And while it appears to all be correct, I would vainly wish that it were all wrong. But wishing does not make things true, no matter what Jim Moore thinks.

The irksome part of it all is that the flaws of promoting inflation were clear to me as a 16 year old high school sophomore back in 1963. Why couldn't thoe federal bankers see the truth??? Or has it been "cony capitalism" all this time, doing what helps the friends who already have a lot? And now the smell of it all is becoming overwhealming.

Gary Anderson 3 months ago Contributor's comment

There is a cult of inflation warriors. I think their legitimacy is uncertain.

Laurent Eliane 3 months ago Member's comment

Unfortunately, central banks have become the credit card of the kids (politicians) who put the responsabilities of disaster to the voters. As long as politicians are not accountable for their actions, they will not grow up (see the debate Trump Bidden).

As long as central bankcan print oaper gold, there is no insurance that they arenot printing more paper than the gold they have ( see the diif.of Germany to reappatriate a part of their solid gold.

This week was a perfect view of manipulation by central banks feeling, like this article, that hyperinflation is inevitable. So sharp discouragement of buyers, inflate zombie companies like Tulipe Musk with a horde of hypernationflagspeculator of irrealistic economic view. Tesla is not the only car but it is the "tulip" of our time.

Government with higher rate will bankrupt in no time. It is not an option for them. Hyperinflation is the only outcome with a collapse of the politics as we know today. Cash, like physical gold will be banned first as gov. cannot see who has what snd what they do with it. We enter totalitarian governments lead by corporates. The value of individual is reduce to numbers. No more, no less.

Lets go back to small villages nearly in autarcy where everybody help each other. This will survive.

Gary Anderson 3 months ago Contributor's comment

Like a boy calling wolf, inflation warnings lose power when they are continually published. Many just don't see inflation as a big threat anymore.