If Gold Backed The World’s Debt

Hazlitt goes on to explain that a recession and financial panic inevitably follows. Eventually, as a way of solving these problems, bankers propose to reduce gold reserve requirements again and extend even more credit.

Indeed, that’s precisely what has happened. The US completely left the gold standard in 1971. So when the Great Recession hit in 2007, bankers were able to create new debt and paper money with ease.

The growth of debt in our modern world would curl Hazlitt’s toes. McKinsey & Company shows that global debt increased $57 trillion between 2007 and 2014 – nearly 60 percent!

15 06 22 global debt growth

Holmes reviews the US domestic numbers since the key date of 1971:

Forty-four years ago, when the U.S. made the switch to a fiat currency system, the federal government owed $399 billion. Since then, outstanding debt has ballooned 4,411 percent to $18 trillion—more than twice the amount of all the gold in the world. Such massive debt levels can be reached only in a fiat currency system, where money is easy, virtually limitless and unsecured by anything tangible.”

15 06 22 us debt to gdp

Government and Keynesian economists are adept at playing down the long-term problems of large debt-to-GDP ratios. However, the future of the global economy may bear little resemblance to the past.

What will happen as Asia – especially China – comes to play a larger role in global finance and the gold markets? What if China begins to directly back its yuan currency with even a small fraction of its unknown and ever-growing gold reserves? These are questions rarely discussed in the financial media or by central bankers, who have grown complacent in the easy-to-manipulate, fiat world of the past 40 years.

Gold is unlikely to shoot up to $33,000 anytime soon. However, the amount of gold being mined continues to shrink, while global debt continues to rise. Long-term investors know these fundamental facts provide a solid foundation for gold’s growth.

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