Wednesday, October 3, 2012
Stagflation In Extremis & The Explosive Rise of Gold
Darryl Robert Schoon
In the 1970s, for the first time in capitalism's history, stagflation (slowing economic growth, high unemployment, rising prices) appeared. Economists couldn’t explain why because they avoided the obvious: In August 1971, President Nixon, on Milton Friedman’s advice, ended the convertibility of the US dollar to gold.
The consequences were not what Friedman expected. He believed that free-market forces would bring floating currencies into orderly market-driven valuations. He was wrong. Instead, closing the gold window resulted in extreme currency swings along with slowing growth, rising unemployment and rising prices: stagflation.
While the US dollar was linked to gold, other currencies were linked to the dollar. Everything was stable. Once the link between gold and paper money was removed, everything changed.
No longer constrained by the need to exchange costly gold for increasingly worthless pieces of paper money, governments began to debase their currencies. This will eventually bring about the destruction of capitalism via excessive levels of debt.
Removing gold from capitalism is no different than removing lime from cement. It's not going to work as well as before. In fact, it's not going to work at all. Without gold, capitalism is like cement without lime, a recipe for disaster. The more cement, the larger the disaster.
Capitalism's demise could well result from today's type of stagflation in extremis. Instead of a slowing economy and rising prices as in the 1970s, today we are facing a contracting economy along with unceasing money printing by central banks.
As a result, hyperinflation, not inflation, may accompany today's contracting economies. In that scenario, inflation may go viral and once that line is crossed there is no going back.
Stagflation in extremis will mean an explosive rise for gold. Its price, measured in hyper-inflated US dollars, could easily surpass the previously estimated $10,000—$12,000 range. The bankers' money printing—QE Infinity—has staved off capitalism's inevitable collapse, but at an extremely high price. The coming finale will be worse than if the collapse been allowed to take its natural course
Posted by Unknown at 1:54 PM