Tuesday, February 7, 2012

Since removal from the gold standard in 1971, all economic growth has been a debt induced bubble

Philip Coggan from NPR wrote a very poignant article today showing that since 1971, when Richard Nixon took the US and the dollar off the gold standard, every single economic growth phase has been tied to a debt induced, and debt created bubble, derived from every increasing money printing by the Fed, and borrowing by the government.

Coggan, who writes about finance for the Economist magazine, explains that before that time, the U.S. used gold to back the dollar; other countries could exchange their currency for American gold. But when President Nixon went off the gold standard, "essentially you had no limit on the amount of money that could be created and no limit on the amount of debt that could be created."
The result, he says: asset bubbles.
Debt was used to buy assets, which rose in price and then burst. He points to Black Monday in 1987, when global financial markets crashed and the Dow Jones industrial average fell more than 20 percent. Those same factors, he says, led to the dot-com bubble of the 1990s and the more recent housing bubble. When bubbles burst, central banks stepped in and cut interest rates to keep the system afloat.
"The result of all that was that it was kind of a one-way bet for speculators: Keep borrowing money to keep buying assets; central banks will always bail you out," Coggan says. "And that's why we ended up in this mess that we are in ... with lots of debts and central banks creating money to try and prop the whole system up." - NPR

And now, in 2012, we are at a point where no amount of money printing by the Fed, and no amount of borrowing by Obama and the Treasury can create or sustain growth in the economy.  Keynsian economics relies upon debt and borrowing to sustain economic growth, but at a certain point, money loses its value so greatly, that each successive scheme requires more and more printing than the prior bubbles.  Eventually, no amount of money will create a recovery, and the global economy is entering that point in history.


Post a Comment