What Does the Great Gold Spike Signify for the World Economy?

The invaluable Unleash Prosperity Hotline recently exposed the little previously reported news that the price for an ounce of gold would hit $4,000, and it did. Over five years, the price of gold has doubled, and over the past year, it has been up 50 percent. This is the largest annual increase since the 1979 raging inflation and long gas waiting lines. Today’s 50 percent gold increase compared with only a 17 percent increase on the NASDAQ, 13 percent for the S&P 500, and 9 percent for the Dow. The Hotline warned that gold is historically the first flight to safety in a serious economic crisis and a leading indicator of future hyperinflation risk. Yet, its editors noted that the other economic indicators remained robust. Still, the spike in gold should remain a “warning sign” for the future. What could go wrong for the world’s greatest economy? Indeed, the U. S. dollar is the world’s monetary standard, not gold, even if a fiat one. And, of course, as economist Hu McCulloch has warned, even a gold standard can suffer from flawed policies such as excessive debt and major events like wars. But a fiat system is much more susceptible to political and self-interest abuse. (RELATED: The Washington Post Is Wrong: History Proves the Federal Reserve Econometric Models Cannot Make a Fiat Money System Work) To solve the 2008 Great Recession, McCulloch notes, The simple solution would have been to wipe out the equity of the responsible firms including Fannie, Freddie, and a few large financial holding companies and then mark down the debt held by the creditors who carelessly enabled this lending. The flagship commercial banks whose shares were held by these financial holding companies might have had new owners, but their own operations and capital would not have been interrupted, so long as the “firewalls” promised by the 1999 Gramm-Leach-Bliley Act were actually in place. Wall Street would have been sadder, but wiser, and life would have gone on. Unfortunately, President George W. Bush, his Treasury secretary, and the Federal Reserve feared that the political reaction to allowing the market to work itself out in pure Schumpeterian style would be too politically disruptive. Instead of marking down the debt, they rescued the affected financial institutions and went further by lowering interest rates to zero and increasing the debt. What could go wrong? They calculated that all that was necessary was for the Fed to keep monetizing the debt, floating the dollar, and passing dollar inflation to the rest of the world. But they were relying upon a very complex Federal Reserve-led world fiat money system. The perceptive analyst George Gilder, who is an active investor himself, is one of the few who really understand it. At the top, this world fiat money system is managed by the Federal Reserve and its sophisticated economic algorithms. The results are used by managers and investors using superconductors to direct and speculate on currency-spot and foreign-trade markets. All takes place within microseconds, with a flow 600 million times faster than the earlier fiber optics system. (RELATED: Trump’s Economic Success Leaves Liberals Red-Faced) Gilder noted that in April 2022, the Bank for International Settlements identified a flow of some $7. 6 trillion a day, more than a third of all U. S. annual GDP every twenty-four hours. This represented an increase of roughly 50 percent since 2016’s total of $5. 1 trillion a day. The 2022 total signified currency transactions throughout the year and around the globe at a rate of more than a billion dollars every second. Judging from the numbers reported by the London City desks, it is now approaching $10 trillion a day. In theory, this is a worldwide trading system, but the Fed is American, and 10 large banks in Western countries transact 77 percent of its arbitrage business. When the world economy collapsed in 2008, the 10 still profited with a $21 billion gain because of their arbitrage advantages. And it all seems to work like clockwork. Yet, as analyst Kenneth G. Pringle noted, the complex system absolutely failed in the “flash crash” of May 6, 2010, a “harrowing five-minute selloff” that sent the market to a midday drop of almost 1, 000 points, or about 9 percent. “It happened so quickly, it was like a torpedo,” one market participant told The Wall Street Journal. “With no obvious news trigger for the crash, suspicion immediately fell on high-frequency trading firms, whose computer-driven algorithms accounted for two-thirds of overall market activity, according to the Journal.” While the Department of Justice later blamed a single trader, Trader Magazine responded that “blaming one trader who worked from his parents’ house outside London for sparking a trillion-dollar stock market crash is a little bit like blaming lightning for starting a fire.” Pringle concluded that “Despite the use of safeguards such as so-called circuit breakers, which halt trading in volatile issues, flash crashes have since hit markets in other nations and asset classes.” He wisecracked, “Perhaps it is time for the machines to solve the problem themselves.” Today, as analyst Steven B. Kamin makes clear, the dollar has survived remarkably well after a short decline during the early President Trump tariff uncertainty. Nearly all globally traded commodities are still priced in dollars. The dollar remains the most important currency used in payments for international trade everywhere (except the Euro, but only in Europe). With 10 percent of the world trade value itself, the U. S. maintains a majority of global trade invoiced in dollars. And the dollar retains its predominant position in international saving, investment, and intermediation. But as Kamin concluded, it is also possible that even as financial markets have calmed down, foreign entities are taking steps to reduce their dependence on the dollar for trade, payments, and investment; it would take some time for such developments to show up in data on international transactions. A weakening of the dollar’s pivotal role will be all the more likely in the coming years if current and future administrations continue to take actions that distort the U. S. economy, undermine fiscal solvency, threaten central bank independence, and undermine global allegiances. And the consequences of those actions will go well beyond the loss of dollar dominance. The only real alternative to the dollar rule might be gold, but that is unlikely with the U. S. having the largest gold reserves itself. Even though it has a relatively small part of the total gold in the world, it would be extraordinarily difficult to turn the mostly private total volume into a competing monetary system. The only likely obstacle to maintaining the current dollar fiat system is a panic led by members of the current investment community itself. The long-term shift of market control from entrepreneurs to politicians, banks, bureaucrats, and complex algorithms has worked for many people over many years. Yes, there have been a half-dozen recessions over the same period, two lasting over a year, one very recently, but the present system has always managed to come back. The real problem with gold prices going up in such a closed, mysterious, and volatile system is the fear that the semi-nationalized banks or even big-time traders could see a coming panic and be the first ones out. In fact, many of the first ones out in the Great Depression did in fact do very well by anticipating the stock market crash of 1929 and cashing in before the following worldwide depression. In the more recent 2008 Great Recession, the insiders did well too, with American International Group, Citigroup, Bear Stearns, Fannie Mae, Freddie Mac, Goldman Sachs, Morgan Stanley, Countrywide Financial, as well as Chrysler and General Motors, all bailed out. Retribution against such actions today might be more likely, perhaps forcing investors to take the loss. But human nature has not changed all that much; so, who knows? Artificial Intelligence Requires Human Understanding Trump on Tariffs, Trade, and Pragmatic Populism The Washington Post Is Wrong: History Proves the Federal Reserve Econometric Models Cannot Make a Fiat Money System Work.
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