Guess Who's Back? – Gold

Gold has acted as a discipline enforcer on profligate government spending for generations. Once the gold standard era was ended in 1971, it needed to be replaced by some other enforcement mechanism to deal with inflation and government deficits. 

This was supposed to be done by central bankers raising rates to fight inflation and by allowing bond vigilantes to use market pricing to help force governments to change their tax and spending habits. If/when that didn’t work, the country’s fiat currency would get destroyed and the nation would often required some sort of bailout by the IMF. Rinse and repeat, no big deal as long as the emerging market country said they would try harder next time and as long as they stayed within the US$ backed system. 

The problem we have today is that most central bankers, particularly the US Federal Reserve, do not act in ways that enforce any discipline on government spending. And then they don’t allow bond vigilantes to do their work to instill that discipline either because it threatens “smooth market functioning” of sovereign bond markets. So it’s the worst of both worlds from that perspective. 

Government deficits are blowing out, especially in the US, where there is no hope to figure out proper tax and spend policy to reign it in. But the Fed enables this dysfunctional behavior to continue in DC and has allowed the US to abuse it’s exorbitant privilege for far too long. But the chickens seem like they are finally starting to come home to roost as the rest of the world is taking notice, setting up an alternative system and moving away from financing US debt. 

I was recently reminded by that Volcker himself was eventually supportive of the US taking itself off the gold standard in 1971. But as Fed chair, Volcker at least acted in a way that put some discipline into the government and economy by raising rates as aggressively as he did to help slay inflation. If more acted like him, particularly the Fed, perhaps Gold wouldn’t be needed. But they don’t. So it is. And it’s breaking out to all time highs. 

Immanuel Kant said, “Man must be disciplined, for he is by nature raw and wild.” Central bankers are men. They need discipline. Gold is being re-inserted back into a multipolar currency world to provide it.