An Entirely Predictable Economic Dip
by John Tamny
by John Tamny: Book
Review: Adam Fergusson's When Money Dies
Six weeks ago
this column observed
that with the price of gold having passed $1,500, the U.S. economy
was already in the midst of a downturn, and that it would be foolhardy
to wait for always backward looking and unreliable government statistics
to reveal what gold already had. Though unemployment figures are
as unreliable as the rest, Friday's anemic report points to a slowdown
in economic activity that the dollar's fall in concert with gold's
why is very basic. Contrary to the popular view among economists
that currency devaluation is necessary during periods of economic
hardship, debasement works against the very investment that drives
company formation and job creation given the tautological reality
that any returns on investment will come back in cheapened money.
Gold, the most
stable constant of value known to mankind (hence its use as a money
measure for thousands of years), doesn't rise or fall as much as
it rises when the dollar in which it's priced declines in value,
and it falls when the dollar in which it's priced increases in value.
If you devalue the dollar you drive investment into hard, commoditized
assets that already exist, and that are least vulnerable to devaluation.
when currency values are maintained with stability in value paramount,
investment flows into stocks and bonds of companies set to create
that which doesn't yet exist. Devaluation is the proverbial
blast to the past, while currency stability and strength are forward
looking, and this explains why countries have never devalued their
way to prosperity.
If we then
look back to the most substantial economic contraction of the 20th
century in 1920-21, the fact that the gold standard was unshaken
amid this unsettling decline in economic activity tells why the
economy rebounded so quickly. With investors confident that their
delayed consumption (meaning investment) wouldn't be clipped by
the monetary authorities, capital flowed to wealth enhancing activities
and the economy roared.
The early 20s
offer other lessons that tell us why the economy boomed 90 years
ago, but sags at present.
to the Krugmanesque view that governments must spend uncontrollably
when economic spirits are down, in the early 1920s our federal government
greatly reduced its spending burden on the U.S. economy. Though
it spent $6.4 billion in 1920, by 1923 total spending had declined
to $3.3 billion.
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