Came across an interesting post at azizonomics, within which this particular set of quotes caught my attention:
The main spur that pushes gold as an asset is goldbug ideology — the notions that it is the only real money, that it has intrinsic value, that fiat financial systems — and even modern civilisation in general — are fundamentally unmanageable and unsustainable and prone to collapse.
Gold really isn’t the ‘only real money’ – ‘goldbugs’ as it were, simply point out that gold is what humans have chosen to use as money over everything else. The end of the gold standard does not invalidate that point – a four decade period of time is hardly of statistical significance in historical terms, and furthermore it was a decision borne of political expedience as opposed to a market based process. The reason gold was chosen is down to the properties gold possesses (divisibility, fungible, ease of recognition, durability, relative scarcity, etc) that render it good for being used as money. This is why gold has intrinsic value, just as steel has intrinsic value – its inherent properties make it suitable in the field of construction, for example, so it is a highly valued commodity in that space. If you don’t believe me, here’s Webster on the meaning of ‘intrinsic’
belonging to the essential nature of a thing : occurring as a natural part of something
usefulness or importance
making ‘intrinsic value’ the usefulness or importance of something based on its essential nature. Thus for gold to have no intrinsic value, it must mean that gold is not durable, fungible, easily recognized and so on; and on top of that the aforementioned properties are not good properties for money to have. I’d be very interested in seeing an attempt to make that claim. You might think I’m going overboard here, but according to the economic/investment community on the whole, it’s not only not a fact that gold has intrinsic value, but a litmus test for sussing out ‘fringe’ beliefs that can be subsequently dismissed because ‘goldbugs,’ or something. Not that I expect that to change, but being that thorough is generally a requirement, if only to make the point so clear that maintaining an incorrect view is virtually impossible (but for exposing a slavish adherence to ideology, goldbug or not).
Carrying on, with respect to fiat systems, it’s not that they are fundamentally unmanageable or prone to collapse. In theory they can work just fine. The issue is the existence of a massive achilles heel, namely the ability for unlimited currency creation. Beyond this, a centralized authority to monopolize that ability renders the whole system vulnerable should it make a mistake. Continuing, Aziz writes:
As the technologies of capitalism, energy and production improve and advance, these goldbug views have been allayed and pushed to the margins as occurred in the 1980s and 1990s. In my view, their resurgence in the early 21st century stems almost entirely from the fact that real energy prices were rising, and real incomes falling.
There is an implication, which is confirmed explicitly later in the piece, that Aziz views ‘goldbuggism’ as emanating from a scarcity mindset. This is an incorrect view, particularly as it pertains to technological progress, which aims to achieve abundance and eliminate scarcity. The mainstream tends to view gold as an impediment to progress, mainly due to the inability to expand the supply of gold indefinitely, as can be done with fiat money. The standard views on monetary expansion and progress only make sense if one first holds that human progress began post WWII, and more specifically post gold standard.
While holding that view seems absurd on its face, this is what a lot of the mainstream seems to imply when talking about ‘modern economies.’ The fact that the gold standard has been decreed out of existence has seemingly caused most economists to mistakenly conclude that the modern economy, in its sophistication, has evolved beyond gold. This ignores the fact that human progress has been ever present since the wheel. Virtually everyone, from the ancient Greeks and Romans right through to the Industrialized 19th century West and the current Internet Age have all lived in ‘modern economies.’ The vast majority of that time has included gold, so it seems odd to suggest that technological improvement would be a catalyst for pushing ‘goldbugism’ back to the fringes.
The real reason for the resurgence in ‘goldbuggism’ in the 2000s has been the existence of negative real interest rates, the persistence of which disrupts one of the functions of money – its store of value. Furthermore, as Aziz points out, a real decline in incomes has resulted in a push to seek a defense against that trend, with gold being a way to do that.
This is where the connection between gold and technological advance leading to abundance comes in. Like Aziz, I do believe that we could be on the verge of a push to a new level of abundance in many aspects, if for the simple fact that the human race has been pretty consistent in achieving such over time. The concern is over how effectively this new abundance can be translated into higher living standards for the most number of people possible in the quickest manner possible. In my view, it is the process of falling prices (rising real incomes) that optimizes this process, enabling more and more people to consume more and more goods and services.
That point should be clear, but to reiterate, consider what it actually mean should humanity reach a point in which scarcity is abolished and needs and wants of all could be met as easily as one draws a breath. In such a condition, the price of everything would be virtually zero. To get from the current state, where prices are a positive number, to the state of complete abundance thus necessitates a continuous fall in prices as that abundance becomes more and more of a reality.
Yet the prevailing economic dogma is that on the whole, falling prices are a bad thing. Policy is designed with that dogma in mind, and so prices are forced higher, or at least prevented from falling, regardless of the existing supply and demand dynamics. Continuously achieving this goal of at least preventing prices from falling in the backdrop of technological progress creates artificial scarcity, as a segment of the population won’t have the ability to consume newly abundant, or better produced goods should they be held out of their price range thanks to monetary policy.
This is reflected in the fall in real incomes which Aziz points out, which not only have put average people in a poor position since the turn of the century, but well before that. By now the following chart of productivity vs real incomes is well known, but I’ll display it again:
What this shows is that since the early 1970s, the technological advances did not translate into increased purchasing power, as it had before. That didn’t necessarily hamper consumption over the time period, as the proliferation of debt made consumption at a high level very possible. The cost of that was, and is, a pledge to return a portion of ones future labor. This wasn’t required as much before the early 1970s, and the intangible consequences of working to pay debt (physical and mental problems induced by stress, failures in relationships, etc) may provide an argument that we are relatively worse off now than prior generations, despite the very obvious absolute improvements that have been made over time.
There has been a clear failure in translating technological advances to increasing living standards (once debt has been factored in). And the fact that this failure so clearly begins in the early 1970s, after the gold standard was removed, is not a coincidence. The removal of gold from the equation essentially removed the necessity to accept prolonged periods of falling prices. Given that falling prices are what allows technological advancements to be fully consumed by society, it follows that eschewing ‘goldbug ideology’ is going to result not necessarily in the interruption of the pursuit of abundance, but a disjointed distribution of it when it arrives.