The End of The Gold Standard. Fifty Years of Monetary Insanity
The comments below are an edited and abridged synopsis of an article by Daniel Lacalle
It’s been 50 years since Nixon suspended the convertibility of the US dollar into gold. This began the era of a global fiat money debt-fueled economy.
The suspension of the gold standard triggered massive global credit expansion and made the US dollar the world’s reserve currency as it de-facto substituted gold as the reserve for the main central banks.
Thus, since the breakdown of the gold standard, financial crises are more frequent but also shorter than before.
Global debt has jumped to more than 350% of GDP, and the financial economy, which is really the credit-based economy, has multiplied.
Suspending the gold standard unleashed an unprecedented push to increase indebtedness and the perverse incentive of the states to pass on the current imbalances to future generations.
The US has been able to borrow and increase money supply massively without triggering hyperinflation because it exports its monetary imbalances to the rest of the world. Other currencies follow the idea without the global demand that the dollar enjoys, so the rising imbalances end up making those currencies weaker versus the greenback and the economies more dependent on the dollar.
This race to zero shows there is no alternative to the dollar as a reserve because the rest of the world abandoned monetary and fiscal orthodoxy at the same time, weakening their ability to be a world reserve alternative.
With the suspension of the gold standard, Nixon guaranteed the financial and monetary hegemony of the US for the long term, while unleashing a global credit-fueled economy where financial risk disproportionately exceeds the real economy.
Lacalle discusses the proliferation of non-productive debt; the tax wedge on citizens; the increasing severity of financial crises; adding more debt and more risk-taking.