Thursday, 24 April 2008

Post-industrial post-gold std economy doomed. 20Apr

Post-industrial post-gold std economies doomed. 2008-04-20:

I listened to Jim Puplava interviewing Louis Vincent Gave from Gave-Kal research a few weeks ago. He said that service economies are less volatile than industrial or agrarian economies. Sounds good but how can it be true? Especially, I don't think that the service economy will last as long as industrial economies did as mentioned in the last post. There is some repetition here of the last post but it needed a separate entry.

One important factor is that the 'original' Industrial Revolution took place in the period of a metallic monetary standard with highly stable currencies: either a bimetallic standard as in the USA before 1873 or under a gold standard as in the USA post 1873 and the UK post 1817 (well, much of Europe had gold and silver money in various forms from the time of the Greeks and Romans 2000+ years ago). This resulted in the lower economic volatility. If you then look at the time since the inception of the Federal Reserve in 1913, the first ending of the Gold Standard in England in 1914, the final endings of the Gold Standard in England in 1931 and the USA in 1933 and the final and complete depegging of the US dollar from gold for international transactions in 1971 (phew), we have faced ever-increasing volatility in the markets, except perhaps for 'stability' engineered by direct government intevention in the financial markets.

Please take a look at my earlier post about the Dow-Gold ratio and the accompanying chart. The ratio between the value of the stock market and gold has oscillated wildly since the early 1900s in a pattern resembling a positive feedback type loop with increasing amplitude; that is, increasing volatility, with a period of 30-40 years, perhaps reflecting the 60-70 year Kondratieff cycle, with half the period.

Therefore, the markets have less and less idea of the value of anything, it seems. The Dow:Gold ratio has been 1:1 (1980) and it has been 43:1 (2000). This is ridiculous! How can there be so much uncertainty? This is part of the reason we have had the Internet stock market bubble and the absurd housing bubble recently, together with interest rates set by central banks ranging from 0% to 20% in the time between 1980 and 2008. Evidently, in our fiat paper money system, real values are becoming incalculable. This creates tremendous malinvestments in the economy as there is overinvestment in one sector followed by a crash and then overinvestment in another sector. Who benefits? Of course, whoever is moving the money around and taking commissions benefits! Also, those who can read the trends could benefit by timing investments and switching between stock, bonds, housing and commodities at the right times. However, the benefit does not go to any productive citizens. This is probably the number one reason why the rich get richer all the time - and of course it is fuelled even more by monetary inflation, because they can benfit by investing their high disposable income, whereas the working class and middle class cannot (they don't have any)! It is insane. In the longer term view, we are therefore surely in a period of greatly increasing volatility, not decreasing volatility!

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