The reason is that, after removing the gold standard 5 decades ago, today the world’s central banks are taking the next step towards chronic inflation – issuing digital currencies, similar to cryptocurrencies.
The difference is as follows. Digital currencies issued by central banks can be “justified” by eliminating money laundering, addressing crises and making everyday life easier for consumers. In effect, central banks will be able to directly increase the balance sheets of troubled companies, sectors or governments.
Judging by the history of central banks, nothing is likely to stop them from doing so. If – or rather when – this happens, the destruction of the purchasing power of fiat money over the past two and a half centuries will pale in comparison to the financial chaos that will follow.
Digital money issued by central banks is a blank check. Thus, they can increase the money supply to infinity, destroying the already weakened purchasing power of currencies.
The suffocating public debt
As governments face a chronic shortage of taxpayers and take control of print media, government spending rises dramatically. Along with them, the endowment of savings is also increasing.
The gigantic government debt was the main topic of a previous issue of the Golden Gazette . Here we will only point out that in the last 13 years alone, all developed economies have raised their debt to over 100% of GDP.
However, an “inflation tax” is not enough to finance the increase in government spending. Therefore, the other source of state funding, taxes, also increases. In OECD countries, tax revenue as a percentage of GDP increased by an impressive 40% from 1965 to 2020. Thus, the lack of a gold standard led to the removal of control over public finances, which in turn untied the hands of politicians to increase taxes at will.
The new possibilities of states, expressed in the unlimited printing of money and the suppression of the interest rate, lead to the chronic inflation of bubbles and their explosion (recessions). Therefore, it is no coincidence that the last 5 decades have seen the weakest data on leading global economic indicators since the mid-20th century.
Richard Nixon’s abolition of the gold standard led to unprecedented intervention in the economy and finance by states. The result is total disaster. Inflation is in full swing, we have an uncontrolled increase in the tax burden and an increase in public spending and indebtedness (starting in 1971) without precedent.
The same is true at the individual level. In the next article, dedicated to the last 5 decades without the gold standard, we will look at what this means for individuals and households. Because, although countries can use their statistics to cover the more or less negative effects of their policies, everyone directly feels the negative consequences of the lack of the gold standard in their pockets.