Why Sound Money Matters

by Lear Capital EditorialNovember 23, 2015

Money has one purpose: to facilitate the exchange of goods and services in the marketplace. Money came into existence because it is easier to exchange a currency accepted by all than to find someone who needs specifically what you have for specifically what you need. Instead, we trade money. That money has to have value to everyone, however. And for money to have good value, it has to have an element of scarcity and stability. The less scarce it is, the less value it has. If you can produce unlimited amounts of a currency, the value goes down and therefore it takes more and more of it to procure your needs. Similarly, if people even think you MIGHT pump vast amounts of your currency into circulation, they lose trust in it and it loses value.

This is all very basic and very logical. But it holds true for any monetary system, even ours today. And yet, the monetary academics in their ivory towers seem to think these fundamental laws of economics don’t apply to the US and the dollar. There seems to be this pervasive attitude that the Federal Reserve can create money out of thin air by the trillions, lend it to crony banks and inflate the money supply and no backlash, no inflation will ever come of it. It doesn’t make any sense.

Part of the reason our system is headed for so much trouble is that money is being used these days for so much more than just as a medium of exchange. Today there are people who make millions of dollars just on tiny amounts on arbitrage between currencies. One country devalues their currency against another and BOOM – exchange traders exploit that and fortunes are made and lost. But no one has produced anything. You can’t base your economy on that!

Or, complicated investment tools are cobbled together and pyramided on top of each other, like mortgage backed securities and derivatives, only to collapse when it is discovered there is no real underlying value.

All of these issues complicate our money. It is tough, impossible really, to plan and do business in the shifting sands of a fiat monetary system. This is why a strengthening contingent of politicians and thought leaders are calling for monetary reform in the form of Federal Reserve transparency and even getting back to sound money backed in some way or at least limited by gold.

Two prominent presidential candidates, Rand Paul and Ted Cruz have brought gold to the forefront of the national conversation in recent presidential debates, and I applaud them for that. Sound money matters. We all know we should save for the future. But how can you feel confident in your savings when you don’t know what kind of world you’re saving for? Will an average car cost $30,000 or $130,000? Will a loaf of bread cost $2 or $20? If you foresee a future with prices more like the latter, what is the point of even trying? That is why sound money matters.

And it is not rocket science to achieve. We would simply fix the value of the dollar to the value of gold. Say, today’s gold price. From there you simply issue more or less currency based on the price of gold. This type of “fixed-value system” could be very stabilizing to the economy and allow families and businesses alike to plan for the future much more effectively.

The problem is that it would restrict government spending and cripple the Wall Street cottage industries that exist because of monetary manipulation and inflation. These are tremendous forces standing in the way of sound money ever happening unless something drastic changes.

The good news is, you can still harness the power of gold for your future, regardless of what the powers-that-be do about the dollar. If you hold a portion of your portfolio in gold and precious metals and we get that future with the $130,000 Toyota Camrys, chances are gold will rise proportionally. That’s what has happened historically and why people look to gold for currency stability.

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