Financial Crisis: History In The Making
May 23, 2022 (King World News) – Dr. Stephen Leeb:
This is one of the most difficult, challenging times the U.S. and the world have ever faced. It offers just one potential win-win solution… And that’s gold.
Gold as an investment for individuals and as the essential underpinning of a new world order.
The only thing that can be considered positive about the war in Ukraine is how clearly it has shown that powerful economies, especially democracies, must anchor their growth to the limits imposed by its material foundations. If the best things in life are free, the things needed to run an economy and raise living standards are anything but. As natural resources grow scarcer, any economy that tries to grow without increasing output from fixed amounts of natural resources will run into trouble.
As I’ve said before, the U.S. experienced its greatest times in the half century after the Civil War and the 30 years after World War II. It’s no coincidence that in these periods, the dollar was anchored to a gold standard, ensuring that economic growth was tied to productivity. Growth was aligned with deriving output from units of human labor and units of natural resources.
In today’s world- it’s the less developed countries, those with a shorter history of modern finance who better understand why the monetary system should include gold.
Russia’s Ersatz Gold Standard
For example, the Russian ruble (about a month after being heavily sanctioned by the U.S.) fell 30% below its pre-sanctioned level. In response, Russia’s central bank experimented with an ersatz gold standard. The Central Bank of Russia announced it would buy 1 gram of gold for 5,000 rubles from other banks. Based on the exchange rate at the time- amounted to about $1,100 per ounce of gold. The $1,100 figure was meant to establish a lower bound for the Russian ruble.
As it turned out, the lower bound wasn’t necessary. The ruble already had started to advance, and today it sits at multi year highs against most other currencies. While establishing a relationship between the ruble and gold may have been a psychological plus, the ruble’s gain reflects Russia’s leverage from its commodity abundance during this era of emerging commodity scarcities. This leverage has allowed the country to demand that purchases of Russian commodities be conducted in rubles rather than in dollars or euros.
U.S. GDP Correlation To Commodities
In today’s world, all economies rely on natural resources, even the United States economy, where the vast proportion of growth is generated by services. I’m not referring to anything as obvious as the importance of food or energy for our survival. In highly developed countries like the U.S. (where services represent 80% of our GDP) we don’t give natural resources much credit. Yet natural resources are vital to virtually every aspect of our economy.
A pristine example would be the computer related technology sector, which is at the heart of the United States economy. The tech sector requires massive amounts of energy, for which oil, coal, gas, and nuclear are the major sources. And many other natural resources are equally critical to our technologies, from helium to cobalt to silver to rare earths…
In the 2022 report, in our more complex society, 64 commodities were reviewed. The United States was only self-sufficient in 15 out of the 64 commodities- which is less than 25%. Many of the commodities which are critical to our technology sector are imported. Without them, our computers would be slower and much of our sophisticated weaponry would be far less advanced.
Our nonchalance about commodities over the past 50 years reflects that we’ve been able to deal with any problem simply by throwing money at it. Why worry about a commodity whose name you can’t even pronounce when you just can print the money to buy it? With the dollar as the reserve currency, we had carte blanche to print all the money required. At least, that’s been the case since we left the gold standard in 1971.
Over the past 20 years, the United States has spent over $10 trillion dollars funding wars. As a result, we have also squandered massive amounts of natural resources. It should come as no surprise that the developed world, led by the U.S., uses more than three times as much resources as the rest of the world on a per-capita basis.
However, we are starting to pay the price for our indifference to resource scarcity. The Ukraine war and our sanctions, which have backfired on us and even more so on Europe, are revealing the ramification of so blithely relying on unchecked money creation as the driver of global economic growth.
U.S. Benefits From Monetary System Linked To Gold
It is past time to pay attention to these many and far-reaching costs, which I briefly summarize below (and detail in my latest book, China’s Rise and the New Age of Gold).
It’s important to understand what the costs to us have been, what we’ve lost, because it explains why the U.S. will actually benefit from a new monetary order linked to gold. It will force us to return to the kind of disciplined long-term thinking that once made us such a great country.
We’re at a critical moment of transition and it might be our last chance to join forces with other countries and together try to save the planet. Until we realize how far astray we’ve gone, and how our presumably beneficial reserve currency status ended up damaging us, we’ll continue trying to block any change in the system. And that would be a fateful mistake.
Real Wages Verses Productivity
The first cost can be seen in any chart you can find depicting real wages and productivity. Until the early 1970s, the relationship between the two was close. After we abandoned the gold standard, though, real wages diverged negatively, almost flat-lining. Productivity growth slowed – on average by about 30% – but still continued to rise.
The slowdown in productivity growth was a natural consequence of the rising focus in the U.S. on near-term returns rather than on the longer-term projects that are critical drivers of long-term productivity. In other words, productivity was playing second fiddle to the economy’s major driver, money. The breakdown in the correlation between real wages and productivity was also a consequence of loose fiscal policy.
Essentially the government had the chance to increase its size, and it seized the opportunity. We could dispense with Eisenhower’s warning that every dollar spent on the military was a dollar less for a hungry person. That was true, courtesy of the gold standard, when Eisenhower famously warned about the military-industrial complex. Once off the gold standard, it was easy to create enough money to fund both guns and butter.
It started with the Great Society and the war in Vietnam, which was really the beginning of the end of the gold standard, and continued with the Cold War and the growth in entitlements. And except for a few short years in the 1990s, it has continued through the present. An irony is that while guns and butter may have enabled us to win the Cold War, it has ultimately left us in a much more tenuous position today. As we face off against the world’s less developed countries, we have been weakened as vicious circle after vicious circle has led to a highly indebted and fractured society.
Massive government spending, including on consumer protections, the environment, regulations, you name it, was largely responsible for creating an enormous financial-legal colossus on a par with the military-industrial complex. One result was that money that in the past went to wage earners as a result of increased productivity now went to the layer of society in charge of managing all the newly imposed regulations…
What Happened To All The Resource Titans?
It’s interesting to note, that from the postwar period through the early 1970s, the richest man in the United States was J. Paul Getty. His fortune was made in resources – in particular, oil. Today the wealth of the country’s richest citizens comes from the value of their stock holdings. And in this extremely elite group there are no resource titans.
The holy grail of a successful economy became the stock market.
Corporate heads became incentivized to the extreme to make shareholders as rich as possible. Rather than being motivated to support critical research in areas such as material science, corporations went after the low-hanging fruit of consumer spending. Most of the major winners of modern technology in the U.S. have been companies dedicated to incentivizing consumers to spend either on goods or by exchanging information with one another.
Our Once-Great Country: America
Not surprising, although the U.S. spends tremendous amounts of money on research and development, that spending comes from corporations looking for immediate paybacks.
This stands in stark contrast to the pre-1970s era, when most R&D was supported by the government. For example, subsidies for Bell Labs inevitably led to virtually all the technology we enjoy today… Like smart phones and the internet.
It’s true that massive amounts of money have also been spent on both healthcare and education. But most of this spending has gone to support enormous bureaucracies, while health and education levels for most Americans declined. Today in terms of life expectancy and educational achievement, the U.S. is ranked near the bottom of the developed world.
The end result is that in today’s society, the elite depend on continued spending by those Americans who have to go ever more in debt to continue spending. Our once-great country is becoming one in which growth is fueled by more and more debt.
I hope I have given you a taste of why it is so essential that we opt for cooperation and opt for the discipline of a gold standard with finesse… Could bring the world together.
This is the way we can beat the greatest challenge mankind has ever faced, that of resource scarcity. If the war serves as an eye-opener, a vehicle for getting us back to a path we never should have abandoned, then in the end it may have served some purpose. As I said at the start, the potential exists for a win-win resolution, one that revolves squarely around gold.
Let’s hope we grab it!