Chapter 2: Findings and Analysis- Growth Problem - National Reserve Currency

2.10   Growth Problem

Gold

Fiat supporters have always argued there is not enough Gold in the world to fund the global economy and international transactions.

The total amount of gold that has ever been mined has been estimated at around 165,000 tonnes. Assuming a gold price of $1,500 per ounce, the total value of all the gold ever mined would be around $6.8 trillion. This is less than the value of circulating money in the US alone, where around $1.4 trillion is in circulation and another $11 trillion exists through banking deposits.

The real problem is not that there is too little Gold but the fact there are too many dollars in the world. The US, which has the dollar as its national currency, can continually print money to meet its economic needs because international financial markets and global commodities markets are all priced in dollars.

The money stock in the world far exceeds the value of the global economy. The banking industry creates money through loans and mortgages. It is here the advocates of Fiat argue that the more money existent in an economy the more growth. In reality more money has created more inflation. The need to create perpetual economic growth has driven western economies to print ever more money creating one economic crash after the other. The case in point is not the insufficiency of gold in the world but the instability that unrestricted Fiat brings to national economies.

The proponents of Fiat money argue money plays a crucial role in the economy since sufficient amounts of money need to exist in the economy for transactions to take place. The more transactions that take place the more wealth is created. Monetarists have long argued that giving up such an economic tool handcuffs a government. With the Gold Standard new gold would need to be mined in order to increase money supply and this would impact economic growth.

Capitalist economic growth requires the economy to continually grow, which in turn needs consumers to continually spend, the availability of debt allows this on a massive scale. Pro-Fiat economists believe the ability to print money freely drives economic growth. Whilst a certain amount of money is needed for transactions to take place, in almost all cases of Fiat economies the amount of money always exceeds economic activity that creates inflation and destabilizing the economy.

The last decade saw the financial sector, which was the driving engine of Western economies stimulate economic growth. Through the creation of nearly $1,000 trillion this artificially drove a housing bubble that stimulated the other aspects of the world economy. All of this took place with a real world economy of only $50 trillion or so. The growth in the economy was false, artificial and unsustainable while the recession and its adverse impacts are all too real.

The Gold Standard would have restricted the amount of credit in the global economy and ensured a credit driven bubble never materialized. Since liquidity cannot be accessed either through printing or through interest based credit, the productive activities leading to growth are risk sensitive and sustainable. Unsustainable growth is when the growth is not able to continue without causing socio-economic problems, the potential of which is repeatedly witnessed in the interest based Fiat system.

Economic growth, unemployment and money creation all need to be separated from each other. Economic growth has become synonymous with low unemployment and manageable inflation. Economic growth in any country is more then just these factors. Economic growth can also be driven by competitive labor and consumer markets, it can be driven and supported by innovation and strong public infrastructure. These supply side factors absorb any inflation created from the demand side of the economy. Thus without the supply side of the economy, money creation in the hope of manufacturing demand will just lead to higher prices.