Members of the American libertarian movement, particularly extremist preppers, are often associated with a belief that a complete breakdown in society is the only outcome from government economic policies and will lead to complete social disintegration. At the centre of their concerns is monetary destruction, with other issues, such as the erosion of personal freedom and the right to bear arms, important but peripheral. They cite history, particularly the hyperinflationary collapses, from Rome to Zimbabwe, and now Venezuela. They draw on Austrian economic theory, which fans their dislike of government and their expectation of total chaos.
Properly reasoned economic theory certainly reduces the science to one of black and white conclusions, which suits conclusion-jumpers. But the whole point of it is to explain society’s errors, so that they may be corrected. It is only by understanding the errors of state intervention and socialism, both communistic and fascist, that solutions can be found. Solutions then need to be applied, not taken into a mountain or forest retreat never to be implemented.
The real world does not work on black and white economic theories. It progresses along a muddled course, torn between statist mistakes and society’s unending patience with government intervention. Governments are the source of all wars and wealth destruction, but societies tolerate them. Philosophers have argued over this from Plato versus Aristotle onwards, and we are still here, two and a half millennia later, chewing over the same bones.
History records our philosophical chewing, and Man’s continuing conflict with and tolerances of the state. It records the rise and fall of kings, emperors, dictators and governments. Hermits and other preppers come and go, either unrecorded or, like Saint Simeon Stylites, noted as little more than historical footnotes. To future generations, prepping will almost certainly be a bygone curiosity, and humanity will continue despite government suppression.
This article is an attempt to rationalise an apparently apocalyptic future into how it is likely to evolve over the coming years. In the absence of a nuclear Armageddon, what we fear, more than anything else, is actually uncertainty and change.
Out with the old
Uncertainty and change are with us all the time. In a truly free market economy we embrace it because they are driven by our personal economic interests, and it is a continual process. But the desire for change is driven by us only in our role as consumers; as workers or businessmen facing competition for our existing labour and skills we tend to resist it. It is that side of us that a government taps into.
Modern governments, except where they are overtly mercantilist, don’t do change. Their support, indeed their reason for being, is based on anti-progressive lobbying from both establishment businesses and socialistic pressure groups. Government economists do not recognise progress, living in a stagnant world of historical statistics. Progressive change interferes with their certainties and is therefore never properly considered.
This is what the welfare states in the West have become, societies managed by anti-progressive governments, nominally responsible to their electorates, but in fact with a life of their own. The interests of governments have long since departed from those of consumers and increasingly conflict with their needs and wants. It is a process that has evolved to the current position over the last hundred years, when governments had understood their role should be strictly limited to identifiable national interests, when government employees deferred to the general public as their civil servants, and importantly, when the national currency was based on money chosen collectively by individuals.
It is therefore a much larger issue than just money. It is about the direction of political travel. For individuals it has become a prolonged road to serfdom, where power and personal freedom have been sequestered by the government from the consumer. The consumer has lost the right to keep his own income, and his preferences are now regarded by the state as subject to its control, to plan and dispose of as it sees fit.
The so-called free world was first ruled by the British and then by the Americans. The roots of both regimes were trade, protected by a government enforcing the rules of property ownership, the certainties of contract law and laws that protected individuals in their interpersonal relationships. As law-makers, governments now legislate to extend control over their peoples. And now the American government, in the name of American business, is even directing its own citizens not to buy from foreigners and is taxing them if they do so.
It is not the first time the state has interfered with our preferences in this way. The lurch into protectionism that led to the Smoot-Hawley Tariff Act of 1930 was one example, and the nationalisation policies of Britain’s post-war government another. These were errors from which a retreat proved possible. Today, the West’s democratic system has reached a point from which no ordered retreat back to free markets, to personal freedom and to governments which serve the people and not themselves, seems possible. Change will only come from the ultimate collapse of a system that promotes interests over freedom.
Transiting to the new
Western doomsters, seeing the contradictions around them and armed with little more than libertarian ideals, believe the world is coming to an impasse. They know it will end badly, and America’s resistance to decline by retreating into yet greater suppression of freedom confirms this view. The mistake is to assume nothing will replace the disintegration of the American state.
Money is the talisman for the doomsters’ vision. The destruction of paper currencies is inevitable, they say. Given these dissenters are very much American-based, their approbation is reserved for the dollar. But we should all take notice because the dollar is the reserve currency. That is to say, we measure our own currencies primarily against the dollar, and we use the dollar to settle our international trade. Our central banks tend to the view that they should generally manage their currencies in dollar terms. Therefore, if the dollar falls, we should all fall with it.
After a temporary bout of strength, concerns that the dollar will enter a terminal decline are spreading in some quarters. There are those who point to the seemingly limitless accumulation of unproductive debt, and the fact that the lessons from succeeding credit crises are always ignored. Today, the chatter is of a global monetary reset, with proposed solutions incorporating debt write-offs, the mobilisation of super-monies such as SDRs, and monetary applications of blockchain technology. The libertarians talk of total monetary failure and of gold, somehow rising from the ashes of the dollar’s immolation. All these solutions ignore wider issues. For the fact of the matter is we face the end of an empire. The American global empire is being superseded by an Asian phoenix.
The loss of influence to rivals is always painful. America’s geopolitical strategists feel acutely threatened by the Russian-Chinese partnership. America’s backing for Georgia in 2008, stimulating colour revolutions in Ukraine, and a proxy war over Syria have all failed to destabilise Russia. Afghanistan and Iran are works in progress, or rather non-progress. In the past, America could rely on unwavering support from her NATO allies. One of them, Turkey, has now all but defected, and the Europeans are breaking ranks on sanctions over Iran and Russian energy imports.
American trade tariffs against China must also be regarded in this light. Recent moves to retain influence in key African nations as well are too late. China is already the largest infrastructure provider to sub-Saharan Africa by far, and she is not making the mistake of just giving money to African politicians. The politicians get their money from extended aid and new donations dressed up as trade deals from America and Britain, as they always have. The West cannot even buy respect, let alone influence, because the Chinese are doing the real work.
America never had very much influence in sub-Saharan Africa anyway. Instead, she focused on North Africa and the Middle East. Regimes from Iraq to Libya have been changed at America’s behest.
It was the agreement with Saudi Arabia in 1974 that oil would be sold exclusively for dollars that legitimised the dollar as the global trade and pricing currency. When Iraq proposed to sell oil for euros, it was invaded, and Saddam Hussein deposed and executed. When Libya proposed a new central African currency based on gold, civil war suddenly broke out and Ghadaffy was hounded and shot by a mob. The message was simple: don’t mess with America and the dollar.
This has now changed. China is buying oil for yuan, and there’s nothing America can do about it. America has tried to destabilise Russia with dollar sanctions, unsuccessfully. President Trump has leant on Angela Merkle not to do business with Russia and Iran. He has also threatened this NATO ally with trade tariffs. The message to Germany is clear, the alliance with America no longer applies. Consequently, Germany is quietly turning her back on America and continuing to trade with Russia. The old threats just don’t work anymore.
China and Russia have long planned to jointly lead Asia and Eastern Europe into a new economic bloc. The Shanghai Cooperation Organisation was set up firstly to coordinate security and anti-terrorist activities, but this morphed into unifying Asian trade. China is building the infrastructure to make the Asian continent the most powerful economic unit ever seen. No doubt she will rebuild Syria when the Americans have left. No wonder America’s strategic planners are worried.
In 1983, China enacted the Regulations of the PRC on the Control of Gold and Silver, giving the People’s Bank of China the responsibility for all the nation’s gold and silver resources under Article 4 of those regulations. In 2002, the Shanghai Gold Exchange was launched by the PBOC and private individuals were permitted to own gold. It is clear that the PBOC over two decades had accumulated sufficient gold to then allow ordinary citizens to do the same. China even advertised the merits of gold ownership, encouraging individuals to accumulate gold. We have no knowing how much gold the Chinese state had accumulated, but given contemporary gold prices, inward dollar flows in the 1980s and trade surpluses thereafter, China could easily have accumulated a strategic reserve of 20,000 tonnes before the public was authorised to acquire gold. We may never know the true figure. We do know that in addition to the state’s accumulation, some 17,000 tonnes have been withdrawn from SGE vaults by the general public.
The Russian government has belatedly begun to accumulate gold reserves, and has now declared reserves of 2,170 tonnes, and importantly, has reduced its dollar reserves substantially to do so. Even India, a staunchly Keynesian state, has finally started accumulating additional gold reserves, having repeatedly tried and failed to encourage its own people to transfer gold to the government. Its nationals have probably accumulated over 10,000 tonnes since the Gold Control Act was repealed in 1990. Other Asian states from Turkey to Mongolia have all been building official gold reserves as well.
There can be no doubt that Asians and their governments not only hold the traditional view that gold is the ultimate money, but their coordinated physical accumulation is strong circumstantial evidence that gold will have an official monetary role in future. In this context, even Germany’s gold policy is interesting. We know the Bundesbank traditionally retains a strong anti-inflation bias and is unlikely to view the ECB’s management of the euro with favour. Furthermore, Germany decided to repatriate some of her gold reserves held at the New York Fed. After an embarrassing row with the US authorities, the gold sought was eventually returned. Various motives were ascribed to this move by Germany, but perhaps the most interesting possibility – which was never reported – is that Germany’s deep state was looking to the East.
Other European nations, particularly France and Italy, retain substantial gold reserves, which places them in a good position to adapt to a Eurasian world without the dollar. We can see that a future without it, and without other fiat currencies backed by nothing other than dollar reserves is certainly possible. It will involve enormous challenges, not least for governments relying on inflationary financing. To secure sound money, governments will be forced to discard socialism and embrace freer markets to bring their own financial demands under control. Those that don’t could rapidly descend into an Argentinian or even a Venezuelan monetary hell.
The US, which still records the largest official reserves, can also stabilise the dollar by offering gold backing and convertibility. To do so would require a significantly higher gold price, as indeed would be the situation for China’s yuan. But it also requires an enormous leap in official imagination, not only concerning gold’s reintroduction as backing for the dollar, but over America’s imperial role. It requires an acceptance that America can never win the geopolitical war with China and Russia, and must accept a diminished global status, just as Britain did when she rapidly shed her colonies in the 1960s.
It is hard to see America giving up her hegemony willingly, and therefore it will be down to events. America and other welfare states also face a transition into more free-market oriented economies with considerably less state intervention. That will not be easy either. Furthermore, there is no guarantee Russia and China will take on the mantle of world domination successfully, but we can be reasonably certain they have planned for this eventuality for a long time.
In the absence of a transformation towards sound money, the loss of purchasing power for pure fiat money will not be a smooth process. The next credit crisis, itself an event of which we can be sure, will almost certainly be met with lower interest rates and more quantitative easing, designed to support the banks with new money and to finance rocketing government deficits. State-issued currencies are bound to accelerate in their decline following this renewed inflation of supply, but for currencies to really collapse requires the public to change its preferences in favour of goods and totally against fiat money. In practice, the public tends to hold onto their belief in state money longer than might seem reasonable, in the hope that its purchasing power will stabilise.
It will be at the next credit crisis, if not before, that China and Russia will reveal their plans to protect their currencies from a financial and currency collapse in the West.
The prospects for fiat currencies and welfare states are not good, but it is a mistake to think homo economicus will sink with them. The views of the super-bears appear to be fundamentally parochial, particularly among the preppers in America. Instead of society’s destruction, we face a period of seismic change, notably the rise of Asia as the centre for global economic power.
Asia’s two major currencies, the yuan and the rouble, will not survive in their current form. They will have to be backed by gold, but fortunately for the world this has long been China’s backstop plan, and Russia is now belatedly acquiring the gold necessary to back the rouble as well. Depending how China and Russia go about it, this could easily be achieved with current levels of gold backing and a somewhat higher gold price.[i]
America could save the dollar by following suit. She probably has sufficient gold reserves, but to do so requires her to abandon almost everything the government and the Fed currently believe in and is therefore only likely to happen under duress.
But our central conclusion is that we will survive, and to retreat into mountain and jungle hideaways to escape an apocalypse is a mistake. We do not face a new Dark Age. What we do face are some home truths about unsound money, bringing with them considerable uncertainty and change.
[i] I wrote about this here: https://www.goldmoney.com/research/goldmoney-insights/gold-s-monetary-rehabilitation
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