The economic term normalization has entered the financial lexicon and will soon dominate markets. As with everything the Fed has done since Nixon ended dollar stability by severing its link to gold in 1971, the advent of normalization is just another academic invented diversion in the seemingly never-ending cycle of errant fiat monetary policy. Forty-six years of fiat monetary chaos has rendered the purpose of monetary policy unrecognizable. Monetary policy is not an economic magic wand that central banks can wave to conjure economic growth from nothing. Yet, this is exactly where the global financial system finds itself today. Central banks have created $12.5 trillion of liquidity since 2008 in an academic experiment to produce real growth out of a flood of digital paper. “Anyone watching from Mars”, in Warren Buffett’s estimation, are not scratching their head over gold’s long history of proven monetary stability. Rather, they are scratching their head over how an advanced technological society has reverted to primitive monetary witchcraft in the hands of a few academic shamans.
The purpose of money is to act as a stable, unwavering standard of reference for the exchange of the galaxy of goods and services that enable a market economy. This is termed a unit of account in the monetary world. In the scientific world, the International System of Units comprises a coherent system of units of measurement built on seven base units; the metre, kilogram, second, ampere, kelvin, mole, and candela. The speed of light in vacuum is the constant that governs the standard. This internationally agreed upon standard is the foundation for progress in the mathematical world. This is axiomatic. Yet, in the monetary world where progress is no less dependent upon an unchanging standard of reference, we default to chaos. Gold has proven over history that it is the monetary standard of reference. Gold is democratic and is not manipulable. Gold is honest and eliminates the proclivity of governments to always devalue in favor of making difficult choices. The result of abandoning gold—the commodity money par excellence, the Numeraire, the monetary Polaris—is the Ph.D standard, an errant, misguided experiment in academic frailty.
In our floating fiat monetary world, monetary values change every second of the day; the hypertrophy of finance as explained by George Gilder in The Scandal of Money. Gilder confesses,
“I underestimated the significance of the chaos of currency trading. According to the Bank of International Settlements, this market has swelled to some $5.1 trillion a day, 25 times global GDP and 73 times all trade in goods and services. Yet all the vast shuffle of money fails to achieve the crucial function of money and markets: to yield a reliable guide for international transactions.”
A standard of reference is essential for understanding today’s confused, global monetary environment. Fed tightening, loosening, 2% inflation goals, normalization, funds rate hikes, movable goalpost data, and all the other gibberish that emanates from the Fed and central banks has no meaning without a foundation reference. If the Fed’s balance sheet has remained at $4.4 trillion since October 2014 with $2.1 trillion of excess reserves, how do funds rate hikes tighten? Chain weighted, hedonic quality adjusted, rigged CPI data is useless as an inflation indicator compared with gold’s historical stability that has more than tripled in price since 2003. A rise in gold from its optimum price is always an indication of dollar devaluation and inflation. There is no need for embarrassing confusion over the elementary concept of inflation that today exceeds the grasp of central bankers. Normalization is the Fed’s attempt to undo the damage created by their liquidity flood experiment of the last nine years, to return to traditional monetary policy that they never should have left. Central banks do not have an unlimited ability to purchase assets within the context of free markets, despite equations and dissertations that say otherwise.
Money illusion, the proverbial monetary punchbowl, has withdrawal costs. Josh Hamilton was one of the most naturally talented baseball players of recent generations. He became a crack cocaine addict, was kicked out of baseball, and squandered his most productive, young playing years. His recovery and return to the major leagues is a great, motivational story. Hamilton was a force as a player upon his return. He led the Texas Rangers to their only two World Series appearances. Soon after, his body began to break down from the years of drug abuse. Despite being rewarded a $125,000,000 contract with the Angels, he was never able to regain his physical form. He ended his career with a whimper, disappearing on the disabled list for most of his last seasons without any productive output.
The unknown is the degree of greatness Hamilton may have achieved had he not squandered his most productive years. The many years of excitement he may have brought to baseball fans or anyone who appreciates exceptional, God-given natural talent. Instead, his errant path resulted in lost potential and a small window of achievement. We cannot lament the unknown.
We also cannot lament what central banks have squandered with their decade long monetary liquidity flood experiment. A decade where zero bound central bank manipulated interest rates dried up IPOs in favor of M&A. Where corporations diverted capital into stock buybacks and financial engineering rather than R&D and capital expansion. Where capital flowed to the hypertrophy of finance rather than the entrepreneur. The massive $5.1 trillion of daily currency churning to maintain our global central bank fiat construct subtracts directly from the productive economy. Lost from squandered capital are the next technological advances and medical cures. Instead, squandered capital widened the inequality gap, diverted to the one percent, while the middle class, wage earners, and pensioners fell further behind. A dissipated standard of living is the Fed’s QE gift to the productive class.
These are the dismal results amid the near decade of central bank liquidity flood. Like Hamilton, there are consequences for the years of central bank monetary abuse. These consequences are of yet unquantifiable. We cannot compare what lies ahead to any other point in economic history. When central banks finally end the liquidity flood and normalize, what should we expect then? The Fed’s plan is to normalize ever so slowly contingent upon nothing going wrong. The truth is the Fed has no idea. Post 1971 is the first time in the history of mankind that no country has linked their currency with gold. While individual countries have routinely devalued themselves into economic irrelevance, there is no basis for the world doing it. James Grant explored the same question in a July 17, 2017 Financial Times piece,
Or, as not one central banker has ever been heard to say, “Really, what we’re doing has never been done before. There’s no way of predicting how it will turn out. The negative nominal yields attached to a certain number of sovereign securities in Europe and Japan today are a 5,000-year first—never before seen in history. We couldn’t tell you exactly what quantitative easing would do. And we certainly can’t predict what the withdrawal of that so-called stimulus will achieve. The future is a closed book.”
We can be certain of one thing. Until the world returns to the monetary stability of gold, central bankers will do the only thing they know how to do in a floating fiat system. Regardless of whatever new monetary terms are invented to explain their actions, they will devalue.