MotM Briefs – The Monetary Reference Point

The monetary reference point is where debtors and creditors are in balance.  There is no inflation or deflation and neither creditors or debtors benefit at the expense of the other.  There is no risk penalty added to terms of trade to compensate for fluctuating currency values.  Economic exchange operates at peak monetary efficiency. From 1789-1933 the monetary reference point was $20.67/oz gold–with the exception of the Civil War, when the dollar was devalued to $47/oz, then revalued back to $20.67.  A period that caused much economic distress. FDR devalued to $35/oz in 1933, and after more than a decade of price level adjustment, this became the reference point–until Nixon ended Bretton Woods in 1971. It took another decade before relative stability established a new reference point of $350/oz by the mid 80s. Greenspan crudely maintained this reference through 2003 (labeled the great moderation), though there was a debilitating deflation from 1997-2001 that precipitated the 2000 tech crash. Since 2003 there is no defined reference point. It is constantly changing. Gold has risen from $350 to $1900, fallen to $1050 and now is rising again. To adjust to a new level that balances creditors and debtors requires an extended period of monetary stability. My guess for where the monetary reference point resides today is around $1150-$1200, but a year from now it could be anywhere–depending on what happens with the POG. 

The 200 percent rise in the POG from $350 indicates that the general price level will also eventually double if gold stabilizes around $1100.  Despite rigged government statistics that purposely exclude obvious rises in the price level, inflation is consistent with the rise in the POG from $350.  This parallels the increase in the price level by a factor of 10 when the POG went from $35/oz to $350/oz. When the price level rises and wages finally catch up, earners find themselves in unindexed higher tax brackets with less real income. A single income earner can no longer support a family—which was common during the monetary stability of the Bretton Woods era. Spouses enter the work world to make ends meet. Latchkey kids, family breakup, and the erosion of the societal foundation ensue with all its commiserate issues.  The solution becomes bigger government which ultimately elevates the destructive cycle.  The economic wrath and societal destruction of a clueless Fed and its economists sycophants.

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