Not only gold bugs talk about gold these days
Fractional Fiat is doomed to fail in the long run. The question is if the current monetary system will see dramatic changes before the system itself get so fragile that it is forced to a dramatic change (could be ugly, could be many years down the road, nobody knowns for sure).
The main problem is as I have pointed out long time ago fractional money, not Fiat itself. Fiat + fractional is fractional money on steroids. Today’s monetary system has very little to do with free markets. One of the corner stones in modern economic theory is that handful of people not are smarter than the market. But when it comes to the fundament of the economic system: money, then the price of money is only to a small degree set by the market. The price of money is to a large degree set by a handful of elected (or non elected) people. I do not doubt that central bank ministers try to do as well as they can under todays monetary system, and under their mandate (best for whom can naturally be discussed). The question is about the monetary system itself.
When everyone wanted to borrow money to buy a second, or third house the price of money did not go up as it would have done if the market controlled the price of money (but under todays monetary system this could in no way work). Thanks to fractional fiat financial institutions together with the people that wanted more money could simply create more money (debt) when they needed more money. If instead the market had controlled the price of money (would have needed a completely different monetary system) then the price of money would have skyrocket when “everyone” wanted to borrow money and the size of the bubble would not have got that large in the first place.
When the gigantic credit bubble busted and the price of money should have sky rocked even more we had the lenders of last resort, the central banks. A handful of people that know better than the whole market were keeping the price of money at artificial low levels (and they possibly should do this under todays monetary system). The lenders of last resorts could thanks to fractional fiat bail out anyone they wanted (in their own currency), they could even get a negative GDP growth to show up positive in nominal terms. Every problem is solved by the printing press (or as they like to call it quantitative easing) these days it looks like. The printing press is causing a series of non optimal reallocations of wealth and production capital. Wealth is to a large degree confiscated through artificial low price on money (when the demand is big, and opposite), debasing the money, + tax on the inflation tax from people that have worked hard, spent little and saved up for their retirement, and given to people that just wants to take a lot of risk with others peoples money ( Twelve books could be written about this a lone)!
However it is not just to abolish the central banks. Under today’s monetary system the central banks play an important role, and many of the central bank ministers do a good job under what is their mandate. What we likely need is a completely new monetary system where the role of the central banks is miniscule. But the change in the monetary system must come first. However any big change could be painful, and should be thought carful about before such changes are decided upon.
When the market does not set the price of money to a large degree then there is no free market in the fundament of the system. Today’s world economy has little to do with a market economy. To compensate for the flawed fundament of the system a lots of regulation is put on the top of the system. But this is the wrong way to go. It is like when you have a root channel problem in your teeth, it cannot solve by polishing the teeth, no matter what polish you use for the surface of the teeth the problem in the root of the system will not go away. It is the root of the system that needs a fix. More polish on the top will not do!
I am not sure going back to a "modern" gold standard will be the best way to go. But yes to get rid of the high-powered fractional system is clearly what should be done at some point. At the fundament of the system we need supply and demand to decide the price of money. Todays economy have free markets on the top of the system, while the fundament of the system is far removed from the idea of free markets. However it is not just to abolish the central banks. Under today’s monetary system the central banks play an important role.
What we need is a new type of monetary system. Personally I think this could be I-Money. More on this another time.
