Will COVID-19 Lead To A Gold Standard?

Mar 22

By Alasdair MacleodGoldmoney Insights February 20, 2020

Even before the coronavirus sprang upon an unprepared China the credit cycle was tipping the world into recession. The coronavirus makes an existing situation immeasurably worse, shutting down China and disrupting global supply chains to the point where large swathes of global production simply cease.

The crisis is likely to be a wake-up call for complacent investors, who are content to buy benchmark bonds issued by bankrupt governments at wildly excessive prices. A recession turned by the coronavirus into a fathomless slump will lead to a synchronised explosion of debt issuance for which there are no genuine buyers and can only be monetised.

The adjustment to reality will be catastrophic for government finances, and their currencies. This article explains why the collapse in overpriced financial assets and fiat currencies is likely to be rapid, perhaps giving ordinary people in some jurisdictions an early prospect of a return to gold and silver as circulating money.

Introduction

My last article suggested that both financial assets and currencies would collapse together. the basis of this supposition is twofold: first, central bank policies are binding together the rise in financial assets with the maintenance of value in fiat currencies. Therefore, if one falls, they both fall. And secondly there is historical precedence for this when one examines The Mississippi bubble 300 years ago.

The timing for such a collapse appears to be imminent. Every day, more and more data confirm that the global economy is sliding into recession. So far, people have been ignoring this important development, but now that it is becoming hard to ignore, no doubt the coronavirus will be blamed.

This is a mistake because the factors leading to a slump, principally the end of the expansionary credit cycle combining with trade protectionism against Chinese imports by President Trump, echo developments leading up to the Wall Street crash in October 1929. If that point is accepted, then clearly the world could be on the edge of a very deep slump exacerbated but not caused by the virus.

The coronavirus has all but closed down China's economy. It threatens to become a pandemic with serious consequences for all other national economies and their fiat currencies.

The central issue flowing from the upcoming monetary crisis centres on the rating of government debt. Almost all welfare-driven states are in debt traps. They think price inflation is under control, because their colleagues in the statistics departments tell them so, allowing them to continue to run increasing budget deficits with apparent impunity.

Central banks do not realise that very soon they will be the only buyers of their governments’ debt which they will pay for with newly minted money. The irony of repeating the mistakes of Germany’s Reichsbank in 1918-23 will be completely lost to them and the path of escalating failure will only encourage the pace of printing to be accelerated.

The latest bombshell, coronavirus, is a trigger perhaps for the markets to regain control from the statist price riggers. This has to be the first step to fixing broken economies.

The Panglossians in the ranks of the banking and investment communities will be rudely awakened to find themselves staring down the barrel of economic reality. Only then is there a chance that neo-Keynesian lies will be discarded by one and all, and a retreat towards sound money commence.