Gold Glisters, Paper Binned

I've been pointing, out for a while, that the solution, to the Debt problems of the EU and UK, will be resolved in the same way that the debt problems of the Banks were resolved - by monetising the debt. That is, Central Banks will simply print money, and use that Money to cover the Government debts. Its what Governments have done from the very first use of money, and the very first creation of debts from borrowing it. In the past, they corrupted money made from precious metals, then they started to simply issue coins that contained less metal, but which retained the same names. Marx speaks, for example, of how the pound sterling, which had begun life as a pound weight of silver, had, by the 19th Century, been reduced to only a fraction of that weight. Once paper money is introduced, as a token representing money, there is virtually no limit to the amount Governments can print of these tokens. As Marx points out, real Money - Gold Silver or whatever has arisen as the Money Commodity - circulates because it has Value. Paper Money, however, only has Value because it circulates. The Value of Gold or silver is determined by the labour-time required for its production. But, paper has very little value because it requires little labour-time to produce. Paper money tokens only have value because they act as representatives of this real money. But, for that reason, the more of them that are printed the less value they have, whatever the nominal value they have. Their real value becomes manifest in exchange in the fact that more of them have to be given up in exchange for any other commodity - inflation.

I've been pointing out that not only is the monetising of the debt the obvious solution - the drastic curtailment of Public Spending to reduce the debt is not in the interests of Capital at the present time in Greece or in Britain - but the drop in the value of the Euro indicates that the markets realise that, and that such a monetisation is inevitable at some point. The other day, I heard a currency dealer on CNBC making the same point. The proposed cuts in Greek spending, as part of the rescue package, are predicted to lead to a fall in Greek GDP of 3% for this year. Other countries, amongst the PIGS, such as Portugal and Spain are also now coming into the firing line, and similar austerity measures have been put in place to reduce their debts, with a similar consequence for growth.

But, the EU is a single market, a single economy. Most EU states conduct most of their trade with other EU states, the biggest Capital flows are from one EU state to other EU states. In good times, this is a powerful driver of economic growth, but you can't have the good without the bad. Economies like Germany, dependent on exports for a large part of their GDP, will suffer if many other areas of the EU not only remain in recession, but are driven even further into recession by swingeing cuts in spending. Gordon Brown is right, when he says that the EU needs to adopt a strategy for economic growth, as the means of dealing with the debt, but the first stage of that strategy has to be to begin by monetising the debt now. Once growth has taken hold again the problem of dealing with the inflation that results from that can be addressed.

But, such a policy of monetisation will result in inflation down the road. It is already leading to a fall in the Euro, just as the massive increases in liquidity from printing dollars over the last few years have led during that time to big falls in the dollar. The same has been true for the pound, and other major currencies, like the RMB and the Yen, have been held down because of policies in China and Japan to print money to keep their currencies pegged or within tight limits against the dollar. But, it follows, that if all paper currencies get binned in this way as a result of printing more paper, the relative values of each will not change that much. That is true, but those currencies are not just valued against each other. As stated above they are valued, each time they are used, in exchange against other commodities. Print more pounds, and more pounds have to be handed over for each sack of potatoes, and so on. More significantly, still sitting in the background, are those Money commodities, those ancient economic relics of Value, on which these money tokens are based, and against which they are supposed to bear some lingering relationship.

Since 1999, Gold has risen, from a low of $250 an ounce, to its current price of nearly $1200 an ounce. It has merely, matched other hard commodities such as Copper in that rise, which is part of the usual Long Wave cycle, during which raw materials rise sharply in price at the beginning of a new Long Wave upswing, as demand rises sharply, which cannot be met due to years of underinvestment during the downturn. In the last Long Wave upswing, from 1949 to 1974, Gold reached its real peak against other commodity prices in 1960. But, between 1970 and 1980, Gold rose from a price of $30 to over $800 an ounce!!! Some people, the so called Gold Bugs, who had invested in Gold during this period, made absolute fortunes, and the same people have been buying Gold again over the last few years.

But, the reason for the near 30 fold rise in Gold prices during the 1970's was due to inflation, because of the massive printing of money, to cover the Vietnam War, and to cover the Keynesian policies, used extensively during that period, to try to stave off the cosnequences of the ending of the Long Wave Boom, and the onset of the Second slump. The rise of Gold, up to 1960, was a rise in its real exchange value, its price of production compared to other commodities. The 1970's rise was purely a rise resulting from inflation. Today, we see the two factors combined. Gold has been rising in price, alongside all other raw materials, as part of the normal Long Wave cycle, but the massive printing of paper money tokens, over the last decade, is very similar to those same policies during the 1970's. The consequence seems inevitable, as paper money tokens get trashed, real money, Gold, will soar possibly to as much as $5,000 to $7,000 an ounce! Good news for South Africa and Russia.

What is different, today, from the 1970's is that, in the 1970's, Keynesian policies could not work to prevent the effects of the Long Wave downturn, and were abandoned. The adoption of Misean economic polices, in Britain and the US, under the guidance of people like Frederick Hayek, led to a reversal of money printing and a contraction that led to mass unemployment. Only when Capital had decisively beaten Labour did people like Thatcher and Reagan switch to Friedmanite Monetarism that called for an expansionary Monetary policy, to stimulate economic growth, in the knowledge that prices could rise, whilst workers would be too weak to obtain compensation in higher wages. It was on that basis they defended profits, and at the same time created asset bubbles on Stock Markets, and in housing. Today, early on in a Long wave upswing, Keynesian polices CAN work. The task for Capital is to restart growth, growth which once underway will be self-sustaining due to the endogenous characteristics of the Long Wave. That has two consequences.

Printing Money in the 1970's, and its resumption at the end of the 1980's, led to inflation. The reason for that is simple. Inflation arises when more money is put into circulation than the volume of economic activity merits. In the conditions of the 1970's, more money in circulation simply led to firms raising prices, and workers seeking higher wages. It did not lead to more investment, which would have put more goods in circulation, to absorb the additional liquidity. Firms did not invest, because they had no confidence that things would improve. The result was stagflation. In the late 80's and 90's, when the Monetarists adopted a loose money policy, in order to smooth over the structural problems arising from increasing globalisation, amid a Long Wave decline, the result was that company profits rose due to rising prices with subdued costs, and workers sought to compensate not through rising wages, but through increased borrowing out of fictional rises in wealth that appeared to come to them without effort via their rising house prices - and increasingly, for many, rising values of their PEP's, Pensions etc. Although, the increase in liquidity DID result in rising prices, therefore, it did not result in rampant inflation, because a large part of the liquidity was used up in financing these rising asset prices, and, because that very same globalisation was resulting in masses of new low priced commodities coming in from China etc.

Today, printing money to monetise the debt will result in currencies being trashed against real money, will result, in the short term, in high rates of inflation, but, precisely because we are in a Long Wave boom, not decline, the resumption of growth will bring loads more commodities on to the market that will begin to soak up that liquidity, and thereby cap the extent to which inflation will rise. Growth will also create the conditions under which the initial costs of monetising the debt can be addressed. More people in employment with rising wages, will mean more tax in Income Tax, and in VAT as they spend more. Higher company profits will have the same effect, and less people claiming benefits of various kinds as employment and income rises will reduce State spending. but, those who have lost out, because having lent to the State, they find themselves paid back in funny money, will demand compensation. They will demand higher interest rates on the money they lend over longer terms. But, with higher income and tax the State will be able to pay these higher interest rates. Businesses, with increased activity and higher cash flows will not only be better able to cover higher interest rates, on longer term Commercial Bonds, but that higher cash flow will reduce their borrowing requirements, and higher incomes and profits will make it easier for them to raise Capital through share issues rather than issuing bonds.

Capital DOES have a fairly straightforward escape route from the current problems, if they choose to use it, and provided their political representatives can take the decisions to effect it - the biggest problem at the moment appears to be that Germany is baulking at resolving the Greek crisis, because of the political background of German elections. The Tories have committed themselves to spending cuts for similar reasons, because they believed it would win them votes.

I should stress that I am not, in any way, suggesting a crisis free Capitalism here. What I am suggesting is that the usual response of the Left, of wanting to present a picture of a Capitalism in terminal decline, in a state of perpetual crisis, is way off the mark even now. Even during a long wave boom Capitalism undergoes crises like the current one, and their will be more during this phase of the Long Wave Boom. But, it is necessary to understand the conjuncture, and to understand how these crises differ from those when the Long Wave boom ends, and those during the Long Wave decline. Without that its like trying to find your way using a compass that always points South, and without knowing where you are to begin with because you don't have a map.