For many conservatives, it was a grave mistake to break with the Bretton Woods Accords. Apparently everything was much better with the gold standard. Richard Nixon, of course, the great culprit of everything. We have the inflationary crisis of the 1970s as a result. The conservative view tells us: “Inflation is always a monetary phenomenon.” Putting the dots together, we get a very popular narrative in some right-wing circles. In fact, You could say that cryptocurrencies are born from a conservative / libertarian reading of the 2008 credit crisis. Is fiat money the source of all our ills?
Why did Nixon break with the Bretton Woods Accords? If we ask the most critical, their motivation was greed. In other words, in this way the Government could spend without measure. We must remember that it was the time of the Vietnam War. So the first answer is statism. In short, the Bretton Woods Accords set the international price of currencies to the dollar. And the dollar was pegged to gold at a fixed rate. In this case, the dollar was a representative currency. It represented ounces of gold deposited at Fort Knox. That obviously limited the power of the Government in economic matters.
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Of course we also have a more neutral answer. The United States had a trade imbalance. It imported more than it exported. And that was hurting their economic growth. In practice, what was actually done was to eliminate the fixed rate and subject it to the free market. Ironically, a move applauded by conservatives. For example, Milton Friedman. We must remember that Nixon was a Republican. Y freeing up the exchange rate was very attractive to free market believers. Why? Because that honesty the rate. Which would consequently increase the competitiveness of the United States in the world.
That is the detail. If the dollar fell in price, that would benefit exports. Which in turn would solve the commercial imbalance. In theory, all very sensible. I repeat: It was an idea very applauded by the conservatives of the time. Conservatives are reactionaries by vocation. They are always advocating a return to the past. Today they are calling for a return to the gold standard. But in times of the gold standard they advocated a return to the old. In this case, the former was a free market system without many controls.
The problem with the Nixon Shock was that everything that could go wrong did, indeed, go wrong. A weaker dollar meant that oil-exporting countries would be giving the same for less. Then, they joined forces to raise prices with supply cuts. This generated the inflationary crisis of the 70s. The price of oil increased by 11X. And inflation in the United States soared. In fact, figures as high as 25% were recorded.
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The truth is that inflation is not always “a monetary phenomenon.” Friedman was wrong in reducing such a complex subject to a single variable. Indeed, the causes of inflation are multifactorial. We have inflation due to a rise in demand, inflation due to a cut in supply, inflation due to increased costs, etc. We can even have inflation due to distrust. This happens when there is no confidence in economic policies and prices rise because it is thought that prices will increase in the future. Over time, we have learned much more about the phenomenon of inflation. Rather, economic thinking has come a long way since the 1970s.
After the 1970s, we had the period known as the Great Moderation. It refers to a long stabilization period. Two major exceptions: The 2008 credit crisis and the current crisis. During these crises, the “good luck” of the Great Moderation was put on hold. However, if we make a historical comparison, it doesn’t take a genius to make previous crises that much longer and more painful. What used to last for decades and decades can now last for a couple of years.
Today, we don’t have an energy crisis like the one we experienced in the 1970s. OPEC no longer has as much power to begin with. Many countries have found that they earn more by producing more. In other words, the supply may decrease in the short term due to different factors, but it is very likely that it is a transitory phenomenon. Now today yeah we have a logistical crisis in the production and distribution chains around the world. The most notable case is the lack of microchips. This shortage has had a domino effect in different industries. For example, in the automotive.
In the United States, increased employment, increased demand, and the logistics crisis have triggered inflation. This, consequently, has forced the US Federal Reserve to take action earlier than anticipated. The first has been to reduce bond purchases (Tapering) and then an eventual increase in interest rates. This liquidity cut affects the markets. Y the effect is now because investors usually anticipate the facts and make decisions out of expectation.
What are the usual practices? Investors in times of “stimulating” monetary policy are carried away by the euphoria of the moment and take many risks. That means they invest a lot in growing companies. “Growth” usually means future potential, but few fundamentals. That is to say, “speculative”. They are generally highly volatile equity assets. Here we must include: Startups, technology, cryptocurrencies. For example: Tesla, Bitcoin, etc.
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Now in more conservative times, Investors lean toward cash, fixed income assets (bonds, T-bonds), and “value” companies. These are the least speculative markets. That usually means companies with sales, fundamentals, and dividends. Let’s say a company like Coca-Cola.
Is the problem fiat money? I am afraid that the economic problem is much more complex than that. “Bitcoin fix that”. A hard currency system is not a panacea. That is something already lived. With catastrophic results. The problem is that now everything is politicized. Everything is a political discussion. And what each side does is defend its dogma. And any columnist with a different opinion is probably a Soros salaryman. Fiat is the problem. And a hard coin is the solution. Such simplicity should raise suspicions. The world is much more complex than that.