By pegging currencies you lose the free market in currency trading. Lose that and the ripple affect on economies and other markets would be in orders of magnitude.
The Fiat Money Hook Written by Daniel M. Ryan
Sunday, May 29, 2011
Federal Reserve Notes have lost more than 95% of their purchasing power over the lifetime of the Federal Reserve. It's quite clear that Federal Reserve monetary policy has had inflation as its centerpiece. Despite lip service being paid to price stability, the Fed always tilts towards inflation. If price stability were held to strictly, the central bank would view 2% inflation with the same alarm as it does 2% deflation. The same goes for 10%.
Obviously, the Fed and other central banks are far more tolerant of inflation than deflation. The reason given is that deflation means another Great Depression, while high inflation means only economic difficulties. Inflation means pain, but deflation means serious injury. We tend to accept that rationale because the Great Depression was the last time that deflation appeared, with the exception of miniscule and ephemeral episodes. Since we don't want to run that risk, many shy away from supporting the gold standard. The false belief that the gold standard was the cause of the Great Depression – now debunked because of all-fiat Japan's Lost Decades – still holds sway.
Never mind that the deflation rate was higher in the 1920-21 recession, which cleared up on its own and relatively quickly.
Of course, holes in the official mythology don't imply that there won't be pain if inflation stops. We’re discovering the hard way that fiat money is addictive.
George Washington knew well what our great-grandparents forgot. In
http://gwpapers.virginia.edu/documents/constitution/1787/bowen.html a letter to Jabez Bowen, he wrote: "
Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice."
We now know it too, not from foresight but from hard experience. We're now living in the “New Normal," and the honest are oppressed. We have seen new breeds of fraud and injustice. The question is: how did fiat money get accepted despite George Washington's warning, and more recent warnings that compared fiat money to an addictive narcotic?
The answer is: fiat money pushers held themselves up as doctors. Fiat money and central-bank inflation were compared to medicinal narcotics. This portrayal is easy to buy into, especially for someone who's been injured. When I smashed my forearm and wrist in a way that presented a complex challenge to a surgeon, I availed myself of all the medical morphine that was offered. After I got out of the hospital, there was a time when I literally could not get to sleep without a dose of Percocet.
The fact that a lot of narcotic addicts started off with medical narcotics, prescribed to relieve or lessen excruciating pain, went by the board. Fiat money was accepted as a needed painkiller.
Another selling point of fiat money, heard more in the 1950s and '60s, was that fiat money can be used to generate "good" inflation. Back then, it was widely believed that a little inflation was a good thing. By lowering real interest rates, consumption was stimulated and so was investment: inflation, in moderation, was good for growth. This claim, which depended upon savers and bondholders being bled for the sake of GDP growth, spoke to the times. The '50s and '60s, of course, were the decades when American growth seemed unstoppable.
Given that claim, and its plausibility, another analogy comes to mind: inflation is like smoking.
One of the mysteries of tobacco smoking is why so many people indulge in the habit despite the associated dangers. Recent medical research has found that
http://www.dailymail.co.uk/health/article-1034701/Smoking-good-memory-concentration.html smoking cigarettes improves memory and concentration.
In other words, smoking cigarettes can temporarily improve productivity at the long-term cost of lung cancer. The analogy fall into place easily: just as cigarettes give a temporary boost to concentration, fiat money gives a temporary boost to productivity. If both lag, another dose will get us running closer to our potential. It is a fact that in an economy with fast broad-based growth, like America in the '50s and '60s and mainland China now, smoking is popular. Some people take up smoking because their memory and concentration have been wrecked, like post-traumatic stress syndrome sufferers; they use cigarettes to self-medicate, just as central banks use inflation to self-medicate an economy that keeps putting along sub-normally.
The analogy doesn't stop there. Just as long-term cigarette smoking eventually triggers the unchecked growth of cancer cells in the lungs, fiat money over the long run triggers the unchecked growth of prices.
Also, quitting smoking is notoriously hard. Fiat-money proponents never tire of pointing out that going back to the gold standard will mean a lot of pain and wrecked performance, which is similar to the reasons smokers give for not giving up the smoking habit. "I can't quit; I'll be a wreck." "I won't be able to do my job." "I'll be in a daze for months." "I'll be a zombie."
"We can't go back to gold – there'll be more busts." "A gold standard means no credit." "A gold standard means no monetary stimulus, which will wreck our growth." "Going back to gold means a wholesale credit collapse – a zombie economy." Not unlike dedicated smokers,
dedicated fiat mavens say that we're hooked on fiat and there's nothing we can do about it.
Given that we're habituated to fiat money, and the government deficits that fiat has made possible, going back to gold will involve certain dislocations. If we're willing to tough it through, we'll have a healthier economy and the risk of commerce-ruining inflation will be gone. There's never been serious inflation with a gold standard, only with fiat. It's not a stretch to say:
"WARNING: Sound Economics Has Determined That Fiat Money Causes Inflation."
