Charles Delvalle

It’s been awhile since I talked about monetary policy.  But the temptation is simply too much for me to ignore.

I don’t know why I’m so enthralled with researching taxes.  It’s entertaining cocktail talk, really.  By showing your position on taxes, you say a lot about who you are as a person.

Are you the type of person who goes for a flat tax with no exceptions?  You’ve probably never been poor before.  And you’re also probably a Republican or Libertarian.

What was that?  You want to raise taxes on the rich?  You’re probably a Democrat.

Now of course this doesn’t always work out that way.  And that’s what makes these debates interesting.

That’s why I spoke out and told everyone how I felt about taxation in the United States.  I went on to talk about how tax cuts don’t always pay for themselves and that by making huge, irresponsible tax cuts, you take away from the efficiency that a few, targeted cuts could have.

I also talked about how tax cuts can increase inflation.  That had one of our readers - Mark L. - scratching his head.  So he sent an e-mail asking…

How would inflation go up if taxes are cut "too much"?  What's inflationary about me keeping more of my money to spend the way I want, versus the Government confiscating my money to spend the way it wants?

Mark, the best way to think of it is like this: The government generally uses money to pay off debt, not increase demand.  By giving money back to the taxpayer, you stimulate demand.

Imagine if all taxes were rolled back and everyone had an extra couple hundred bucks to spend. That would certainly add to inflation pressures (since it’s like getting a raise).

But Mark, you also made the statement that…

To combat inflation, we should go back to the gold standard -- and get rid of the Fed:  The Fed prints fiat money, which ultimately fails every time it's tried!

Mark, wouldn’t you say that the gold standard also failed?  If it hadn’t failed, we’d still be using it!

The problem with the gold standard is that it doesn’t follow human nature.  Let’s face it, most people want something for nothing.  If you back every dollar bill with gold and prevent more dollars from being made (because there’s no gold to back it up), then it goes against this idea of something for nothing.

So what would happen if we went back to a gold standard?  Within one or two nasty wars, we’d be right back off of it.  I can almost guarantee that.  How am I so sure?  Because people always want something for nothing.

And if you think about it, this is why we’re in the trouble we’re in.  Politicians promised to give people something for nothing.

Did we do anything to deserve the $600 refund that’s coming to us in May?  Not really.  All we did was get ourselves into this mess.

Did Alaska need a highway to nowhere, bought and paid for by the federal government?  No way.

And finally, is it right for the government to continue to make more money, just because they can’t control spending?  Not at all.  It’s just another example of the government trying to get something for nothing.

If we know that people want something for nothing and that democratically elected governments will eventually give people what they want, how could a resumption of the gold standard ever work? It wouldn’t.

To think it would is to expect a full-on transformation as to how the government is run.  More importantly, you’d need to change human nature.

One more thing about the gold standard is that while it would control inflation better, it also introduces deflation into the equation.  And if you recall, deflation was the number one reason why the Great Depression was as nasty as it was.

Now I know why a lot of resource bugs call for the gold standard.  They like the idea of having money backed by something real and tangible, not an empty promise.  And I have to admit, I’d love to have a chance to walk into the bank and exchange my dollar bills for gold.

But let’s face it, should the financial system collapse today, do you think you could walk out into the middle of financial Armageddon and hand someone some gold in exchange for wheat?  No way.

It’s not like Iraqis were handing each other gold bars in exchange for Nikes when Iraq was taken over by the U.S.  In that situation, I’d have much rather had oil, not gold.

And let’s not forget the millions of people just aching to get into your home to find something worth taking.  If you have gold, you might end up being killed as it’s stolen from you.

Some might say that at least they can take their gold, go into another country, and do business. Well, if the U.S. financial system collapses, it will take the world’s financial system down with it. Don’t forget, the dollar is the standard.  And countries have trillions of them sitting in their bank accounts.

While everyone is predicting the death of fiat money, I happen to think it simply won’t come around.  Should the world financial system collapse, it will take all of a few weeks for world banks to pardon all debt and set currencies back to some “fair value.”

Don’t get me wrong, there will be some insanity going on.  But it won’t be the end.

It’ll just be a hot fix that leads to the resumption of the norm … a resumption of life how we know it.

To your success,

Charles

P.S.  To let me know what you thought of today's article, send an e-mail to: feedback@investorsdailyedge.com.

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