Gold / Commodities Crash: Depression?

The reasons behind the gold crash

US, Europe, and Japan are all in a depression. We just don't know it because governments are spending about 10% more than they can take in and the central banks are flooding the system with currency. They are delaying the inevitable, and possibly making it even worse when it finally arrives. All the printing is now leading to a currency war which is just a variation on Smoot-Hawley.

Sadly, these depression cycles need to happen. They are part of capitalism (not the perfect economic system, just better than the alternatives). Because of technology / globalization, there is currently too much capital and labor chasing too few opportunities. The result is falling asset values and labor rates (if not for the borrowing/printing, it would be true in absolute terms; because of it, it is true in real terms). There is a massive economic displacement that has to be resolved.

The best thing governments could do right now is let capital and labor flow freely so they can find their new forms of wealth creation. Instead, governments are using the opportunity to grow their power and restraining capital and labor movement, thus making it worse. Central banks are trying to flood the system with capital, but that capital is trapped by bad fiscal, regulatory, and other policies. So the multiplier is abysmally low.

Keynes' idea was that government could smooth these cycles by bringing money in during good times and spending it during bad. Interesting theoretical concept, but it assumes certain intentions and wisdom in government that are simply not the reality.

If prices fall by 3% and wages fall by 4%, then wage earners lose 1% of their spending power. That would be called a depression. Instead, because of all the government / central bank intervention, prices are rising by 3% and wages are only rising by 2%. Same 1% spending power loss. To the bulk of the middle class, those two scenarios are largely indistinguishable. Where it matters is to those with large wealth and large debt, to whom income level is irrelevant.


Keynes' ideas have never been put into practice. Keynes' idea was that the government runs a surplus during good times and uses that surplus during down times. Since the US became a "debtor nation" in the 1980's, we have had several ups and downs and never run a surplus.* Keynes would be rolling over in his grave is he knew people were using his name to defend running 3-4% (of GDP) deficits during "good times" (the GWB years) and 8-10% deficits during down times (now).

The nature of government and politics makes true Keynesian economics almost impossible. Government's natural propensity during good times is to use the extra revenue to "buy power / votes". The primary difference between Keynes' economics and Hayak's is their assumptions about the realities of government. Most of their theoretical economic models are remarkably similar.

* before you think it, Clinton never had a surplus. During his 8 years, the Soc Sec surplus was close to $2 trillion. That's the amount of money that should have gone into the Soc Sec trust fund but was spent elsewhere. When you factor that it, even the small "surpluses" at the end of his terms did not exist.