From an Arnold Kling article called, Fundamental Causes:

The claim that this crisis was caused by “deregulation” is a claim that government needs to exercise more power. Right now, that is the conventional wisdom of the establishment. There is no mainstream newspaper or politician raising any doubts about the wisdom of increasing government power. The free market is now a fringe phenomenon, and those of us who support it are irrelevant.

It is a bit depressing right now for us on the free market fringe, but I think Kling is a little too pessimistic. More interesting was this comment on the same post:

Well since we’re on the subject of what was done to quell speculative excess in the 1930s, the 800 lb gorilla in the room happens to be Bretton Woods. Why? What led to derivatives (recently rightly referred to in Congressional testimony as the latest incarnation of Bucket Shop practices) engulfing the world monetary system? It was none other than the end of the system of settling imbalance of trade among nations in gold. After the Nixon administration pulled the plug on this in 1971 the scene was set for a global casino of currency speculation. One bubble after another was created and blown out. Now we are at the point of either attempting insanely to further hypothecate our economies or to return to the Bretton Woods system of stability.

This commenter is correct in my opinion. The underlying problem for the world economy is the fiat, floating rate currency regime. I have been attempting to calculate the cost of this insane policy but I haven’t been able to quantify it yet. How much capital is wasted each year on the basically useless activity of currency hedging? There is an additional cost associated with hedging the volatility of commodities that are more volatile in a floating rate regime. And companies rarely get these hedging activities right; there have been numerous reports of big losses associated with hedging, particularly of oil:

Citic Pacific shares plunge after forex-hedging loss

Gol Reveals losses on currency fall, fuel hedges

Oil Hedge Losses Sink SemGroup

Fuel Hedge Losses mounting for Airlines

We need a stable currency and the only way to get there is a gold standard. Unfortunately, no politician is likely to advocate such a thing since it will reduce government spending and therefore reduce the power of politicians over the economy.

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