I read about the desire expressed in some quarters to return to gold standards.The world is confused on the international monetary and exchange front, after abusing it for 4 decades under the pretence that they knew it all.

Each country played its own game, printing currency, artificially controlling exchange rates, fanning or dousing the demand for goods or money depending upon the situation, etc. Each played to its own gallery but sadly that works only to a very limited extent in a connected world of interdependent economies. The Laws of economics kept working unmindful of these shenanigans and finally the day of judgement came for countries whose economies were over-extended when the derivative-led collapse happened in 2008.

To put it simply, in the developed world, people financed their today by using their childrens’ tomorrow. Derivatives totalled over 20 times their underlying hard assets and 8 times the global GDP! That was like smoking pot with money borrowed from the drug dealer. The latter got rich quickly. I concede that he may never get fully reimbursed but he still has some power to control his customers and we all know what happens to druggies!. It will be very difficult to convince druggies and their families to get detoxed quickly. That is what going back to Gold standards will be like.

They know that they have to cut back and accept austerity as a way of life for some time till they can restore some balance. Politicians will be scared to administer the required detox treatment. Germany, under Merkel may be bold but the US wants a QE2 to ease the transition from being spend thrifts to mature spenders fearing withdrawal symptoms that would destroy their vote banks. It is in their interest to postpone the treatment in the hope that time would heal (a new dawn may bring new solutions) or that it may be left for their successors to deal with it.

It is evident that while the current situation is untenable, moving back to gold standards will be difficult to implement. A New Brettonwoods will emerge after a lot of debate. Before that we will need to see another crisis of debt in some parts of the world and new asset bubbles created elsewhere by those exploiting easy money crossing fault-lines caused by cheap money and artificial exchange rates.