The True Consequence of Ending the Gold Standard

The single most important chart for understanding the current state of the US financial system is the following:

US Gross Domestic Product vs. US Total Debt Securities, Trillions US Dollars (1945-2016).

In simple terms, the above chart reveals that once the US abandoned the Gold Standard completely in 1971, the amount of debt in the US financial system skyrocketed relative to the real economy.

As a result of this, by the time the mid-1990s rolled around, debt levels in the US financial system had become a systemic risk: with this much leverage in the system, even a brief bout of debt deflation (when debt markets deflate) would induce a systemic crisis.

If you don’t believe me, consider that the Great Financial Crisis of 2008, the one during which everyone thought the world was ending, was the small “dip” in the dashed line in the chart above.

Because of this, the US Central Bank, called the Federal Reserve or “the Fed,” has resorted to intentionally creating bubbles in various asset classes in order to keep the financial system solvent.

There’s one big problem with this however.

Asset bubbles ALWAYS burst, triggering crises.

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