War And Gold (Part 1)

Tuesday, March 29, 2016

gold barMany who have arrived at this site know that in addition to being an active investor in the precious metals markets, I am also an outspoken critic of the US and Western involvement in the wars in Afghanistan, Iraq, and beyond.

Such criticism comes from my direct experience in the wars. During two six-month deployments to both Afghanistan and Iraq, I worked primarily on the predator-drone program and several other reconnaissance technologies for certain agencies within the US Intelligence Community.

And so I often get asked the question - What is the link between war and gold?


The short answer to the above question is gold stands in the way of government's ability to conduct perpetual warfare. It is only in the modern era of purely unbacked currency that world governments are able to engage in ceaseless and unwinnable international war far beyond their economic means.

Both modern and historical accounts will show this. A government that must pay for its spending with a currency backed by gold, silver, or any other tangible commodity cannot engage in continuous war, because it cannot possibly tax its citizens sufficiently to pay for these war expenditures.

Gold is a fiscal-discipline enforcer of balanced government spending, and for this reason, throughout history, governments have attempted to distance themselves from its limitations. However, again universally throughout history, governments attempting to spend more than they collect via taxation have this discipline imposed upon them by the gold market itself.

Such has happened over and over again throughout the last 5,000 years, and it is happening again today.

Properties Of Gold

Throughout most of recorded history, gold has served as money.

It is not perfect in this capacity, but it is the best that we have seen as a society thus far. Many other things have been tried and found to be inferior to gold for the purpose of money, such as seashells, gem stones, and paper. However, time and time again throughout history, societies return to gold as a store of wealth.

A few of the reasons why people have found gold to be well-suited for storage of wealth include:

  • It is extremely rare. All of the gold ever mined in the history of the world could fit into two medium-sized western houses.
  • It cannot be fabricated.
  • It never corrodes or rusts.
  • Gold is the most malleable of all metals. One ounce of gold can be spread into a sheet of nearly 300 square feet, making it easily divisible.
  • It is one of the densest metals, and as such, is extremely difficult to counterfeit.
  • Gold maintains its value over decades and millennia.

Compare this to fiat (Latin for "let it be so") paper or digital money that is printed or electronically created by central banks today:

  • Loss of value every year due to inflation.
  • Is often counterfeited.
  • Can be printed at will by politicians and central banks for insider use.
  • Can be electronically stolen / hacked.
  • Can burn and/or decompose.

In short, gold is superior to centrally-controlled currency in nearly every facet. It is not perfect, but it is the best that we have seen thus far as a civilization.

Gold, The Printing Press, And Inflation

Just as you or I cannot perpetually spend more money than we earn (because eventually our credit cards will be maxed out), governments, too, cannot perpetually spend more money than they take in through taxation.

That is unless they control a printing press.

In the modern era, for the first time in recorded history, not a single world currency is backed by any tangible commodity. In other words, each government controls an infinite money-printing press.

Again, this has never happened before in the history of civilization. It is important to note that most key technological revolutions, including the colonization of the Western Hemisphere; the Industrial Revolution; and the invention of the steam engine, the telephone, and the automobile all happened on a gold standard. Unbacked  fiat currency is clearly not necessary for society to progress.

Through the modern fiat printing press, governments today can tax their citizens, indirectly and obscurely, to pay for things they would not otherwise be able to budget for.

This indirect tax is called inflation. While inflation is generally assumed to be a natural process akin to the blowing of the wind or the movement of tides, it is actually a very, direct human-created effect.

Inflation is caused by the creation of excess money.

An Example Of Inflation

For example, imagine there are $1 billion dollars in existence, equally divided amongst all citizens. Now imagine the government wants to engage in an international war and needs to tax all citizens 100% for the full $1 billion to pay for the war.

Obviously, the government would not be able to impose a 100% tax on citizens to pay for the war. There would be a revolt if it tried to do so.

But what if the government instead printed $1 billion in new dollars, and spent those to pay for the war. What would happen?

Did the government just create new legitimate money out of thin air? Of course not. If it were that easy to create new wealth, the government could simply print all the money it ever needed and never have to tax us for anything ever again. Indeed then, no one would ever have to work if we had a benevolent government that could simply print and distribute new money to its citizens ad infinitum.

So what happened here in our theoretical new $1 billion war expenditure?

The government, by printing this new money, has actually devalued the entire rest of our currency by 50%. Whereas previously there were $1 billion in circulation, there are now $2 billion. Yet the same amount of goods and services are still in existence. The government has, thus, devalued all of our money in exactly the same proportion as if it had taxed us directly.

It has just done so in a way that not one person in a thousand is able to recognize. The result of this inflation is a rise in the prices of food, rent, and other necessities of life. That is how we pay the inflation tax.

And, thus, the government can engage in continued overseas war - war that would otherwise have previously drained the Treasury and forced a withdrawal. The government can do so as long as it continues to have a monopoly on the printing press and a citizenry that does not understand that it is being taxed by this means.

To Be Continued in Part II...

Christopher Aaron

Christopher Aaron began his career as an intelligence analyst for the CIA and Department of Defense. He served two tours to Afghanistan and Iraq between 2006 - 2009, conducting pattern-of-life mapping for military leaders.

Mapping shares similarities with technical analysis of the financial markets because both involve the interpretation of repeating patterns found in human nature. He is the founder of iGold Advisor, providing research on the precious metals, and iGlobal Analytics, featuring technical analysis of the global capital markets.

Christopher speaks regularly on the cyclical patterns found within the financial markets and on international policy. He has been featured in the New York Times and NPR news amongst other publications.