Of course even when Nixon completely detached the dollar from gold we had a very very modified gold standard. But at least there was some tie to reality.
Now we live in an almost completely fiat system, though it can be argued – well – that oil is the de facto backer of US currency these days, the so called petrodollar. (Though some do not buy this argument.) Regardless we live in a highly financialized world with lots and lots of cheap money floating around. Those who are closest to the printing presses, the banks and the rich, get this cheap money first, before it’s made cheaper. As such so long as the paper keeps spending and the privileged can keep pace with the money printers things generally are good for them. Those of us who live farther from the printing presses see our dollars decline steadily along with our standard of living.
For ordinary people, the result is an inability to maintain their wealth without risk. With gold as the monetary base, the saver has three possibilities:
- If the saver trusts the stability of the economy and of the currency, she can invest her money in an investment project and make a return on it. In this way, she maintains her assets in non-liquid form with an expected return. However, she faces the risk of loosing her assets if the investment is bad.
- If the saver does not trust the stability of the economy but trusts the stability of the currency, she can keep her assets in a bank account. Here her assets will be liquid and they will maintain their value without risk.
- If the saver does not trust the stability of the economy and of the currency, she can maintain her assets as gold and stay liquid (gold is the base currency). This can help protect the value of her assets from economic and monetary turmoil.
In a system without convertibility, like the one we have lived in since 1971, the third option disappears. In other words, if a person thinks the economy is entering a recession (economic instability) and that the monetary authorities are behaving irresponsibly by, for example, monetizing too much debt (monetary instability), she is forced to choose between losing her assets with an investment project or by keeping liquid balances that will depreciate as a result of careless monetary policy.
Economic agents who want to protect themselves against inflation must either forcibly buy illiquid real assets — capital goods or real estate — with the danger of losing them (because of economic or housing crises) or maintain a currency that will lose its value because of bad monetary policy. Leaving the system by remaining liquid is no longer an option, effectively turning everyone into a speculator.