Will 'Sandy' stimulate the ‘US’ economy?

‘Sandy’ suspends markets

This week, the US stock market closed for a couple of days, an unusually long period of time for suspending trade. This was on account of Hurricane ‘Sandy,’ which was reported to result in US$20 billion of damage.

Good disasters?

If we are to go by popular economic theories, ‘Sandy’ is actually a boon to the struggling US economy already deep in deficits, debt and other obligations. According to prevailing economic doctrines as exemplified by the late John Maynard Keynes, the mere fact that workers will be hired to rebuild a hurricane-struck area, would increase employment and get people to spend, thus circulating money instead of letting it sit idly in the bank.

Gold restrains monetary policy

In connection to this, a gold standard or gold-based currency is a hindrance to this spending policy. Because of the relatively stable supply of gold, banks under a gold standard would not be able to issue credit beyond what they have in loanable funds. The private sector then could not go about with such stimulus spending on its own. Or rather, the spending for this would be more in line with actual savings.

Under a gold standard, the government would only be able to fund its ‘stimulus’ programs by raising taxes, which is more likely to get an outcry from people, because taxes are a more obvious means of taking from incomes. Government spending is thus kept in check.

Good credit and bad credit

But once gold is removed as a barrier to credit expansion, people would then tend to consume more than they actually produce. Imagine a teenager given a credit card for the first time. If they wanted to buy a certain good for a hobby, are they likely to acquire it by working for several months… or by swiping a Mastercard through a credit card machine?

Not to put down credit. Credit is a useful way of getting productive ventures on their feet. But it has to be based on real savings for the system to be sustainable. Only in this way are creditors more certain to get back what they lend with interest. Interest rates themselves are kept at sustainable levels only when credit doesn’t go beyond supply of loanable funds.

Immediate and overall effects of ‘stimulus’

The reason government stimulus programs are so popular is because their apparent positive effect is immediate. When job numbers rise as a result of certain rebuilding programs, it seems that the disaster is actually a boon. This is then used to justify easy credit policies and spending programs. It is not asked if such 'prosperity' is actually sustainable after rebuilding is done.

The illusion comes from focusing on specific sectors, while ignoring the diminutive effect on other sectors. When a hurricane occurs, people divert resources to damaged sectors instead of spending on other consumer goods or saving for future investments. The net gain to the economy from these programs is zero or less, considering the wasted opportunities that never see the light of day.

Gold’s role in protecting savings

The current financial crisis attests to the impracticability of running on credit, or of allowing fiscal and financial policy to dictate what is done with a community’s wealth.

The 400% rise in the gold price, over this past decade of financial recklessness, is no coincidence. In spite of the flak gold receives from traditional investors, it is a market commodity that retains its purchasing power amid devaluation of currencies, and is thus recognized as a safe haven.

Gold and a sustainable economy

This is not to say that repairs shouldn’t be undertaken when disaster strikes. The point is that destruction should never be the basis of policy. Providing work for work’s sake is no substitute for producing according to what consumers actually want and need. A sound monetary system backed by gold is most conducive to maintaining, and growing, wealth, because it restrains wanton spending.