Jeff hit the nail on the head with the
fiat currency point; fiat currency not only enables governments to make promises to their people that they can't deliver (entitlement programs), but it also allows governments to wage war without immediately palpable fiscal consequence, and it allows politically popular but utterly wasteful government spending to continue year after year. Also, the fiat money system is directly related to
fractional-reserve banking, which when combined with central bankers who attempt to manage economic activity by means of interest rate manipulation, and politicians who pass legislation encouraging a particular form of economic activity ("Every American should be able to own a house, no matter what your income level is, because it's the American dream!"), you end up getting getting gross distortions in the economy, where entire sectors experience an artificially induced boom, which is destined for an inevitable bust. I am not certain that
business cycles would be erased entirely if there were no central bank and a gold backed currency, but I
am certain that when interest rates are set on the market, as a reflection of the pool of real savings in an economy, rather than by central bankers who believe they can "guide" economic activity better than millions of working/saving/spending/investing private citizens and businesses can with their own money, that any booms and busts will be substantially smaller both in severity and time duration.
The thing that pisses me off most about the typical popular calls for greater regulation of bankers, is that most of the regulations in place already are all just poor attempts to address the inherent problems with fiat currencies and fractional-reserve banking. And don't even get me started on deposit insurance, like the
FDIC we have in the US; what an absolute freaking joke. It's meant to make a bank depositor feel safe and thus prevent bank runs (which would wipe out a fractional-reserve bank, which is inherently insolvent), but in doing so, it essentially subsidizes risky lending practices by banks, which in turn makes bank failures and financial crises more likely. Not to mention, the FDIC has only about 1-2% of the money that it supposedly insures; that is, the FDIC would need to be bailed out by the Federal Reserve if there were enough bank runs or bank closures, and in doing so, the Fed would instantaneously steal a large portion of the purchasing power of all holders of US Dollars in order to create the money needed to honor those lost deposits.
The gold standard is the best option, period. Money was never intended to be a loosely-defined concept with an unstable value- money is simply the evolution of bartering, as economies outgrew the practicality of trading one specific physical good for another. As
Murray Rothbard puts it,
Money did not and never could begin by some arbitrary social contract, or by some government agency decreeing that everyone has to accept the tickets it issues. Even coercion could not force people and institutions to accept meaningless tickets that they had not heard of or that bore no relation to any other pre-existing money. Money arises on the free market, as individuals on the market try to facilitate the vital process of exchange.
He continues,
But of what direct benefit is an increase in the supply of money? Money, after all, can neither be eaten up nor used up in production. The money-commodity, functioning as money, can only be used in exchange, in facilitating the transfer of goods and services, and in making economic calculation possible. But once a money has been established in the market, no increases in its supply are needed, and they perform no genuine social function. As we know from general economic theory, the invariable result of an increase in the supply of a good is to lower its price. For all products except money, such an increase is socially beneficial, since it means that production and living standards have increased in response to consumer demand. If steel or bread or houses are more plentiful and cheaper than before, everyone's standard of living benefits. But an increase in the supply of money cannot relieve the natural scarcity of consumer or capital goods; all it does is to make the dollar or the franc cheaper, that is, lower its purchasing power in terms of all other goods and services[...]Hence, the great truth of monetary theory emerges; once a commodity is in sufficient supply to be adopted as money, no further increase in the supply of money is needed. Any quantity of money in society is "optimal". Once money is established, an increase in its supply confers no social beneft.
Anyway, I could go on and on about all of this, but basically, the bottom line is this: the current fiscal and economic woes facing the world can all be traced neatly back to fiat money and fractional reserve banks, which the entire modern world has been built on. My advice to every nervous person out there with some savings, is to buy gold and just sit on it until the current mess blows over...it
will blow over, and it will probably be pretty catastrophic, for the US in particular, as our nation has a shocking national debt and an unfathomable amount of unfunded liabilities (Social Security, Medicare, etc), something like $79 trillion. Once the world realizes just how unwise it is to continue holding and spending US dollars as a
reserve currency, then the US will be forced to face its own fiscal problems, and it will be very, very ugly for Americans. Cheesebone made a great point, too- the longer that governments try to avoid simply addressing their fiscal problems, and instead lean on the hope that more bailouts and more printing-press stimulus will inspire market confidence, which they hope will lead to economic stability, the worse the underlying imbalances become, and the worse the final day of reckoning.