On the Feasibility of a Return to a Gold Standard

***   This is fiction.   ***

 

This is an IMAGINARY discussion in the home of an important Federal Reserve official in the year 2016 …

Federal Reserve Official #1“We created, printed, swapped, loaned and guaranteed $16 Trillion or so in response to the financial meltdown in 2008.  We quadrupled our balance sheet with about $4 Trillion in dodgy asset purchases to bail out commercial banks and our friends in New York who own the politicians.  All those dollars didn’t help much.  And now I’m worried more bad news and financial trauma are coming, the dollar will sink further, and in several years a million angry people will march up the steps of the Eccles building and resort to violence.”  He sighed.

Official #2:  “Don’t be naïve.  Of course the dollar will weaken, but even worse are the yen, the pound, and the euro, not to mention the yuan and the ruble.  You missed the point.  We bought enough time to create a diversion for what we both know is coming.  We’ll get a war in the Middle-East or Europe if the White House follows orders.  Then we have a guaranteed excuse and a distraction and we blame it on Russia or Saudi Arabia.”

Official #1:  “But what if we proactively strengthened the dollar?  I’ve been thinking that we should rebuild our currency and expect no help from the politicians.  That economist Bassman got me thinking.  I have a proposal, and I know it is crazy, but hear me out.  I propose we print enough dollars to purchase over 10,000 tons of gold.  Yes, I know, gold prices will rise and food and energy prices will jump, but we need inflation so that’s a good reason to push gold prices higher.  I suggest we print $200 – $400 billion, which is chicken feed, and buy all the gold anyone will sell at say $2,000 per ounce.  We accumulate 100 – 200 million ounces of gold and we get an inflationary pop in other prices.”

Official #2:  “Have you gone mad?”  He starred at his colleague in shock.

Official #1, on a roll, continued, “And then we wait a year or so, print another $400 billion and buy another 100 million ounces of gold at $4,000 per ounce.  We announce this will be the last purchase and people will flock to sell their gold.  It is amazing I know, but people will trade real gold for pieces of newly printed paper.” 

“A year later we announce another extraordinary purchase, print $600 billion and offer to purchase gold at $6,000 per ounce and swear this is the last such purchase.  That adds another 100 million ounces to our gold horde.”  

“A year or two later we print another $ trillion and offer to buy 100 million more ounces of gold at $10,000 per ounce.  By then we have only printed about two $ trillion but we have accumulated about 400,000,000 ounces of gold – over 12,000 tons of gold to back the US dollar.  The dollars cost us nothing, we created the inflation we wanted, you and I walk away with 1,000 ounces of gold each, and we go to work for the IMF.  We have backed the dollar, strengthened the US economy, and the Fed has real gold.”

Official #2:  “Okay, you have gone completely bat-shit crazy.   You should be on medication.”

Official #1:  “No, you don’t get it.  I’m perfectly sane.  In the long term we both know the dollar is toast, but right now we have an opportunity to create trillions of dollars and buy real stuff with dollars – like gold.  Why you ask?  Look at Japan – a dead-man-walking economy that will implode because of their incredibly large debt.  In ten years the US will probably be there, in the same shape or worse, and by then we may not be able to get any gold.  The whole system might come down unless we back the dollar fairly soon with something real – like gold.”  

“Russia and China are buying all the gold they can get, so they’ll eventually overpower everyone economically, unless we nuke them or economically crush them.  Basically, we go to a gold standard fairly soon and save the dollar, or they’ll implement a gold standard and the dollar sinks to toilet paper status.  By the way, how well do you speak Mandarin?” 

“Besides, we need to inflate away our debt and gold at $10K will help.  Ten years after our final purchase, gold will sell for $20K or $30K but who cares – the dollar will be better than every other currency, the debt and inflation problems will be nasty, but far better than if we had done nothing, and we have taken care of ourselves and our friends on Wall Street.  The average Joe will be screwed, but he is screwed no matter what anyone does, so there is no point worrying about him.”

Official #2:  “Okay, I agree we need to support the dollar.  Ever increasing debt and paper currencies have never worked in the past and they aren’t working now, even though the system hasn’t collapsed yet.  You got that right.  Nobody cares about the average Joe – right again.  Japan is not the model we want to follow – right again.  And nobody wants Russia or China to rise to world dominance, so maybe we need to shore up our failing dollar.”

Official #2 downed half a glass of Scotch, paused, and shouted angrily at Official #1, “But we don’t do gold!  We do digital dollars.  With a gold standard it’s tougher to suck out our skim, and the whole damn financial system is going to crash anyway, so there’s no reason to try to stop it from crashing by using gold.  Stupid! Stupid! Stupid!”

Official #1:  “You still don’t get it.  We print dollars by the truckload, like we did in 2008, buy gold with it, and save the US financial system and the dollar.  Sure the inflation will get ugly, especially for the average Joe, but the alternatives are worse.  You want martial law, millions dead, mass starvation and a barter economy in a country where the people have guns?  You want the average Joe hungry, trying to feed his children, and pissed at politicians and bankers while he loads his assault rifle and thinks he has nothing to lose?  Either we save the dollar by backing it with gold or we’re totally screwed in a few years anyway.” 

“A gold backed dollar sounds far better than millions dying in the streets.  Besides, after we publicly buy over 10,000 tons of gold and make a huge public spectacle of moving it into Fort Knox, we can retrieve it a few tons at a time after dark.  Nobody will know, and obviously, it has been done before.”  

They discussed late into the night, killed a bottle of scotch, and decided ….

 

***   End of the Fiction   ***

 

Yes, there are issues with this piece of fiction.  I’ll list some and readers can add others.

  1. Federal Reserve officials don’t like gold and will only back the dollar with gold if all the other choices are worse. Paraphrasing Churchill, the Fed will do the right thing, after they have exhausted all other alternatives.
  2. Revaluing gold to $10,000 per ounce will eventually happen, one way or another, given our addiction to debt, central banking, deficits, and money printing. But how we get there is important!
  3. Consumer price inflation will be ugly no matter which way gold rises to $10,000 per ounce. It will be a difficult world and a time will come when the consequences of decades of bad fiscal and monetary policy cannot be delayed any longer.
  4. Would 10,000 tons of gold be available for purchase, even at $10,000 per ounce, during the next several years? Maybe not.
  5. I doubt the Fed will initiate a program for which it can be blamed. If the Fed raises the price of gold to $10,000 they might be blamed by the masses for the price inflation that will plague their daily lives.  If the Fed and the politicians continue down our current unsustainable path of deficits, debt, and devaluation, consumer price inflation is inevitable, but it can be blamed on Russia, China, politicians, Saudi Arabia, greedy speculators, global warming, the UN, and maybe space aliens.
  6. Yes, the dollar has lost nearly 99% of its value in a century of Fed mismanagement, but what Fed official would predict the dollar will devalue further, given that the Fed is continuing the same failed policies and accelerating the dollar destruction? No, not us.  We didn’t know … We couldn’t have seen it coming …  It was all Russia’s fault.  Really!!!
  7. And finally, if the plan to purchase 10,000 tons of real gold with dodgy dollars is even half possible, doesn’t it make you wonder how the Fed can successfully “print” a few trillion digital dollars and exchange them for 10,000 tons of real and valuable gold? There is something deeply wrong with that “something for nothing” picture!  And that is a monumental problem  …   and it has created consequences for all of us  …  that are coming …  as clearly as night follows day …  and probably sooner than later …

WHAT TO DO?

 

  • Remember the reason central banks exist.
  • Remember that a debt based – unbacked – paper and digital economic system requires currency devaluation and price inflation, and usually only survives for a few decades. There will be more devaluations, inflation, and wars for “stimulus” and distractions.
  • “Negative interest rates” (Europe and Japan for now) do not indicate robust economic health. They indicate fiscal and monetary desperation.
  • Own hard assets: gold, silver, platinum, land, real estate, fine art, diamonds and more.

 

Gary Christenson

The Deviant Investor

 

 

9 thoughts on “On the Feasibility of a Return to a Gold Standard

  1. In 2016, there is a VERY REAL LIQUIDITY CRISIS in bonds, largely as a result of the Dodd-Frank Act and the massive and growing crisis of defaults on corporate bonds.

    The global economy became a Ponzi scheme in the early 1980s around 1982 after the Latin American debt crisis and not in 1971. There is no problem with the US dollar or so-called “fiat” currencies at all, and there is no “intrinsic value” to any form of currency. The gold standard was TOTALLY DISCARDED DOMESTICALLY BACK IN 1933 as that brief 60 year failed experiment was an exercise in utter absurdity and the US economy had totally outgrown any use whatsoever for a little thingy commodity such as gold in relationship to its currency.

    Little niche collectible fungible commodity metals such as gold and silver have NO FINANCIAL RELEVANCE whatsoever in today’s modern electronic currencies and economies.

    The US long used a “silver standard” until that was discarded around 1870 and briefly replaced with the so-called “gold standard” which was totally discarded domestically in the US in 1933 as an entirely failed experiment. No currency can be limited to the production of some irrelevant “thingy” commodity such as gold or anything else when the population of that currency’s country is vastly expanding as was the case of the US by the 1930s.

    Artificially constraining the growth of money supplies while the population is growing substantially CAUSES DEPRESSIONS and causes countries to fail economically.

    All currencies are backed by the current and future assets and labor and productivity of the people of the issuing country which is vastly more valuable backing then some little thingy like metal.

    There is nothing surprising at all about the current GRAND GLOBAL DEPRESSION which began in August 2007 and which has been ongoing to nearly 8 years and which will continue intensifying ever since.


  2. The gold standard was TOTALLY ABANDONED AND ABOLISHED IN 1933 FOR ALL DOMESTIC PURPOSES IN THE US. Only a tiny remnant of it was left for INTERNATIONAL settlements until that was abolished in 1971.

    Gold has NO FINANCIAL RELEVANCE whatsoever and never will ever again and the total value of all of the gold ever mined even at today’s preposterously absurd price of $1274 per ounce is less than $7 trillion with 70% of that being in the form of privately held jewelry widely dispersed around the world leaving only about $2 trillion in the form of bullion and coins most of which is also privately held.


  3. ACTUAL FACTS ABOUT GOLD

    There is nothing stable at all about the price of gold or silver.

    GOLD OF OF ABSOLUTELY ZERO FINANCIAL RELEVANCE and is nothing other than AN EXTREMELY WILDLY VOLATILE FUNGIBLE LITTLE NICHE COMMODITY.

    The total value of all of the 180,000 metric tonnes of gold ever mined in the history of the world is less than $7 trillion and 70% of that is in the form of privately held jewelry and only about $1.24 trillion of it amounting to about 32,000 metric tonnes is even owned by banks which is a TINY LITTLE SPECK OF DUST compared to global assets of around $800 trillion and a global annual economy of more than $70 trillion.

    The world long ago TOTALLY OUTGREW ANY USE WHATSOEVER FOR GOLD IN ANY FINANCIAL / MONETARY CAPACITY which is why the so-called “gold standard” was totally discarded domestically by every country in the world back in the early 1930s.

    Gold is just a TINY LITTLE TRIVIAL NICHE COLLECTIBLE FUNGIBLE COMMODITY for which the primary use has always been JEWELRY since the stuff was first discovered. The annual sales of the approximately 4,600 metric tonnes of gold supply are only about $240 billion which is less than half the annual sales of Wal-Mart alone.

    Gold and silver have NEVER been money and have merely been used to mint coins with a fixed stated nominal FACE VALUE. You can use a legal tender 1 oz. gold American Eagle anywhere in the US and much of the world where dollars are accepted for its $50 face value but that’s as close as it gets to money for gold.

    The price of a commodity does not make that commodity of any FINANCIAL RELEVANCE whatsoever in relationship to money. The price of the Platinum Group of Metals (platinum, palladium, and rhodium) has nearly always been significantly higher than gold because they are much rarer and of far greater practical use than gold, but that does not make the PGMs of any financial relevance.

    The US long used a “silver standard” until that was discarded around 1870 and briefly replaced with the so-called “gold standard” which was totally discarded domestically in the US in 1933 as an entirely failed experiment. No currency can be limited to the production of some irrelevant “thingy” commodity such as gold or anything else when the population of that currency’s country is vastly expanding as was the case of the US by the 1930s.

    Artificially constraining the growth of money supplies while the population is growing substantially CAUSES DEPRESSIONS and causes countries to fail economically.

    As to bullion forms of gold and silver, however, THEY HAVE NO PURCHASING POWER AT ALL and never did. Not to mention that their value as commodities has plummeted 39% for gold and 68% for silver over the past 4 years since April 2011.


    • My – a highly intelligent person – but I think completely wrong. We will have to agree to disagree, but I appreciate your comment as a counter-point to my thinking.
      Thank you.
      The Deviant Investor


      • China’s holdings of US Treasuries remain BARELY CHANGED right around $1.3 trillion and they do keep buying US Treasuries to replace those that mature all the time in order to keep the total outstanding balalnce right around the same amount which they NEED TO SUPPORT LETTERS OF CREDIT FOR TRADE.

        There will be no “gold backing” of the renminbi (RMB/Yuan) and that notion is totally IMPOSSIBLE as the total value of all of the gold ever mined in the world amounting to around 180,000 metric tonnes is less than $7 trillion and about 70% of that is privately owned in JEWELRY widelely dispersed around the world, while the total global GDP is now in excess of $72 trillion and total global assets are approaching $800 billion and the total value of all of the gold in existence is less than 1% of global assets.

        The remnimbi (RMB/Yuan) is the MOST EGREGIOUSLY OVERPRINTED CURRENCY IN THE WORLD and China has created more than $30 trillion of it over the past 10 years increasing their money supply from less than $3 trillion to now nearly $34 trillion despite the fact that their economy is only about half the size of the US economy of $18 trillion. The US money supply, by stark contrasts, consists of only $3 trillion in M1 with less about only $1.2 trillion in the form of printed currency, and about $13 trillion in M2. The renmimbi (RMB/Yuan) has become a proposterous joke of a currency as China has treated it just like fake monopoly money and that is precisely where its value and utility is headed.


  4. It is very unlikely, for political reasons, that we will return to a gold standard. A return to a gold standard means a severe limitation on the power of governments and all those who profit from unlimited credit creation. Can that ever happen given the indifference of people to politics ? But not only governments profit from the paper standard. Much of the social spending is enabled by the paper standard which allows bankrupt governments to continue to spend on social programs like Social Security and Medicare. So the lower class people are great beneficiaries of the paper standard. There would be more poverty under the gold standard.

    But I am not even sure that a gold standard is really desirable. As long as the purchase of precious metals is legal, I do not really mind what type of monetary system we live in. Savings in gold, paper money for investments and consumption. The manipulation of gold prices is always temporary. Eventually, gold will return to its true market value.

    A return to a gold standard is feasible only after everybody agrees that economic growth is neither possible nor desirable. We are far away from that point in time. The Soviet Union collapsed peacefully in 1990 without any bloodshed. That was possible because nobody believed that communism has any future. But it took more than 70 years for people living in the Soviet Union to change their opinion regarding communism. In the west, we are only 45 years on a pure paper standard. Perhaps we need another 40 years before we as a society are ready to give up the paper standard.


    • I agree that a gold standard is unlikely at present, is a severe limitation on government and the financial and political elite. I do not agree that lower class people are great beneficiaries of the paper standard. The upper class can protect themselves from the inevitable inflation that occurs from paper, the lower classes largely cannot. I think the lack of a gold standard shrinks the middle and lower classes at the expense of the upper class.
      Just my opinion.
      The Deviant Investor


  5. The cost of everything will quickly adjust to PM corrections
    and a loaf of bread will become $100.
    What’s been totally forgot on by many , is the adjustment
    of declared derivatives made by the criminal BIS in 2008..
    they adjusted the derivative number down fro $1 quadrillion
    to $685 Trillion, and expect us to believe none were added
    since then? we can presume that derivatives are NORTH of 2 or 3 quadrillion, and as high as 10. Every grain of sand on the planet has been leveraged with gambling debts… the entire system will be sucked into a black hole, and all currencies will become worthless… so it really doesn’t matter what dollar value Gold/Silver have .
    The illuminati central bankers want to bloody the planet with war and despaired , so they can offer their mark of the beast solution…the tenderizing process will take many years, and those who oppose it will be swept aside by natural selection… (as planned) . One day in the future,
    freedom will be taught as Greek mythology. If people don’t pull their heads out of their asses soon, we’ll be doomed to 1000 years of New Babylon.
    Georgia Guide stones this way cometh.


    • Nope. We are in a GLOBAL DEFLATIONARY SPIRAL and the cost of bread is falling right along with other food prices all across the world and that process of FALLING PRICES will continue and intensify.

      Derivatives are IRRELEVANT to the issue of currencies and are a ZERO SUM GAMBLING GAME and nothing more.

      As to the US dollar, it will continue to RISE ON THE DXY and will soon be well over 100 and on its way to perhaps as high as 164 on the DXY. It is presently right around 94 on the DXY.


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