Our Financial House of Cards and How to Start Replacing It With Solid Gold
A credit crisis has been spreading through the economic system. It began with the collapse of the housing bubble, which was the result of years of Federal Reserve-sponsored credit expansion. This follows generations of almost continuous inflation and credit expansion, in which almost everyone has become accustomed to assume that asset values will always rise.The solution is a radical reform: a full-bodied precious metal monetary system and an end to the government's control over the money supply and all of the violations of individual freedom that that control represents and makes possible. FULL ARTICLE
Comments (43)
"At $12,700 per ounce, the banks and the Fed would have enough gold to redeem every single dollar of checking deposits and currency in the economic system. (That's the meaning of a 100 percent reserve.)"
Sounds like a reasonable estimate.
What are the social implications of the redistribution of wealth this plan would produce? For example, the people who listen to right wing radio must be buying gold else it would not pay for the gold traders to advertise there. Gold traders do not advertise on left wing TV. Would the working class Republicans become the new rich?
The people who risk electrocution in order to steal copper wire . . . at 12K/oz would they kill old people for the gold in their teeth?
Published: March 25, 2008 1:47 PM
Don't let your gold fetish get in the way of your common sense. The real solution is not a gold standard, instituted and mandated by the state, but a true free market in money. Perhaps the market chooses silver instead. Or platinum. Or something else. Perhaps we will have multiple competing "standards".
But suppose we accept that notion that imposing a gold standard is just one tiny step along the way towards liberty. Do we also keep fractional banking? Will the state allow the lending of notes unbacked by any reserves? That was the historic reality of the classic gold standard. If you don't deal with fractional reserve banking, then you aren't solving the problems of inflation or the business cycle.
Austrians need to stop talking about gold and start talking about free market money. Get the government out of the money business and let the market decide!
Published: March 25, 2008 3:01 PM
Let's not forget why the founders of the country wanted Gold and Silver to represent money. There is an issue of ethics involved i.e. theft is not a policy upon which a free people can prosper.
The Federal Reserve was created by the Government such that it can override the ethics of honest money i.e. Gold and Silver.
This in conjunction with the eventual removal of Gold backing and fractional banking allowed Government to spend way above income from taxes
and banks to loan and make large profits from interest charged on fictional assets.
However the Inflation of all goods and services is the result, including booms and busts.
The gainers of the present monetary system will fight tooth and nail to keep this unethical system going as long as possible, hopefully it doesn't come to the point of explosion as did the French Revolution.
Published: March 25, 2008 4:24 PM
I continue to believe that we are headed toward capital and currency controls in the run-up to the establishment of an EU-like North American Union and the issuance of a euro-like amero, with a return to honest money awaiting the collapse of these statist monstrosities amid technological breakthroughs that are already facilitating money's re-privatization:
http://www.cipe.org/publications/ert/e32/e32_2.pdf
Either that, or regional super-states will merely be the precursor to a world state and its attendant world currency, in which case the prospects for humanity in the 21-century will be so dire as to be beyond imagining.
Published: March 25, 2008 5:28 PM
i wouldnt go killing anyone for gold in their teeth..i guess there are enough people killing others for FRNs.
what would you people be inclined to use if there was a 'free market money(s)'?
does anyone at this blog refuse FRNs for payment of anything?
i am not sure, but since the dollar doesnt really have a weight definition anymore, would it be better for a different weight unit for for gold/silver/commodity money to be used? such as grams (fractions of and multiples)? with an established use in industry and science perhaps less suceptible to alteration by the political classes.
Published: March 25, 2008 6:01 PM
Creating a pretend value of $3.3 trillion for a Fed's gold stock with a market value of $260 billion, then holding this pretend gold value in trust for the banks, which may then draw currency from the Fed to take care of any bank deposit withdrawals has the same effect as simply having the Fed lend the banks unlimited currency to meet all withdrawals.
100% pretend value gold reserve against bank deposits is simply that - a pretence. There is no real consequence of such a proposal beyond the allowance of unlimited, unbacked loans from the Fed to the banks.
Published: March 25, 2008 6:02 PM
What happens to gold mining? If we have free coinage, I see inflation as mining is extremely profitable at that price. If we don't have free coinage, I don't see how the proposal solves any problem. It merely replaces the dubious $42 definition by another dubious definition.
Published: March 25, 2008 6:04 PM
Dr. Reisman,
When you suggested that the banking system could unravel to the point of $40B, you were excluding the funds that are FDIC insured?
I had a friend who worked a couple summers at the FDIC and he said that the FDIC's estimated amount of "correct reserves" were in the 4-8% range of insured deposits. However, the FDIC (at that time) actually had reserves far, far below its stated target.
Published: March 25, 2008 6:21 PM
do you have any info of what the current costs of mining an ounce of gold are?
is it in dollars per feet drilled or some other metric?
Published: March 25, 2008 6:24 PM
The important thing that was stated in
the article is that all deposits and FRN's
would be backed (tied to) the gold at the
FED. So by definition the deposits
and the FRN's cannot expand nor contract.
It also sets a real market price in terms of
gold as to what each one of those $1 deposits and FRN's
are worth. 1/12700 of an ounce of gold.
The article is offering an alternative
to allowing deflationary collapse and/or
continuing inflation.
The author makes mention of the FED being cautious in obtaining more gold
(in other words at current appx. $1000 an ounce).
If however the FED purchased any new gold at $12,700 in Treasuries, I believe this
would work.
Govnt securities > gold > dollar
Published: March 25, 2008 7:56 PM
What a systematic, logical, and thorough analysis and prescription!
I am not surprised to see how simple the solution is nor am I surprised to see how entangling and strangling is the plight of interventionism.
The voices and the wisdom of uncompromising classical liberals will be very important in the chaos ahead.
Thanks to George Reisman for his mastery of economics and human logic and for his distinction.
Published: March 25, 2008 9:10 PM
I agree with David Johnson. Get the government out of money!
You don't have to wait: e-gold
Anything you can buy online you can buy with gold over at
http://www.goldstores.com/
Published: March 26, 2008 1:50 AM
antonio said:
I agree with David Johnson. Get the government out of money!
At an emotive, ideological and utopian level, I too agree with Johnson. But hey, cut Mr Reisman some slack: He's suggesting something that would be a workable, one-step incremental change to an inherited status-quo that promises to forestall catastrophe, while moving us closer to where we want to be.
As much as we might dream about the perfect libertarian society, implementing it overnight would present huge, discontinuous demographic shifts and much suffering.
Restructuring the economy is akin to redesigning a car without switching the engine off. Not easily done.
Published: March 26, 2008 3:59 AM
scott t
do you have any info of what the current costs of mining an ounce of gold are?
is it in dollars per feet drilled or some other metric?
Published: March 25, 2008 6:24 PM
How long is a piece of string? It varies with each mine, indeed each seam of ore. Its a function of ore richness, depth of seam and what sort of rock lies above it, labour and capital costs, and even power costs and the presence of groundwater( which has to be pumped out of the shafts while mining is done), all of which vary depending on where the mine is and what the credit rating of the company concerned is. And I daresay there are other parameters too numerous to mention.
There are marginal mines in South Africa that lie unworked when the gold price is low, and are brought into production only when the gold price goes high enough to make the effort worthwhile. Gold price goes back down again, and the mine goes dormant again.
Indeed, in and around Johannesburg, there used to be huge mountains of earth ( known locally as minedumps) that accumulated from the 1880s until the 1970s, representing what was left after the gold was extracted from the ores brought up from underground. Most of these have since been flattened and the remainder are shrinking fast, because advances in technology and the rise of markets for other more exotic elements associated with gold in the ore, have permitted these piles of waste ( tailings) to be reworked profitably.
What has added to the profitability and hence attractiveness of these reworking efforts, is that removing the mine dump ( in effect a small mountain) unlocks s the real estate value of the land underneath. And whats left of the waste after the last worthwhile mineral wealth is extracted, finds its way into the construction industry as ballast or aggregate. In some cases, its hard to say whats the product and whats the by-product - the gold or the land or the construction material!
All of which tells us that there is no basis for calculating a universal cost of mining gold - the important thing is what happens at the margin - and the gold price itself informs whether the marginal mine produces or not.
Published: March 26, 2008 4:37 AM
I like the idea of returning to a gold standard. However, I am having trouble understanding how converting the value of the dollar from 1/1000 of an ounce of gold to 1/12,700 of an ounce of gold will help. Wouldn't that just lead to a rapid depreciation of the dollar vis a vis exchange in other worldwide commodities? Or is the idea that the actual inflation of the dollar has already taken place and this exchange rate would just better reflect reality.
I would have thought that a better way to proceed would be to set the exchange value near or maybe marginally above the current value of gold at some point in the near future -- say two years. This way, the market would then balance the number of dollars and quantity of gold held by the central bank in a similar way to the mechanism utilized to restore the value of the greenback after the Civil War.
Published: March 26, 2008 5:38 AM
I am not sure if this would work.
- The Fed might need to actually offer to exchange money for gold, it may happen that nobody will trust their promise not to devalue this 'fixed' dollar later
- I don't think there is a choice between "deflation + bankrupcies" and "inflation". It seems to me that the choice is between "deflation + bankruptcies" and "inflation + even more bankruptcies later" or "hyperinflation + total collapse of economy"...I'm not sure which option is better....
The problem is that there were bad loans made that cannot be repaid. Somebody must bear the cost - in the past it used to be lender (inflation scenario) or borrower (deflation) or something in between. Somehow it appeared to be better to compell the lenders (those 'rich' people') to bear the costs - by inflating. However, with all those ARM's it seems to me that inflating may not be the option.
On top of that, the cost may be too high for either side to bear.
The suggestion to peg gold at $12.000... you would get immediate inflation - let's say 8x. This would wipe out many debts, but it would wipe out incredible all savings people have in banks. Wages would not raise 8x, they would be much, much lower, but interest rates would be much higher. A household is currently paying e.g. 1/3 of it's income to service the debts. The costs would raise 8x, wages would raise 4x. You STILL end up with household unable to service the debt! On top of that the interest rate gets to more then 20%, which - because of the ARM's - which means that even if before the household could service the debt, now they simply cannot.
There is no silver bullet. Either wave of defaults in the economy now, bigger (if it is possible) wave of defaults later or hyperinflation - collapse of money system. All fiat systems collapse - at least it may be the reason to make a better money system.
Published: March 26, 2008 8:18 AM
Another very enlightening article. Thanks!
This goes a long way to explaining the impotency of the Fed in expanding the money supply during the Great Depression and today. Greenspan likened it to pushing on a string, but it’s more like one airplane chasing (the Fed) chasing another that is in a steep nose-dive. The Fed doesn’t have the horsepower to catch its target. Because of the extreme leverage that banks operate under, the money supply falls much faster than the Fed can pump it up.
A way to return to sanity would be to have the Fed buy and sell gold in order to keep the value of the dollar stable in terms of gold. Wouldn’t that be simpler and as effective?
Published: March 26, 2008 10:48 AM
Boss: Where does Reisman propose that the money supply would not be permitted to increase under his fake value gold proposal? Where is the Fed prohibited from purchasing securities on the open market?
Reisman proposed this plan to prevent a reduction in the money supply from bank contraction.
By the way, in spite of the pretend gold value proposal, each FRN and $1 of bank deposits is worth 1/1000 of an ounce of real gold.
Published: March 26, 2008 11:04 AM
George
This credit expansion poured hundreds of billions of dollars into the purchase of homes largely by subprime borrowers who never had a realistic capability of repaying their mortgage debts in the first place.
No - this a very common misconception, designed to to deflect the blame from the true culprits, the Fed and the credit rating agencies. What the subprime borrowers had no chance of doing was to be able to make payments on ARM mortgages, indexed to LIBOR or 1-year CMT's in a rising interest rate environoment. (Note that these rates varied from a s low as 1.5% in 2002 and increased steadily to Sept 2007 when they were over 5%). This, coupled with negative amortizing loans, based on the assumption of an every increasing price of houses (as you astutely pointed out) made it impossible for borrowers who had made all their payments to refinance into a traditional fixed mortgage, due to lack of equity. This is an interest rate risk problem, that the rating agencies who packaged these loans into securities completely overlooked. (The information required for Moody's M3 and S&P levels is essentially the same as the GSA's - loans based on no income verification, low FICO score, and low equity are penalized, requiring the pool to be over-collaterized to make up for the higher projected default rate.)
The whole fiasco is a good example of what Nassim Taleb call a "black swan" - an event that has not been observed and is therefore assigned a zero probability of occurring in the future. Here the black swan is the Adjustable Rate Mortgage adjusting upwards by 4% over a 5 year period. (in the past ARM's have invariably adjusted down.)
Apart from this comment, George, this was an excellent article.
Published: March 26, 2008 1:47 PM
MIke D. "The whole fiasco is a good example of what Nassim Taleb call a "black swan" - an event that has not been observed and is therefore assigned a zero probability of occurring in the future. Here the black swan is the Adjustable Rate Mortgage adjusting upwards by 4% over a 5 year period. (in the past ARM's have invariably adjusted down.) "
Was it impossible for people to see that ARMS would adjust upward as the Fed increased interest rates?
Mike: "...these rates varied from a s low as 1.5% in 2002..."
This is the credit expansion that Dr. Reisman wrote about that "...poured hundreds of billions of dollars into the purchase of homes..." Lower interest rates cause assets to be worth more and therefore encourage banks to lend, while at the same time encouraging prospective home owners to borrow.
Published: March 26, 2008 2:55 PM
fundamentalist
Was it impossible for people to see that ARMS would adjust upward as the Fed increased interest rates?
No, obviously not. However, the mistake was to assume that when the Fed cut rates to 1.25% that they were going to stay there. For years, the Austrian School has been criticizing the Fed for interfering. You will find many articles in the archives of this site, predicting exactly what would happen at the time the Fed lowered the rates to 1.25%.
This is the credit expansion that Dr. Reisman wrote about that "...poured hundreds of billions of dollars into the purchase of homes..." Lower interest rates cause assets to be worth more and therefore encourage banks to lend, while at the same time encouraging prospective home owners to borrow.
Precisely what was said repeatedly on this site, before it happened. Also, when rates on Treasury Instruments dropped below core inflation, fixed income investors to looked towards other asset classes - hence the explosive growth in the demand for mortgage backed securities and investment grade tranches. Again, you will find many articles in the archives predicting a bubble and the bursting thereof, before it actually happened.
Published: March 26, 2008 3:36 PM
This is a well-reasoned article, broad in its scope and bold in its solutions.
Some posters have suggested that it will cause prices in dollar terms to rise across the board. I disagree with that, since it is only the gold-price of goods and services that will be affected. However, so sharp an increase in the gold-price would certainly introduce distortions. Many more gold mines would open, and people who hold their savings in gold would become wealthy overnight. The price of other precious metals would probably soar (in dollar terms), and their use in industry would be severely curtailed.
My main concern is that a gold price of $12,700/oz is arbitrarily high, and overvalues gold. Historically gold has maintained purchasing power very well over millennia. For example, using CPI as a rough measure of purchasing power, the CPI went from 6 in 1821, to 9.8 in 1913 when the Fed was established, to 211 today.
1913 seems a reasonable starting-point, when the dollar was redeemable in gold, and fiduciary media had not yet been given a leg-up by the Fed. Since then, the CPI has risen by a factor of 22. Admittedly the CPI has been understated in recent years, but a factor of 22 is consistent with (say) the price of a loaf of bread, which was 5c in 1900. But it would imply a gold price today of 22 x $20.67 = $450/oz!
Today's price of $1000/oz is probably anticipating intensifying inflation. But $12,700/oz is way over the top!
I haven't taken into account the increase in mined gold since 1914, since that has roughly kept pace with the increase in the world's population. World population today is approx four times (6.7/1.8) what it was in 1913. Over the same period, assuming that the annual increase in the above-ground quantity of gold due to mine-supply has averaged 1.7% pa, today's total stock of gold has risen to approx five times what it was in 1913. So if the average persons's demand for cash-holding has remained roughly constant during that time (a big IF!), we may disregard gold-inflation due to the increase in mine-supply.
Reisman states that the cost to the Fed of his plan is $11 bn, which is the book value of its gold reserves. That is misleading since the gold has a market value of $260 bn. But, in any case, the real cost to the Fed is ZERO. What is its reserves for if not to provide backing for the stock of dollars (including fiduciary media)? And what about its other assets - mostly US bonds? If it could somehow sell them for gold at today's price (a very big IF, for a transaction of that magnitude!), then it could fix the gold-price at more like $3000/oz. That's still too high, but maybe not too high a price for restoring solvency to the banking system.
Published: March 26, 2008 5:26 PM
An excellent analysis, but I am not so sure about the remedy. In the same way as real wealth cannot be made by printing money, real capitalization of banks cannot be made by artificially changing the price of gold (which would be applicable only to the Fed and the banks). If the market price of gold stays unchanged, this fictional gold price and fictional capitalization are meaningless.
In order to have sound money, which does not exclude paper money - it only needs to be backed 100% by whatever the market accepts as real money (gold, silver, platinum, etc.) - we would need to deflate something that has been inflating for decades and get rid of the fractional banking system. There is simply no way around it and no accounting trick will do. For political reasons this will never happen in a planned and orderly way, because the politicians and bankers would first have to come clean and explain to the masses what they have been doing all this time . Heads would be rolling. Not to mention the vested interests in the status quo and their physical and financial power. Therefore, such a radical change would only happen as a side issue or prompted by some catastrophe (natural disaster, war, etc.). Educating people about the fiat money and the fractional banking could act as a catalyst.
Published: March 26, 2008 9:16 PM
fusgerm: "1913 seems a reasonable starting-point, when the dollar was redeemable in gold, and fiduciary media had not yet been given a leg-up by the Fed. Since then, the CPI has risen by a factor of 22."
You seem to be confusing the symptom of inflation, CPI, with actual inflation -- the increase in the monetary supply. Therefore, I believe you will find that the factor of 22 is not a good predictor of the depreciation of the dollar relative to gold. That is why Reisman is referencing the monetary supply when determining the exchange value of gold.
Still, I agree that $12,700 seems like much too high of an exchange value for gold and would likely cause rapid loss of wealth on the part of the average American. Unfortunately, this plan could lead to the rapid accumulation of wealth by those who are in the know and purchase the right asset in advance. Also, it seems to me that we use many commodities as money, at least in part. Gold, silver, platinum, palladium all circulate as coins. Similarly, barrels of oil are highly fungible, useful and scarce. It appears that many countries like China are using oil as a store of value in lieu of the dollar. Therefore, gold seems to be too limited a means for restoring a free market and would arbitrarily favor gold over other "money" thus creating market distortions. I am sure this is not Reisman's intent. A better way might be to determine the total assets of the US Government and convert that to a "gold" value. These assets could then be traded for gold or collaterallized so that the government would have sufficient reserves to cover, at least in part, the FRNs in circulation and lock in a value.
Published: March 26, 2008 11:36 PM
In order to have sound money, which does not exclude paper money - it only needs to be backed 100% by whatever the market accepts as real money (gold, silver, platinum, etc.) - we would need to deflate something that has been inflating for decades and get rid of the fractional banking system. There is simply no way around it and no accounting trick will do.
You're missing two important facts. First, the only way to find out "whatever the market accepts as real money" is to basically wipe out the entire financial system, go back to barter, and then let money re-arise naturally. Not doable. You can't just choose something and say "let's make that money". But... Second: the way fiat money arose out of the gold standard was basically just an "accounting trick", too; there's no reason I can see why the same trick can't be reversed to reinstate gold.
Published: March 27, 2008 5:09 AM
I agree that Dr. Reisman's proposal is an important incremental step towards a free banking system. What is required is an emergency stop-gap measure which prevents a complete deflationary-inflationary meltdown. In that regard Dr. Reisman's plan should be taken seriously.
One issue that I believe that we need to focus on is the necessity of seperating the currency regime from the impossibility of present fiscal commitments of the federal government. If this doesn't occur soon the prospects of liberty will most certainly be deferred.
Whatever the time-frame for the ultimate destruction of the dollar is impossible to predict. It could occur as a result of the present crisis (as a result of inflating our way out of a deflationary spiral), or in the future (when the fed is statutorily forced to "buy" worthless/impossible government debt obligations.
The whole point is that the potential for a multi-generational deferrment of liberty and the concommitant violence could occur agin, as it did during the 20th century as a result of the inflationary induced Great Depression.
Classical Liberals, like us, need to re-claim the wheel of revolution as rightfuly ours ( a Rothbardian concept), as we posessed it prior to 1848, and start turning it in the "Right" (or more properly the "Left") direction.
Eliminating central control of money would be an enormous victory for freedom (in inverse proportion to its historical loss). I believe it should be the central focus of everyone of us to prioritize this issue. That's why Dr. Paul, in my view, is certainly in the Jeffersonian tradition. The national bank debate, central in the old republic, is not over. We can still win, but it's the bottom of the 9th with 2 outs and we need to rally hard.
rant over - thanks
Published: March 27, 2008 12:02 PM
Great article Mr. Reisman,
I would think an easier solution would be a quick 2 step.
1) Scrap legal tender laws, i.o.w. let the market select its most trusted, valued and easy to use currency.
2) Enforce a progressive increase in bank reserves from the current lows (10%?) up to 100%, i.o.w. deflating at a gradual rate.
Published: March 27, 2008 1:03 PM
PS: Personally, I like the concept of James Turk over at Goldmoney. Gold storage is valued in gold grams, which correlates with Murray Rothbard's idea in "What has government done with our money and the case for a 100% gold dollar".
Being in electronic form, it becomes even more flexible to use. I think that's the money of the future. :-)
Published: March 27, 2008 1:09 PM
Most ARMs are capped at 10% interest rates (at least mine was), so inflation, with the resulting interest rates increases wouldn't be a big problem if it got high enough. If it goes up fast enough, they are also limited to an increase of not more than 1% (might be 2%) each year, so inflation would benefit those with an ARM as well - though not as much as those of us with a normal loan at a low fixed rate.
Not that I want the above, but the fed has the power here to screw anyone it wants to.
Published: March 27, 2008 7:52 PM
Peter,
There is no need to go back to barter. Just get rid of the legal tender laws and people will figure out what is valuable to them and at what price it should be traded. In the beginning, most of prices would still be denominated in dollars, but we would shift away from it as it looses value and alternatives emerge. It would be messy, no doubt about it.
I don't believe that the "accounting trick" works both ways. It is easy to create nothing out of something (to print inflated paper money based, in part, on real money), but one cannot create something out of nothing (create real money or capital out of inflated paper money).
Published: March 27, 2008 11:03 PM
It is the folly of civilizations to repeat past mistakes because when one reaches its tipping point towards decline and death the chroniclers suffering through it don't record the WHO, WHAT, HOW and WHY of it. And today's chroniclers in the West are similarly failing to record ROOT CAUSES, a major one of which has been (is) Anglo-Saxon and Jewish bankers driving the UNCONSTITUTIONAL Federal Reserve as a SELF-SERVING PROFIT MACHINE; and by the way, Jewish bankers are the ARCHITECTS - the Master Minds - while Anglo-Saxon bankers follow their lead (if you doubt the charge, then you've not been paying attention these past several decades).
Published: March 28, 2008 8:29 AM
Deacon: "Jewish bankers are the ARCHITECTS..."
Jews invented modern banking because the Catholic Church wouldn't allow "Christians" to lend money during the dark ages, and they kept Jews from government and the military which were the main paths to wealth. That doesn't mean that Jews today control anything in the US. They don't. But if they did, so what?
Published: March 28, 2008 10:58 AM
Deacon: Huh?
Published: March 28, 2008 2:17 PM
Just get rid of the legal tender laws and people will figure out what is valuable to them and at what price it should be traded. In the beginning, most of prices would still be denominated in dollars, but we would shift away from it as it looses value and alternatives emerge. It would be messy, no doubt about it.
I don't think you understand what "legal tender" means. There's absolutely nothing stopping you from pricing things in bushels of wheat today if that's what you want to do. (The big thing is taxes, which have to be paid in fiat dollars)
I don't believe that the "accounting trick" works both ways. It is easy to create nothing out of something (to print inflated paper money based, in part, on real money), but one cannot create something out of nothing (create real money or capital out of inflated paper money).
Reversing the trick is exactly what Dr. Reisman's article (and earlier, Rothbard's) is about.
Published: March 28, 2008 8:02 PM
peter says:
"There's absolutely nothing stopping you from pricing things in bushels of wheat today if that's what you want to do. (The big thing is taxes, which have to be paid in fiat dollars)"
an obvious stumbling block for using wheat as your currency is the capital gains/loss assessable on every one of your service/good transactions. i'm not clear if that's what you were implying, but it renders any commodity money uncompetitive in the current environment..
Published: March 29, 2008 7:14 AM
i have a problem with one of dr reisman's main premises, ie that deflation must be avoided at all costs.
sure, the size of the credit bubble means that a deflation would lead to massive depression, banking collapses etc.
yes, bankruptcy courts would be clogged, but this would necessarily mean other solutions are arrived at by the banks' receivers. bank depositors and debtors would be forced to mediate privately (probably in class arbitrations) over who took the biggest haircut, thanks to the log-jam in the courts. mortgagees might lose all or part of their equity, depositors all or part of their savings. but both sides would be able to fight it out, fairly.
on a political level, far better to let the whole house of cards fall. this would have the necessary and salutary effect of burning into the public mind the dangers of paper money. after all, it was the hard work and thriftiness of those who lived throught the depression (and were scarred by the experience) that built up the vast capital structure of america. the very same capital that later generations busied themselves consuming.
as it now stands, bank depositors and fixed-interest investors are going to get it in the neck - first as the fed helps the banks (overtly through bailouts, covertly via inflation), and later when the government grants debtors relief measures, or immunity.
mixing gold into some institutionalized solution to the credit disaster will allow devious politicians to point the finger at the barbarous relic, yet again, as the cause of the pain. this time, at least, that avenue should be denied them.
we're on the runaway "paper" train, the brakes are fused and we're building speed. the bollards at the final station are the only thing that's going to be stopping this one.
Published: March 29, 2008 8:05 AM
to jake:
the problem with "goldmoney", and its imitators, is where can you spend it? you really can only deal with other participants. you can only open accounts via the banking system, and sure as eggs the government will be keeping a weather-eye on these developments. if the numbers become large, you'll find the government squeezes shut this exit door. once your money is offshore, how do you repatriate it? and if you do, what about the capital gain in nominal dollars?
i think physical has a lot more going for it, as it bypasses the banking system, the weak link in electronic gold.
also, where assets are in a different jurisdiction to depositors, the risk of fraud cannot be ignored. cross-border legal recourse could be costly and complicated.
Published: March 29, 2008 8:46 AM
This article made me think about the ways in which central banks loaned gold during the 90's. The effect might have been similar to them selling gold, which would absorb some of the excess money the central banks created during that decade and reduced price inflation. At the least it kept the price of gold lower than it would have been. Anyone have any thoughts on that?
Published: March 29, 2008 3:30 PM
Peter
I might be wrong, but my understanding of "legal tender" is that we are all REQUIRED to accept paper dollars for settlement of debts, i.e. if someone wants to pay you with dollars you cannot legally refuse. To solidify the widespread use of its money, as you mentioned, the government mandates that all taxes can be paid only in its bank notes. This makes the usage of any other money very inconvenient. That is why I think that getting away with the legal tender law is necessary for alternative money to take any realistic foothold. I am not aware of any laws preventing us to quote prices in whatever currencies or goods we want, but the settlement of payments is legally restricted.
I agree that Dr. Reisman's article is about reversing the accounting trick, but my argument is that it is not the solution. I don't see how we can with a stroke of a pen suddenly fill the gap in banks' balance sheets; how can the cause of the instability of this financial system (fictious wealth) suddenly become its cure? It is equal to the Fed's attempt to improve the economy with printing more money when the economy is struggling as an effect of the printed money.
As I see it, we have "accumulated" financial pain during the last century by deferring effects of inflated money. There is no accounting trick to help us avoid that pain if we want to set the financial system back on a sound footing. We could reduce the pain felt at any moment by stretching it over longer time in an orderly manner, but I don't think this can be done for political reasons. Therefore, the pain will be very strong when the system finally unravels in a short period of time, either falling apart under its own weight or prompted by completely unrelated factors.
Published: March 29, 2008 4:47 PM
to fundamentalist:
for years now, "gata" has been pursuing the conspiracy theory re:suppression of gold/silver prices by central banks.
i'm not convinced that it was anything more than a happy alignment of interests.
gold companies got up-front funding at reasonable rates for mine construction. central banks got to put a passive asset to work and at the same time put pressure on the gold price, allowing them to inflate merrily away. (the happpy-happy-joy-joy sort of inflation - bull markets in bonds, equities and property). and finally, brokers earned good money structuring loans and hedges.
however, i think that all this would have been impossible had wholesale and retail price-rises not been well contained from the mid-eighties until the end of the millenium. this i attribute to chronic over-investment in resources in the seventies (for producer prices), and to the influx of cheap goods and services from india, china, brazil, and the ex-ussr (for retail prices).
besides, what comes around goes around. the bull-market in precious metals of the last eight years has been given extra fuel by the unwinding of the massive hedge positions built up by some miners. even arch-hedgers like barrick have been buying back their shorts (and crystallizing losses), so the gold price is probably higher now than it would have been absent the bullion-lending.
for citizens of australia, like me, it would have been far less galling if the reserve bank had only loaned its gold, and not made large gold sales at 1997 prices (holding dropped to 80 tonnes from 247). still, even the british have plenty to be angry about - the boe picked the absolute bottom of an almost two-decade-long bear market to ditch its gold . (ditto for the austrians, belgians, canadians, dutch, portugese, south africans etc.)
or at least that's how i see it...
Published: March 30, 2008 12:52 AM
Newson: "i'm not convinced that it was anything more than a happy alignment of interests."
I agree that the investment in mining and oil drilling kept prices down in the 90's. That's what Rogers says about all commodities. Plus, we had a surge in productivity due to better uses of computers.
I remember that in his early years Greenspan watched the price of gold carefully. He tried to keep it below $350. But loaning gold would only absorb the dollars paid in interest on the loans, which wouldn't be as great as the dollars absorbed by selling gold. So it probably didn't make a difference.
I would be mad, too, if the US sold gold in the 1990's. But I don't understand why they don't sell now and pay down some of its debt.
Published: March 30, 2008 8:16 AM
to fundamentalist:
well, although the dollar is widely criticized as junk, from off the top of my head, it has a considerably larger gold-backing than the euro.
why don't the us sell gold? i think to do so would be contraversial (fort knox has entered the idiom), and would risk some sort of public debate, which could possibly spin out of control. far better to de-emphasize gold's role; after all the fed's job is not to manage inflation, but to manage inflationary expectations.
besides, the market value of the us' gold is now about $260 bn (@$1000/oz). a drop in the bucket. and imagine the price if the market sensed the us' stocks were to be liquidated.
greenspan decided to rosen up his bow and take the devil's challenge, figuring he could out-fiddle anyone in georgia. (i figure he lost the bet, and his soul). bernanke, i fear, has none of greenspan's cynicism or acumen. that's my nightmare, that he believes in the institution, and not just in his career.
Published: March 30, 2008 9:08 AM
"Taking the outstanding supply of money today as being $3.3 trillion, Rothbard's proposal implies a gold price of approximately $12,700 per ounce. At such a price, the Fed's gold stock would be sufficient to provide a 100 percent reserve against all US checking deposits and all US currency."
"The provision of a 100 percent reserve would be an immediate guarantee against any reduction in the supply of checkbook money. This would obviously be the case if the banks simply paid out gold in response to customers' demands for the redemption of their checking deposits. At $12,700 per ounce, the banks and the Fed would have enough gold to redeem every single dollar of checking deposits and currency in the economic system. " http://www.mises.net/story/2926
it seems to me that the 12,700oz figurte was arrived at by basing the total number of dollars in M1+ a few extras divided by the known total of ounces of gold held by the govt.
i assume most people here use their respective nations currency for tranactions most of which are backed by some sort of debt instrument??
1/12700 of an ounce coumes out to nealy 2 thousandths of a gram of gold - i would assume for redemption of smaller dollar amounts that silver might come into play here as well.
as far as killing people for gold teeth - people have killed other people for a lot less.
i dont know how much non-moneyed gold there is around in this country.
apart from from a few pieces of cheap jewelery and a some gold alloy wire terminals there is probobly just over an ounce of so of gold in my house.
"The Federal Reserve System holds approximately 260 million ounces of gold." http://www.mises.net/story/2926
but i am not sure about the total amount of non-moneyed gold in the us. if there was say 40 million ounces - that over a years time made its way into the economy via authorized mints, that would add somewhere around 508 billion dollars in to economy.
which i guess is an increase in the supply of money of about 15-16 percent.
if these authorized mints coined the un-moneyed gold and issued new dollars for gold received it seems to me that a 100 percent reserve banking at the 12,700/oz (" enough gold to redeem every single dollar of checking deposits and currency in the economic system.") rate could be maintained.
and that the money supply increase due to 'money-izing' (minting coins, etc) gold objects, though potentially steep would be brief in duration.
Published: May 4, 2008 1:13 AM