This week, Richard Horswill proposes a radical shift in the world's monetary system.
Is it a stock picker? Is it a bond buyer? No, it's "Goldenman." He's here to mend an out of control financial system. Here to recapitalise the world. Here to put the financial engineers out of business and here to bring back from the brink a world which has been hijacked by central bankers running the largest Ponzi scheme known to humanity that has proliferated principally since a fateful day in 1971. Go, Goldenman, go!
Setting the Scene
Over more than four decades the global financial system has effectively become a Ponzi scheme based on the availability of unlimited credit. This debt-based system of finance was thrust upon the world in an event known as the "Nixon shock" in 1971; the US dollar was no longer linked to gold, which meant that the previous system of perceived value being underpinned by a fixed price commodity and where dollars could be exchanged for gold at $35 per troy ounce was no longer available. Surplus nations would be forced to accept the dollar regardless of U.S. monetary policy which had been maverick (to say the least) as billions of extra dollars had been created to fight the fear of communism. Wars in Vietnam and Korea had cost the U.S. a fortune and gold reserves were being depleted fast as the trading partners of the U.S. saw that gold was their saviour against dollar supply expansion and thus devaluation. The world was thrown into a massive experiment, but far from diminishing, the US$ was cleverly linked the price of oil in a deal done by Henry Kissinger and Saudi Arabia in 1973 which meant that, regardless of how the dollar was perceived, the world would still have to use it to buy oil, which secured it as the world’s reserve currency. It took a decade before international markets settled down to the new command and control central bank system headed by the U.S. Federal Reserve. Continual fears of a dollar collapse were evident, particularly through the 70's as the value of gold soared from $35 to a peak of $850 per troy ounce in 1980. In order to stabilise the global currency markets drastic action needed to be taken, so Paul Volker, the Chairman of the Federal Reserve, dramatically increased U.S interest rates crushing the gold price and initiating the greatest ever bull market in bonds. Four decades and multiple financial shocks later -after the last and biggest shock in 2008 - the current global financial system has once and for all hit the buffers.
The Great Modernisation
The development or modernisation of standards of living, particularly in the western world, was created by a subsequent credit explosion, since the great moderator - in the form of gold - no longer held the money supply in check which gave the financial engineers carte blanche to do their stuff. The securitisation of everything became a possibility and the ability to borrow money almost limitlessly without question led us to where we are today. Technology in computers, pharmaceuticals and medicine, transport, telecommunications, TV, food production - the list goes on - would not have been possible without the current financial system but sadly we can all have too much of a good thing and that's when things start to go wrong. The debt saturation that has occurred as a consequence has taken to a point of no return. Tough decisions must now be made. The debt binge should have ended in 2008 when the credit markets seized, but that seizure was eased by an unsurpassed stimulus which continues today as central banks pass the QE baton, creating trillions of currency units to bail out insolvent organisations and ultimately countries, postponing the inevitable collapse for another day. Zero interest rate policy and now negative interest rate policy are essential to keeping the game going; however, why anyone believes these policies are appropriate is simply down to the fact that the financial planners are out of ammo and flying by the seat of their pants, to coin a phrase or two. Central bank balance sheets are overloaded with worthless debt purchased from the global banks that brought the system to its knees through a complete disregard of monetary history. Third world banana republic economics is seemingly now perceived as the way forward!
Since 2007 global debt has increased by $57 trillion taking the overall total to over $200 trillion or about 300% of global GDP. All of the policy instruments used to date have only been short term fixes and will ultimately not succeed. They have merely given an impression of recovery bailing out the insolvent and creating massive financial bubbles all looking for a pin. The leading indicator of the deflating global economy is the industrial commodities sector, where all have dropped precipitously, oil leading the way. Many of the debt laden companies that inhabit the commodities space are struggling badly (Glencore perhaps being an example) and all of this is pointing to the commencement of the mother of all global recessions.
Goldenman can save the world
Gold can only come to our rescue if we once again recognise its attributes as money and its historical basis. Gold acts as a weight and measure, nothing more, nothing less. It is an agent of control as its expansion is limited to the amount that can be mined which is currently about 2400 metric tonnes per annum. Fiat money on the other hand can be created out of thin air by the press of a computer key to generate as much as is needed to maintain the current monetary lie. Thus, by giving gold a fixed value that reflects the current global money supply, recapitalisation of the current system can occur. Mining cost or "intrinsic" value is irrelevant however sovereign nations would have to own the rights to all future production for the benefit of the whole of their populations and not just the privileged few. Gold is therefore the people's money. Gold would regulate the maximum amount of currency in circulation based on its fixed value but we would still be able to grow as a global economy as more gold mined into existence would expand the supply of money and thus produce growth, albeit a rate that is lower than the powers that be want, but we would put the global economy back on a sustainable footing. It would actually tie in nicely with the current low growth circumstances we find ourselves in as a consequence of unsustainable debt servicing even at zero percent rates and in principle should not affect the value of current assets as people holding gold would probably sell to the exchequer at a considerably higher price than gold is today in order to deleverage their lives or exchange their gold for a more productive asset. The gold held by sovereign states would underpin their international balance sheets and their newly nationalised banks, meaning that the countries that had the most gold would probably be the ones with the biggest consumer bases also assuming that their populations were rich in gold or other precious metals that they could sell to their state. We might also see some countries actually confiscate people's gold as happened in 1933 USA but this of course would be for the good of the nation. The principle reason for confiscation would however be the fact that the State had no gold because they had either sold it (take a bow, Gordon Brown) or as a consequence of the gold leasing that central banks have got themselves into, chasing a yield which breaks all the rules of holding sound money. Remember gold has no yield for the simple reason that it has no counterparty risk and is therefore nobody’s liability.
Painful to administer economic changes would have course have to be made particularly with the economies whose real productivity has diminished significantly due to over securitisation, the UK being one such country. We would have to invest more in people and skills to compete again with a skilled globalised world, or very quickly run out of the foundation of our monetary strength, gold.
The art of warfare would also suffer as war is expensive and frankly a waste of resources. It might just mean that we would all have sit down together and work things out like civilised people rather than attacking first and asking questions later as has clearly happened in the Middle East for the past two decades.
These changes that would occur may be seen to be difficult to administer but let's consider the other options. Based on the current economic trajectory we have two possible scenarios to consider. A central bank’s main priority is to create inflation in order to coerce the public into believing that we are all getting richer (clearly, some more than others). In order to do this, they have created masses of currency units and reduced interest rates to zero and the world is still in deflation as deleveraging occurs. If they were to decide enough was enough and allow the market to follow its own path we would go into a debt deflation as in 1929 with bankruptcy and poverty to follow, but we would emerge eventually better and wiser knowing that we had taken an honest route. On the other hand, if we continue to follow the current path blowing bigger and bigger bubbles with freshly minted money, confidence will eventually be lost in all fiat currencies and a hyper-inflationary depression will ensue to rival the worst history has to offer. QE to infinity and helicopter money will fail us and the dishonesty of the current system will be clear for all to see.
Based on the above, a reintroduction of a classical gold standard looks like a walk in the park.
The protagonists who say that gold has no role in a modern financial system should think again particularly as it is very clear to the informed that the solvency of the current system is in question using the current rules of the game. The powers that be who want to maintain the status quo are part of a minority who are benefiting from it. As for a potential global monetary reset with gold as the centrepiece, it may just be out of the hands of the western financial masters as gold flows since 2008 have been very much west to east meaning that the advantage is with the nations that have the gold, and they eventually make the rules - as history tells us. It may just be a stroke of genius from our current government to invite the Chinese into our home. As the old guard leave, it's good to make friends with the new guard.
This article was written by Richard Horswill. All views and opinions expressed are strictly his own.