If you have not yet heard of Mr. Bernanke’s great blunder, you should before reading this article; see http://www.businessinsider.com/ben-bernanke-explains-why-well-never-see-another-gold-standard-2012-3
The gloves are now off; Bernanke reveals that the emperor truly is naked. He exposes the abysmal ignorance of his Keynesian school. Either abysmal ignorance, or else Mr. Bernanke is spouting outright lies.
There is not enough Gold;
This is Gold myth Number One. In fact, Gold is the most abundant resource in the world… if measured by its stock to flow ratio. There are at least 160,000 Tons of pure Gold known to exist above ground, while primary mine supply is about 2,000 Tons per year. This means that there are 80 years or more of Gold supply on hand, compared to a few weeks of stock for other commodities like crude oil or copper or grains.
Why is there so much Gold around? Because Gold is money, Mr. Bernanke! People treasure and save money… not IOU’s. Gold has positive value; it is not a debt note like a Dollar bill or Euro masquerading as money. Gold is not just a ‘precious metal’ like Platinum. Platinum is NOT money, never was and never will be. Platinum has a stock to flow ratio no different from that of copper or lead.
Gold is the monetary metal par excellence. Gold is the ultimate extinguisher of all debt. IOU notes like Dollars or Euros do not extinguish debt, merely shuffle debt around. Fiat currencies cannot extinguish debt; they ARE debt. Dollars and Euros appear as liabilities on the Central Bank’s balance sheet. In stark contrast, Gold is nobody’s liability… Gold is a pure asset. It needs no ‘backing’ as do bank notes. Bank notes today are ‘backed’ by treasury bonds… and treasury bonds are more IOU’s, liabilities of the treasury. Gold is never a liability on anyone’s balance sheet.
Any suggestion that there is not enough Gold is nonsense; and at best, suggests that Gold is undervalued in terms of the USD or the Euro. Do you know that the British Empire under the classical Gold Standard ran world trade on 150-200 Tons of Gold held in the vaults of the Bank of England? Do you know that the USA alone has 8,000 Tons of Gold in its vaults? Silly to say there is not enough Gold. The bottom line is that the quantity of Gold is not the problem; quality trumps quantity every time.
Not convinced? Crude oil is the single largest trade item in the world today; about 80,000,000 barrels change hands every single day. At $100 per barrel, this amounts to about 8.5 Billion dollars… per day. Gold at today’s price of $1,650/oz. is $39,000,000 per Ton; so 215 Tons of Gold is enough to support all this trade if a daily netting out occurs, like in commodity markets. If a bit of modern computer technology is introduced, and netting out is done 3 times per day, only 72 Tons of Gold would be sufficient to support the enormous and vital international oil trade.
The magic of this netting out is accomplished by multilateral circulation of Real Bills, as recognized by Adam Smith. Real Bills in circulation serve as the clearing mechanism of the Gold Standard, allowing a ton of Gold to do the work of a hundred tons. As long as trade nets out, as long as there are no trade imbalances, not an ounce of Gold has to move; Real Bills do all the work. Gold only moves if grievous trade imbalances are allowed to develop. Gold imposes desperately needed discipline on international trade. Does Mr. Bernanke understand any of this? Is he truly this ignorant of Gold Standard fundamentals… or is he lying by rote?
Gold is deflationary;
Gold is dug out of the ground at real risk and expense, not borrowed into existence like fiat paper. More fiat paper borrowed into existence equals more debt… period. Extinguishing any given quantity of fiat debt is impossible without the destruction of a corresponding quantity of fiat paper. What is borrowed into existence as debt must disappear on repayment of the debt.
Gold never ‘disappears’… unless it is forced into hiding, perhaps by fear of Government confiscation. There is never a true reduction of Gold stocks; how would Gold supply be reduced? Would people grind up their Gold, mix it with dirt, and stuff it back into the mines it came from? Please!
Deflation under freely circulating Gold is impossible. In contrast, paper ’money’ can indeed deflate, or literally disappear; but before any deflation is possible, there must first come inflation. Paper money must be created before it can be destroyed… not the other way around. If previously created credit ‘money’ disappears, we experience deflation. This is pretty obvious, is it not Mr. Bernanke? Of course, Mr. Bernanke does not admit this, but blames all on Gold…
Throughout the history of the classical Gold Standard, countries repeatedly went ‘off Gold’, usually in wartime… inflated like mad… then went back ‘on Gold’. The so called ‘business cycle’, which in reality is a credit cycle, is caused by this very process; leave Gold, inflate, go back on Gold. As the inflationary paper disappears, blame Gold; but the cause of deflation is not to be found in the return to Gold… the cause is to be found in going off Gold in the first place. Going ‘off Gold’ sets the inflation/deflation cycle into motion.
Prices do not remain stable on a long term basis;
Prices are an essential market signal, and while wild short term price swings should be avoided… as they indeed are under Gold… long term steadily declining prices are marvelous. This is the very situation that prevailed under the classical Gold standard. Increasing productivity reflected in slowly, steadily dropping prices. By contrast, ongoing Central Bank fueled inflation punishes savers, pensioners, and all productive members of society. Gentle, steady ‘deflation’, or more exactly steadily increasing purchasing power is beneficial for all… except for banksters and politicians.
The real benefit of Gold is not long term price stability but long term interest rate stability. Gold regulates interest rates admirably, so well that interest rate speculation under Gold is unprofitable. Speculation that is unprofitable does not come into existence… who in their right mind would start up an inherently unprofitable business?
The Great Depression was so long and so bad because of Gold;
Government interference with natural market feedback mechanisms is what prolonged the Great Depression. The root cause of the Great Depression was Central Bank interference in the credit markets, made possible by the abandonment of the Gold Coin Standard and the Real Bills Doctrine of Adam Smith before WWI. The proximate cause of the Great Depression was the injection of excess credit into the economy through expansionary Central Bank policy during the credit fueled boom of the ‘roaring twenties’. Under an Unadulterated Gold Standard the creation of excess credit is impossible.
No depression, great or otherwise, is possible without fiduciary (promise based) bank notes in circulation. Fiduciary bank notes are backed not by Gold or by fully liquid Real Bills… but are issued fraudulently against long term (Government) bonds… Government promises. In plain terms, cash obligations in the form of Federal Reserve Notes … aka Dollar bills… are backed not by liquid assets like Gold or Bills that mature into Gold within 91 days, but by long bonds. Bonds are illiquid because if there is a sudden demand for cash, selling bonds for cash causes bond prices to fall. Falling bond prices decimate the bank’s balance sheet… as the asset side now holds bonds, not Gold or Bills.
The inevitable collapse comes when confidence in the system is lost, and the short term borrowing offsetting long term obligations cannot be rolled over… and the run on the banking system starts big time. Such a run is starting right now. Even Bernanke’s famous helicopters cannot drop Dollar bills fast enough to stop the run.
Gold standards leave central banks open to speculative runs;
As we saw above, bank runs are not possible under an Unadulterated Gold Standard. Indeed, there is no need or any use for a central bank under an honest Gold money standard. No wonder Mr. Bernanke is a mortal enemy of Gold. The central bank system was created to offset the evils of property rights invasion with regards to money. Specifically, laws were passed in the nineteenth century decreeing that once money is deposited in a bank, that money is no longer the property of the depositor, but becomes the property of the Bank. Central banks were also chartered at that time. Coincidence?
Imagine taking your furniture to a warehouse for storage, and having the law deem that your furniture has suddenly become the property of the warehouse owner. The warehouse owner can legally do whatever he wants with your furniture; lease it out or sell it… meanwhile leaving you as a common creditor of the warehouse company, with no rights to your money… er furniture. If the bank… er warehouse… goes bankrupt, you have no legal recourse to recovering your property… as it is no longer recognized as being your property.
This is unconscionable, but is exactly what happens to your money today. Inevitably banks grab demand deposits and lend them out long term at great profit. This is why a ‘lender of last resort’ is needed; to help banks in trouble when they cannot meet calls for depositor’s money. The depositor’s money is not available; it has been lent out long term.
The answer to this problem is to let the true owners of money decide what they want done with their deposits. Do they want their money in a demand deposit that pays no interest, or in a term deposit that does… but locks up their money for an agreed length of time? If loan maturities match deposit maturities, runs are impossible. Demand deposits remain available for immediate withdrawal… and time deposits must stay with the bank until maturity.
Even if ALL demand depositors were to ask for their money at the same time, the banks could deliver. Of course, in such an honest banking system banks would have to forego the illicit, dangerous, but profitable practice of borrowing short to lend long.
Furthermore, Bernanke never talks about what happens when the ‘lender of last resort’ is tapped out, as it is right now. Today not only central banks but government treasuries are bankrupt; see Greece, Portugal, and the ‘sovereign debt’ crisis. Only tax payers are left to bail out the CB’s… and they cannot possibly do this, as the amount of debt in existence is impossible to repay, or even to hold steady. The debt tower keeps growing… and the real economy supporting the tower is collapsing.
The gold standard tends to cause interest rates to rise during downturns and interest rates to fall during good times;
More mythology; in fact, Gold serves to maintain steady interest rates; rates so steady, that interest rate speculation did not exist under Gold. Such speculation was not profitable. Steady interest rates are most important to industry, pension funds, producers, etc. Along with the steady value of the Golden numeraire, or Golden unit of account, low and stable interest rates allow the real economy to thrive.
Managerial attention is focused on running and improving the business, not on planning for inflation or deflation, and not on ‘hedging’ –or speculating on- interest rate swings and ‘forex’ swings. Under Gold there is no forex; Gold is Gold in any language. Without forex, there can be no forex speculation. With interest rate speculation and forex speculation impossible, the only way to profits is the old fashioned way; one earns profits by serving ones customers… better than ones competitors do.
Mr. Bernanke does not (yet) seem to realize that he has a tiger by the tail; even Allen Greenspan, the ‘Maestro’, has admitted that ‘in extremis, fiat has no place to go except to Gold’. The process of ‘remonetization’ of Gold is under way; Iran is already buying food for Gold… as it has no choice but use Gold or go hungry; extremis indeed.
The sweet irony of this is that Washington, the very epicenter of Dollar printing, is putting extreme pressure on Iran, literally forcing Iran to turn to Gold. As the trend toward Gold remonetization accelerates, as fiat paper collapse puts intolerable pressure on other countries as well, you can be sure that it is Bernanke who will be murdered by Gold… not the other way around.
Rudy J. Fritsch
Editor in Chief
Rudy On Gold 