Comin’ Home to Gold

1854 Gold Dollar, Liberty Head, Obverse (Photo credit: Wikipedia)

The Daily Reckoning Australia reports that,

 

“SOMETHING is brewing.  We don’t know what it is, but it feels ominous. . . .  we know the financial system is broken and that the market should collapse. We know you can’t solve a debt problem by increasing debt.

“Jim Rickards reckons the most likely outcome of all this is chaos. . . .  When a system of international finance comes to an end, it normally goes through a chaotic period before another system emerges.

“What will that new system be?  Rickards puts a number of options forward.  All involve something taking over from the US Dollar as the world’s reserve currency.

“The problem with the US Dollar is that it fulfills the dual role of domestic currency and international reserve asset. This gives rise to the ‘Triffin Dilemma’, named after the economist Robert Triffin. The dilemma is that the objectives of managing a domestic currency run contrary to the objectives of an international reserve asset.”

I.e., a currency can serve only one “master”.  The US dollar can serve only the people of the USA or only the people of the world.  If the dollar serves one, it must slight the other.

Insofar as: 1) the US fiat dollar is the world’s reserve currency; and 2) globalists have captured control of the US dollar and are bent on supporting global free trade and a New World Order—then the financial and economic interests of America are being sacrificed to serve globalism.  Americans are being subjected to long-term, debt bondage in order to provide the currency the world needs to stimulate the global economy and enrich the rest of the world.  Our government has agreed to reduce our children and grandchildren to impoverished debt-slaves in order to support and advance the New World Order and Global Government.

“For example, the US runs a trade deficit. It has done so for decades. US trade deficits supply global liquidity. Excess US Dollars flow to Middle Eastern oil producers, Chinese widget manufacturers and Japanese car makers.”

What a brilliant insight.

US trade deficits supply global liquidity.

A primary reason that a global economy—and a one-world government—might emerge is Americans’ willingness to function as the world’s consumers (debtors) and to mortgage their children’s futures in order to give the 3^rd world nations of the world enough excess cash to build up their own economies.

America’s post-WWII trade deficits aren’t an accident or an example of simple fiscal foolishness.  They’re an intentional form of welfare provided by the US government and paid for by the ignorance and largess of the American people.

Again, people in positions of power have agreed to sacrifice The United States of America, in order to enrich and empower the world.

 “What do you think would happen if the US suddenly became competitive and financially prudent? What if it started producing trade surpluses? It would be disastrous for the global economy. Global liquidity would dry up . . . there would be a massive credit crunch.”

Implication:  Just as our trade deficits were orchestrated to enrich and empower foreign countries, our loss of competiveness and financial imprudence was intended for the purpose of stimulating the global economy.  By using the fiat dollar as world reserve currency, America is being driven into poverty and debt bondage—our nation is being sacrificed—for the sake of globalism.

Think about that.

“So the [global] system depends on US profligacy.  The US may enjoy an ‘exorbitant privilege’ [that of having the world reserve currency] in the words of former French President Charles De Gaulle , but it’s one that has benefitted . . . the world in terms of delivering debt-based economic growth.”

America has been sacrificed to benefit globalism and the New World Order.  That makes me mad.  Our politicians had no reason or right to betray America’s best interests to support the world’s.

But, on the other hand, our sacrifice has been to provide “debt-based economic growth”.   Growth based on debt is something of a fraud or an illusion.

So what happens if and when the world’s designated debtors (America’s current consumers and future generations) default (as they must) on their debt?  The whole damned system will collapse leaving who to emerge from the rubble, once again, on top?

•The former Soviet Union collapsed in A.D. 1990.  The Russian people went through a hellish decade, but they’re back as an important and prosperous national power.

The same could be true for America.  We’re going to go through a painful period of at least 5 to 10 years.  We’ve earned that pain with our national ignorance and misguided trust in government.  We can’t escape the coming retribution, but we can minimize its duration by getting smart, objective, and tough.  If we can learn to do what’s right for America—rather than what feels good or sounds good or is personally lucrative—we can shorten our coming years of discontent.

Alternatively, we can cling to our lies and foolishness of big government (much as the Russians once clung to communism) and extend our pain indefinitely.

“Robert Triffin identified the [currency] problem way back in the 1960s. Since then nothing has changed. The dilemma is now so big that it can’t be undone or reversed. The dual role of the US Dollar as national and international currency is no longer viable.”

The inherent conflict for a currency that’s intended to serve both a nation and the world was first identified by Robert Triffin in testimony to Congress in A.D. 1960—52 years ago.

But how many times have you heard of Triffin’s hypothesis?  I’ve never heard of it before.  I doubt that that’s an accident.  If Americans had understood the dangers posed by allowing the US dollar to be the world reserve currency, America would not have allowed their own self-sacrifice.   Therefore, I suspect that Triffin’s theory may have been “concealed”.

If we’d played hard-ball and hard-money for the past 40 years, we wouldn’t be facing a potential economic catastrophe.  Conversely, once we get smart, get tough and get gold, we’ll be on our way back to the top.

“So what happens next?  Rickards reckons the IMF (international Monetary Fund) could come in and produce SDRs, or special drawing rights. SDRs are effectively a unit of account defined by the value of a basket of [fiat] currencies: the US Dollar, the Euro, the British pound, and the Japanese yen.”

No Chinese yuan? No BRICS (Brazil, Russia, India, China, South Africa) currencies?

The SDR is composed of four dying fiat currencies.  None of the new and vital currencies are included.  That sounds like a formula for disaster as outdated as the Maginot Line.

SDRs might replace the fiat dollar for a while—but probably not for more than 2 or 3 years, if that.  SDRs may impress the world’s bankers, governments and corporate giants, but I don’t expect the SDR to replace dollars in the pockets of the street venders in India, Africa, and South America.

If and when the fiat dollar fails, the world is unlikely to accept a “new-and-improved” fiat currency to take its place.

The fiat dollar isn’t the global reserve currency simply because bankers and presidents say so. The dollar is the global reserve currency because the world’s street peddlers say so.  I doubt that you can have a world reserve currency that isn’t recognized and used daily by the world’s poor and middle class.  If you offer “SDRs” to the poor of India or Africa, how quickly will they accept that fiat currency?

•  The BRICS currencies and SDRs won’t easily replace the fiat dollar as world reserve currency.

Why?  Because the dollar became the world reserve currency after WWII for two reasons: 1) the US was the only remaining economic power in a devastated world; and 2) the US dollar was “good as gold”.  The paper dollar (at least in foreign markets) was 100% redeemable in gold all the way up to A.D. 1971 when Nixon closed the “gold window”.

The people of the world had become conditioned to accept the paper dollar as valuable while it was backed by gold.  Once the dollar was not backed by gold, people didn’t generally notice.  The fiat dollar lost value steadily, but it didn’t collapse.  The fiat dollar had inherited some of the gold-backed dollar’s reputation.  The world’s street peddlers first accepted the dollar because it was “good as gold” and later accepted the fiat dollar out of habit.

But, can the fiat dollar be replaced as global reserve currency by another currency that’s not issued by the world’s most powerful, national economy?  Can the fiat dollar be replaced by the Chinese yuan or Russian ruble? Is there a single national economy that dominates the world as the US economy did after WWII?

No.

Will there be another single, national economy that dominates the world as the US economy did after WWII?

No.

China may be powerful, but they have too many internal problems in a multi-polar world to assume that the Chinese yuan will replace the fiat dollar.  The Chinese yuan and the Russian ruble can now compete with the fiat dollar, but they can’t replace it.  The world’s street peddlers may come to value the yuan and ruble just as highly (or “lowly”) as the fiat dollar.  They will accept any currency that they know can be used.  But, the only kinds of money that the street peddlers will prefer over dollars will be gold and silver.

•  Which bring me back to the dollar’s pre-1971 reputation as being “good as gold”.  The only way it acquired that reputation was by being 100% redeemable in gold.  If the dollar hadn’t been 100% redeemable in gold for 26 years after WWII, it’s doubtful that the fiat dollar would’ve ever achieved the status of “world reserve currency”.

For at least 3,000 years the only “world reserve currency” has been gold.  Oh, there’ve been some alternatives (like fiat dollars) that lasted for a few decades.  But in the end, the alternatives were pretenders and counterfeits that finally failed.  You can bet that for the next 3,000 years, the only true “world reserve currency” will be gold.

Global free trade and the New World Order are built on fiat currency.  If the dollar must be replaced, the Globalists will work mightily to install a new-and-improved fiat currency.  But can they persuade the world’s street peddlers to accept the next fiat currency in preference to gold or silver?  I don’t think so.

Why?  Because, while any fiat currency can be convenient on a daily basis, fiat currency is never a reliable store of value.

•  Look at Zimbabwean dollars. During their hyperinflation, a Zimbabwean street peddler might sell something at 10AM for 1,000 Zimbabwean dollars knowing that Z$1,000 would buy a loaf of bread right then, but it would take Z$10,000 to buy that same loaf of bread tomorrow.  Therefore, the peddler who had $Z1,000 would instantly run to the store to buy a loaf of bread.

Next day, our street peddler would sell his product for Z$10,000, and instantly run to the store to buy another loaf of bread for Z$10,000.

Third day, same thing except that our peddler sells his product for Z$100,000 and then runs to buy another loaf of bread for Z$100,000.  Zimbabweans adjusted to hyperinflation.

The fiat currency system works.  The people adjust.  They get by.

But they can’t save in a fiat currency.  Because fiat currency is subject to hyper-inflation, saving is impossible and irrational.  When prices are increasing 10X every day, you’re crazy to save fiat currency.  If you save Z$1,000 today, it will only be worth Z$100 tomorrow, and the day after than Z$10, etc..

Thus, the fiat currency system can work just fine to see that everyone gets a loaf of bread each day.  But no one will be able to save enough wealth to build or buy a bakery.  Because fiat currency is not a store of value, as inflation rates rise, saving becomes senseless.  Without savings, there is no real investment.  Without savings, there is no real capitalism because there’s no capital—only credit, which equals debt.

No matter how frugal or smart our Zimbabwean street peddler may be, so long as he’s trapped into using a fiat currency, he can’t save, he can’t invest, he can never get ahead.  He can only buy a loaf of bread each day.

On the other hand, if his currency was gold, inflation would be almost impossible.  Savings would be comparatively easy and rational.  Those who were diligent, frugal and fortunate could get ahead and even prosper.

Why?  Because gold is not merely a currency, but also a store of value—something fiat currencies can never be.

Gold will be the next “world reserve currency” because it’s always been, and is, the only true “world reserve currency”.  Gold will be the next “world reserve currency” because it’s the only substance that can be a reliable store of value.

Without gold, there’s no saving.  Without savings; no investment of capital.  Without investment of capital, the economy will slow or perhaps even stop.

The same principle has applied here in the US.  In A.D. 1968 (just 44 years ago), you could exchange one paper dollar for one silver dollar.  Today, it will cost your thirty fiat dollars to purchase one silver dollar.  Point:  In just 44 years, America has seen 97% inflation.

If you’d saved $1,000 40 years ago, today, its purchasing power would be only about $30.

Run the numbers on gold ($42 in A.D. 1971 and $1,700 today) and you’ll see another result of 97% inflation in just over 40 years—and those number assume that the price of gold hasn’t been artificially suppressed.  If the price of gold has been significantly suppressed, our actual losses to inflation are even greater than 97%.

Is it any wonder that our infrastructure and industry have deteriorated?  How can we accumulate the savings and capital required to build, maintain and innovate if our currency loses at least 97% of its value in 40 years?

The insanity of abandoning the gold and silver backing for our currency has become so lethal, so obvious, that even The Powers That Be are surrendering to the power and inevitability of gold.

We’re going back to gold as money.

And probably not so long from now.

In June, the Federal Reserve and FDIC in the US—and the Bank of International Settlements in Europe—all simultaneously recommended that gold be elevated from a Tier III bank reserve asset to a Tier I reserve asset.  This change signaled that the world’s banks will not only buy more gold, but that the world’s best bankers, economists and financiers are convinced that the price of gold is going to rise into the foreseeable future.  More, this change signaled that gold has won the war with fiat currencies.  By recommending gold be elevated to the status of a Tier I asset, the central bankers of the world have capitulated to the inevitable restoration of gold as money.

On August 23rd, the Financial Times posted an article entitled “Republicans Eye Return to Gold Standard”.  According to that article, this year’s Republican Party platform will call for:  1) an audit of the Federal Reserve; and 2) the creation of a commission to study restoration of the link between the dollar and gold.

It would be virtually impossible for either major political party to advocate a return to a gold-based dollar unless the party elite recognized the inevitable:  The world is going back to gold as money.

If the dollar wants to survive, it better hook up with gold.  If the fiat dollar tries to survive without a gold-backing, the fiat dollar will die.

Either way—if the fiat dollar dies or the dollar restores its link to gold—those holding gold will profit handsomely.  Those left holding the “bag” (paper, fiat dollars) will lose their assets.

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