Business Insider recently reported in “The Ruble Is Crashing” that, during a single day in late December, A.D. 2014, the Russian ruble suffered a 9.3% decline in value as measured against the US dollar in a single day.
Or (given the teeter-totter relationship between the ruble and dollar in this report), the fiat dollar increased in value (deflated) nearly 10% in relation to the ruble.
Which is worse? 10% inflation or 10% deflation?
Which nation took suffered a greater adverse impact? Russia, with 10% inflation in relation to the US dollar in a single day? Or the US—with 10% deflation in relation to the ruble?
“This crash follows the [Russian] Economy Ministry’s announcement that [Russia’s November] GDP contracted by 0.5% from a year earlier, following a 0.5% increase in October.”
Everyone seems to agree that the Russian ruble is crashing—and perhaps it is—but does a 0.5% reduction in value in a single month constitute a “crash”?
How significant is it that the Russian economy may have contracted at an annual rate of 0.5% in November? If the Russian GDP contracted at 0.5% per month for a full year, the total annual contraction would be 6%—about the same as the US economy contracted in A.D. 2008. Not good. Arguably a near “crash”. But, as in horseshoes, close doesn’t count.
Besides, we already know that the Russian economy didn’t contract by 0.5% every month in A.D. 2014 because Business Insider admits that the Russian GDP grew by 0.5% in October. More, we can assume that the Russian GDP probably grew some or even most months in the first half of last year.
We can even speculate that the Russian economy probably contracts most Novembers, Decembers, Januaries and Februaries simply because of the harsh Russian winters.
So, it’s not clear that a 0.5% contraction in the November GDP can be accurately described as a “crash”.
Plus, how significant is it that the Russia GDP contracted by 0.5% in November, if it increased by 0.5% in October? Sounds to me as if December’s Russian economy might be just about the same as it was in September. Was anyone chattering about a Russian economic “collapse” last September? If not, is Business Insider’s description of Russia’s current economic condition as a “crash” journalistically accurate or exaggerated?
If exaggerated, why? Does someone want you and I to believe circumstances in Russia are far worse than is really the case?
“This [contraction] is linked to sanctions first of all, oil and the panic we saw on the market in December. The damage to the banking system and consumer sentiment will take a long time to repair,” Dmitriy Polevoy, the chief economist for Russia.
“Additionally, oil prices have crashed again on Monday.
“The price of West Texas Intermediate crude oil plunged to as low as $52.90 per barrel, a 4% decline, and Brent crude oil fell to its lowest price since May 2009 — falling as low as $57.37 per barrel.”
Well, if the price of oil crashed for Russia, it also crashed for the US. Clearly, Russia is more dependent on the price of crude oil than is the US. Thus, the falling price of crude will probably affect Russia more than the US.
However, Russia’s primary exposure to the falling price of crude is in relation to Russia’s income.
For the US, the primary exposure to falling price of crude is found in junk bonds (debt) issued by US oil companies engaged in fracking and in derivatives used to hedge those junk bonds and the price of crude.
The same falling oil prices that adversely affect the Russian economy now, may also affect the US economy’s junk bonds and derivatives later.
Does anyone truly know which economy is more vulnerable to falling oil prices? Russia, now? Or the US, later?
• My point in all this, is that I’m not yet convinced that the ruble is truly “crashing”. It’s suffering some serious inflation in relation to the fiat dollar, but whether that’s evidence of an economic “crash” for Russia or just higher prices for some goods imported into Russia is not yet apparent.
But let’s suppose the ruble is not only “crashing”—inflating; declining in value and purchasing power—let’s suppose that the fiat ruble really crashes as utterly as the former Zimbabwean dollar.
If the fiat ruble suffered a complete “crash” (which currently seems improbable), what form of money would replace a failed fiat ruble?
It’s hard to imagine that Russia would replace a failed fiat ruble with another fiat currency.
Instead (although it’s hard to imagine), it seems more likely that Russia would have to go to a gold-based money.
But, if so, is Russia’s 1,150 ton treasury of gold sufficient to back a new currency?
At least, probably not at the current price of gold.
If gold is $1,200 an ounce, Russia doesn’t have enough gold to provide 100% backing for its next currency. But what if the price of gold was $12,000 an ounce? Would Russia then have enough gold to back its currency? If not, what about $25,000 an ounce? Would Russia’s gold treasury then be sufficient to issue a gold-backed money? Maybe so.
If the price of gold were irrationally low (say, $1,200/ounce) and a new Russian ruble was backed by gold at that low price, the world would eagerly flock to acquire new Russian rubles that could be traded for Russian gold.
Result? Russia’s treasury of physical gold would be quickly exhausted.
The same would be true for any new currency backed by gold at the currently suppressed price.
But if the ruble could be backed by gold at a much higher price (say, equivalent to $25,000/ounce), people might acquire and hold rubles rather than redeem them for gold. If the price of gold was much higher, those holding gold-backed rubles might be less likely to redeem their rubles for physical gold.
Thus, in the unlikely event that any nation soon returns to a gold-backed monetary system, the first step towards that return should be a dramatic increase in the price of gold—and a correspondingly dramatic decrease in the purchasing power (inflation) of the particular currency.
Q: How likely is it that any fiat currency will soon be replaced by a gold-backed money?
A: It’s not likely, but it might still be inevitable.
If the fiat ruble (or any other major currency) came close to crashing (or, actually does crash), the push for a new currency backed by gold would rise.
However, no new currency could be backed by gold, unless the official price of gold were increased dramatically—or even irrationally.
Why? Because if the price of gold is irrationally low, everyone would exchange their fiat currency for physical gold and wait for the inevitable day when the paper currency collapsed and the price of gold soared. (Which is exactly what countries like Russia, China and India have been doing. The price of gold is irrationally low, so they’ve been buying all the gold they can afford.)
Conversely, if the price of gold were irrationally high, people would believe that the price of gold must eventually fall. They’d be less likely to save physical gold and more likely to spend their paper currency rather than save physical gold.
• My speculation suggests that, if any major fiat currency were close to collapse, the price of gold should rise.
History indicates that all fiat currencies fail—usually after 40 to 80 years.
It’s about 81 years since the US dollar lost its gold backing and became a domestic fiat currency.
It’s about 44 years since the international dollar lost its gold backing and the US dollar became a pure fiat currency.
If I were a betting man, I’d bet that at least one fiat currency will collapse within five years, and perhaps much sooner. If that bet were good, the price of gold should rise dramatically within five years, and perhaps much sooner.
Whatever inflationary pressures are placed on the Russian ruble by US sanctions and/or the falling price of crude oil, those pressures should logically tend to increase the global price of gold.
For the moment, the rising price of gold in terms of most other foreign currencies is not seen in the US because of our current bout with deflation as measured on the US Dollar Index. That deflation can’t continue indefinitely without pushing the US into an economic depression.
Sooner or later, the US government must either move aggressively against deflation (and cause the dollar to experience significant inflation), or allow the US economy to slide into a depression and perhaps watch the US dollar implode. When that moment arrives, either way, the US price of gold must rise. Big time.