Reuters published “India’s ‘gold monetization’ scheme could have a big impact on global demand”. According to that article:
“Last week the Indian government approved the so-called gold-monetization scheme . . . [by] creating a system in which Indians holding private gold will be able to deposit it at banks—and then earn interest on their bullion holdings.
“The government plans to then make the deposited gold available to buyers across India. The aim is to reduce gold imports from outside the country, which run at nearly 1,000 tonnes yearly.
“India’s cabinet also approved a ‘gold bond’ program in which citizens will be able to buy interest-bearing bonds backed by gold, rather than owning physical gold.
“Estimates are that private citizens across India hold tens or even hundreds of millions of ounces of gold—which could become available to the banking system, if the monetization program is well received.”
First, a metric ton weighs 2,200 pounds. If India imports 1,000 metric tons of gold at $1,200 per ounce, they’re importing $42 billion worth of gold each year.
India’s current GDP is about $2 trillion per year. Thus, India currently spends 2.1% of its annual GDP purchasing more gold from foreign sources. That’s 2.1% (more or less) last year; 2.1% this year; 2.1% next year. Note that US economists hope that the US economy will grow by 3% annually. Compare that 3% hope to India’s 2.1% annual drag on their economy due to purchasing foreign gold. You can see that 2.1% is a significant expense for an economy the size of India’s and cause for governmental concern.
Second, the Indian government now proposes that the Indian people deposit their privately-owned gold into bank accounts and accept a paper receipt in return. Then, the Indian government intends to sell the deposited gold to other Indians who wish to buy gold. The stated purpose for this scheme is said to be to reduce the amount of gold imported into India—but I doubt that’s the primary purpose.
I suspect that the Indian government is essentially trying to put gold into circulation as money rather than allow Indian women to continue to wear their accumulated gold as jewelry to demonstrate their wealth.
Why? What’s the Indian government have against gold jewelry and/or gold “saved” in the form of bracelets and necklaces? Well, I doubt that they have anything against gold, per se. But, as you’ll read, they may have a lot against savings.
The Reuters article also tells us that the primary, intended beneficiary of the new “gold-monetization scheme will be the bankers rather than the Indian people. One of the reasons Indians save/hoard gold is that they don’t trust their fiat currency (rupee), India’s bankers or India’s government. By admitting that the new “gold-monetization scheme” will primarily help the bankers, India’s government has almost certainly alienated the Indian people and guaranteed that their newly-proposed “scheme” will flop.
Even so, we can still learn a lot by considering India’s proposed “gold-monetization scheme”.
• For example, India’s fundamental monetary problem is that the Indian people traditionally turn their excess wages (paid in rupees) into gold, which they can bury in the back yard or give to their wives to wear as jewelry. Saving their gold is a well-established tradition and also an insurance policy against their government’s monetary malfeasance. However, by saving in the form of gold, Indians reduce the supply of rupees in the national currency supply or at least slow the velocity of money in their national economy.
By saving their wealth in any form, including gold, and thereby reducing the currency supply and/or slowing the velocity of money, the Indian people provide a deflationary force in the Indian economy which causes the national economy to be less vigorous and less prosperous than it might otherwise be. Wealth saved in the form of gold is taken out of “monetary circulation” and the Indian economy is thereby slowed or impaired.
If the Indian people own, say, 300 million ounces of gold, they’re a wealthy people holding about $330 billion worth of privately-owned gold. But, because they save that gold rather than spend it, none of that $330 billion is circulating in the Indian economy.
If that $330 billion were circulating in the Indian economy, it would stimulate the economy to grow faster and become more prosperous. Under a fractional reserve banking ratio of 10 to 1, if the Indian people deposited their gold into private banks, those banks could lend the equivalent of at least $10 for every $1 worth of gold deposited into their vaults. Thus, if the Indian government could persuade the Indian people to deposit even half of their estimated $330 billion in gold into the banks, the banks could lend about $1.6 trillion into the Indian economy. Given that India’s annual GDP is only about $2 trillion, an “extra” $1.6 trillion loaned into the economy could be very “stimulating”.
You can see why India’s government and banks would want to persuade Indians to deposit their gold into Indian bank vaults and then sell their gold to other Indians: doing so would actually reduce gold savings and place more gold/savings into circulation to stimulate the economy.
The problem is that the Indian people know from bitter experience that they can’t trust the fiat rupee, Indian government or Indian bankers. Therefore, they trust in gold. Big time. They won’t be easily persuaded that “this time it’s different” and they can trust the bankers, the government, and whatever gold-backed paper debt-instruments are about to be issued.
• By using their earned rupees to pay for imported gold, India’s people allow their rupees to be collected by foreign banks and businesses that then spend the rupees in India to buy India’s most prosperous businesses and valuable properties. That foreign ownership should also tend to drain profits out of India and slow and impoverish the Indian economy.
The Indian government presumably wants to diminish the growth of foreign ownership of prosperous Indian corporations and businesses. In order to do so, the Indian people must be prevented from buying gold from foreign sources.
1) the Indian culture reveres gold as a store of wealth; and,
2) the Indian people distrust the fiat rupee;
It follows that India’s appetite for gold savings is,
3) insatiable and is reducing India’s supply of currency (rupees) and/or slowing the velocity of money and thereby pushing its economy towards recession.
• The Indian government is helpless against the Indian people’s distrust of the fiat rupee, the banking system and the Indian government, itself. The government could print more fiat rupees, but that would only cause more inflation, more distrust of the rupee, higher prices for gold, more public demand for gold, more gold being imported by the Indian people, less rupees in circulation—and a persistent drag on India’s economy.
There are lessons here.
First, once a nation’s people lose trust in their government, currency or economy, they tend to save rather than spend.
Second, once that trust is lost, governments are hard-pressed to regain their trust and restore the economy.
Third, irresponsible governments inevitably destroy their own nations.
We see those lessons in India and perhaps also in the US.
I.e., during the Great Depression, the American people lost confidence in the government, economy and possibly the currency. They stopped unnecessary spending and saved whatever they could. The economy stayed in a depression until WWII began and managed to drag Americans out of a “savings” mentality back into spending and prosperity.
More recently, the US government’s irresponsible economic manipulations and creations of “bubbles” laid the foundation for the Great Recession of A.D. 2008. Since then, the American people have shown an increased tendency to save and a decreased tendency to spend. Repeated bouts of Quantitative Easing and Near Zero Interest Rates have so far failed to “stimulate” much additional spending in the US economy.
If the general theme of this article is roughly correct, I doubt that the US economy will be restored until the government figures out how to restore the American people’s former trust in the US government, the Federal Reserve and our fiat currency. Those who distrust government and national institutions like the Federal Reserve, tend to save rather than spend.
In just the last two or three years, the Indian government tried to stop the flow of gold into India by raising import barriers. That effort resulted in more smuggling of gold into India, a stronger black market for gold, and a rising market for silver and an increased outflow of rupees to foreign gold markets. The Indian government’s attempt to use a “stick” to stop Indians from buying foreign gold failed.
OK—given that the “stick” approach (import restrictions) failed, the Indian government is now trying to temp the Indian people with the “carrot” of a new-and-improved “gold monetization scheme”. I doubt that they’ll succeed.
• The Indian government seemingly believes that the easiest way it can stimulate their national economy is to persuade or deceive the Indian people into putting their gold into “circulation” with bank accounts denominated in gold or government bonds backed by gold.
In other words, if you can’t beat ‘em, join ‘em. Given that Indians don’t trust the fiat rupee, hoard gold, and reduce the money supply, the only way to “stimulate” the Indian economy may be (at least indirectly) to restore a gold-based monetary system that will put private Indians’ gold into “monetary circulation”.
I.e., India wants its people to deposit their gold into bank accounts and allow their gold to be resold to other Indians who will presumably deposit the same gold into their own bank accounts only to be sold again and an again to other Indian people. Thus, India’s gold would be taken out of private savings and put into “circulation” in the public economy.1
India’s slow-moving economy is being driven to recreate something like a gold-based monetary system because the Indian people: 1) are nearly fanatical in their dedication to save whatever wealth they acquire; 2) won’t trust anything other than privately-held gold to save their wealth.
A people’s money must be composed of something they trust. If they trust their government, you can make their money out of paper, electronic digits or government certified corn cobs. If they don’t trust their government, you must make their money out something physical like gold or silver.
But note well that the Indian economy isn’t being slowed by gold—it’s being slowed by savings.
The Indian government’s “gold monetization scheme” is less an attack on gold than it is on savings.
• The same hypothesis should apply to any nation whose people come to distrust their government, banks and fiat currency. As distrust builds, more and more people use their fiat currency to purchase gold and drive the price and desirability of gold upward. As people buy more gold and the prices rises, more of the nation’s wealth is taken out of circulation as fiat currency and saved in the form of physical gold—which tends to slow the economy.
The US Government has, for most of my lifetime, tried to stimulate the economy by inflating the dollar, making it persistently lose value and thereby encourage people to quickly spend their fiat currency rather than save it in banks, hidey holes, etc.. But, normally, inflation also pushes the price and desirability of gold higher, which causes more people to save their wealth in the form of gold rather than US dollars, which savings tends to reduce the supply of currency in circulation (or at least the velocity of money) and thereby slow the economy.
It seems to follow that—from the government’s perspective—in order to stimulate the economy, government should inflate the currency at the same time it suppresses the price of gold. Why? Because, so long as the price of gold is stable or falling, less people buy gold, less people store their wealth in gold, more people trust in their fiat currency, and the fiat currency supply is not as diminished by people who save rather than spend.
• Again, it seems arguable that the US government’s economic war is not against physical gold, per se—it’s against people who save their wealth, remove their savings from monetary circulation, and thereby slow the economy.
If that’s so, then government should be averse to any savings in any physical form. If you spent your wealth on land, buildings, perhaps even commodities, government should be regulating those investments so as to suck the savings out of those investments (perhaps by raising taxes or fees) in order to prevent wealth from being saved in a way that removes currency from the currency supply or at least slows the velocity of money.
• If you think government isn’t waging a war against savings and those who save, explain the Near Zero Interest Rates that we’ve had for nearly seven years. Near Zero Interest Rates are great for borrowers, but terrible for lenders. And who are lenders? They’re people who’ve saved their wealth. They are savers.
Savers are injured by Near Zero Interest Rates. Is that injury accidental? Coincidental? Collateral damage? Or intentional?
Who wants to save their wealth in a bank account if the prime rate is 0.25%? By holding interest rates near zero, the government forces people to stop “saving” and instead spend/invest their money in riskier enterprises like stocks or bonds. In theory, these riskier investments will stimulate the economy. Near-Zero Interest Rates discourage conventional savings and impoverish those who save.
Implication? The government is waging war against savers.
• If Near Zero Interest Rates aren’t bad enough for savers, what about proposals to soon implement negative interest rates?
During the Fed’s September announcement of continued “near zero” interest rates, one member of the Fed even argued for negative interest rates. Bloomberg Business explained:
“For the first time ever, one monetary policymaker thinks the U.S. needs to move to negative interest rates until at least the end of 2016 to achieve full employment and get inflation back to 2 percent.”
According to Casey Daily Dispatch,
“This is another sign of our warped economy. Negative interest rates shouldn’t even be possible. Negative rates mean that a bank will charge you interest to hold your money instead of paying you interest. Negative rates mean that lenders [savers] pay interest instead of borrowers.
“Zero percent interest rates have made it incredibly cheap to borrow money. Americans have borrowed trillions to buy houses, real estate, and cars. This has warped the price of nearly everything.”
“Now instead of unwinding these crazy policies, one member of the Fed wants to make it even cheaper to borrow. We think these crazy policies will eventually cause a major financial crash.”
I agree that the last 80 months of Near Zero interest rate policy seems “crazy” in that it’s distorted markets and robbed creditors, lenders and savers of a fair return on their savings/capital.
I agree that a possible further reduction to negative interest rates would be “crazier” still—at least in an era where central banks worked for the public interest rather than their own.
But, if we viewed the “Near Zero” interest rates as evidence of an intentional policy to attack savers, then a lowering of interest rates all the way into “Negative” territory wouldn’t be “crazy”. In fact, in the context of a war against savers, negative interest rates would make perfect sense.
I.e., what could provide a greater attack on savers than Negative Interest Rates—other than outright seizure of savers’ accounts by government and/or banks for “bail-ins”?
Implication? Again—the government and Federal Reserve are waging a rational war of self-interest against savers.
Implication? If government is really waging a war against savers by suppressing the price of gold and holding interest rates down to low or negative levels, then the next logical tactic in this war should be for government to openly seize the savers’ savings out of their bank accounts. These seizures could be called “bail-ins” for banks or outright confiscation by government.
If government is waging war against savers, do you want to store you savings in a bank or similar institution where they can be easily identified and seized by government and/or the banks?
• David Stockman, economist, former Congressman and Budget Director under President Ronal Reagan agrees. He was recently featured in a video and article entitled “The Fed Is Waging Jihad Against Savers and Retirees”.
Stockman knows that government is waging war (“Jihad”) against savers.
• But why a war against savings and savers?
Yes, we can see that savings are “anti-social” (or should I say “anti-socialist”?) insofar as they tend to reduce the currency supply and slow the economy. But, surely, there was no “war” against “savers” when I was boy or young man.
Q: Why would there be a war against savers today?
A: Times have changed. When I was a boy, this nation was a producer. By definition, a “producer” produces more than he consumes. Savings are the result of excess production. At bottom, only “producers” are capable of savings. Savings are good in a productive economy since those savings can be invested in productive corporations, businesses and enterprises that generate more wealth and more prosperity than they consume.
But today, we’ve become a nation of consumers. By definition, “consumers” consume more than they produce. Consumers are largely incapable of savings.
As a consumer, your primary job is to spend your currency. You’re encouraged to “shop ‘til you drop.” Insofar as you’re saving your wealth in a consumer-based economy, you’re not spending—and that’s “anti-social”. From the government’s perspective, anti-social “savers” should be punished with low interest rates and higher property taxes in order to get their money out of savings and back into circulation.
Consumers (those who consume more than they produce and don’t generally save) are necessarily dependent on someone else to provide for their needs. Who can ultimately feed the dependent consumers if not the government?
If a government wanted its people to be dependents, it would make good sense to encourage them to become “consumers”. It would make good sense send their “means of production” (factories, industries, jobs) to some foreign in order to reduce their productive capacity. It would make good sense to deprive of their savings with inflation and negative interest rates since it’s a lot easier to control a man who is impoverished and starving than it is to control a man who has substantial savings and resulting capacity for independence.
• In fact, when I stop to think about it, I can see that all private property is a form of savings. For example, everyone knows that, since WWII, the primary form of savings for the American people hasn’t been their bank accounts, pension funds or stock investments—it’s been their homes. Until the onset of the Great Recession, many of us used our homes as “private ATM machines” to release some of our home-savings and price increases for spending by means of second mortgages.
If you can see that your home is a form of savings, how ‘bout your car? What about your desk, your computer, the books on your shelves and the clothes in your closet? What about the two years’ worth of “emergency food” you’ve stored in the basement? Just like your gold and silver, aren’t all of these items of private property examples of “savings”?
What about deficit spending and the National Debt? Can they be viewed as taxes on (and a war against) even future savings?
From this perspective, taxes on private property can be viewed as taxes on private savings. It’s even arguable that government taxes your private property (private savings) year after year in order to liquidate your savings into a currency that will circulate within, and stimulate, the economy.
• If the hypothesis that all private property is a form of savings seems over-the-top, note that Karl Marx once described the essence of communist revolution is the destruction of private property.
Given my argument that all private property (land, cars, petroleum, commodities, gold) is a store of wealth and a form of savings that’s been pulled out of the national economy and thereby tends to slow the national economy—is it possible that Communism’s primary adversary is savings in any physical form (like land, homes, petroleum, gold or other private property) that reduce the money supply and/or slow the velocity of money and thereby impair the economy?
• Without savings, aren’t we all necessarily more dependent on government? Without savings, aren’t we all less able or inclined to resist government edict? Don’t higher taxes necessarily empower the government and disempower the people?
From this perspective, don’t higher taxes reduce savings and constitute part of the war being waged by government against the nation’s producers and savers? Insofar as the producers and savers are being diminished or even destroyed, is that evidence that your government is bent on establishing an oppressive, totalitarian regime?
Insofar as we perceive modern economics as a war against savers, we can open an alternative perspective for understanding economics, government actions and government intent, and modern economic events.
What do consumers, subjects and slaves have in common? Virtually no savings.
What do despotic, collectivist and fascist governments have in common? They restrict or prohibit their people’s capacity to save.
From this perspective, government’s war is not against gold, per se—it’s against savings, self-reliance and individual independence.
1 India’s “gold monetization scheme” allows one ounce of gold to be deposited into a bank account and then sold, again and again, to additional gold “buyers”. In theory, the same ounce of gold might be sold to scores of buyers. In that regard, India’s proposal reminds me of COMEX where there are allegedly 208 ounces of paper gold “in circulation” for every ounce of physical gold actually in the COMEX markets. From that perspective, could we reasonably view COMEX as a “gold monetization scheme” (like India’s) whose fundamental purpose is to fight savings denominated in gold and, indirectly, put gold savings back into “circulation” in the economy?