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Four-Letter “G” Word Discussed on TV

Monetary Metals's picture




 

 

The title of the video clip under review and subject of their discussion is: “Would returning to the gold standard end currency wars?”  Obviously, countries which use gold as money would have to accept the fact that gold cannot be devalued.  This would be a huge improvement over today.

Michael Woolfolk from Bank of New York Mellon takes the anti-gold position, and Komal Sri-Kumar from Sri-Kumar Global Strategies is pro-gold.  Mr. Woolfolk seems the perfect representative of the establishment.  He works for a major bank and just wants to continue the status quo, though as most do, he has some quibbles with it.  While he admits that there is no long-term benefit to “currency wars”, he asserts that there is a short-term benefit.

Mr. Sri-Kumar, answers Mr. Woolfolk as he deserves.  Nothing good comes from robbing savers and productive enterprise via devaluation, in the short term or in the long term.  Unfortunately, he is not a great representative of the gold standard, as we shall see below.

Mahatma Ghandi once said, “First they ignore you, then they laugh at you, then they fight you, then you win.”  In this Bloomberg video clip, we see that we are currently somewhere between laughing and fighting.   Gold can no longer be ignored.

Mr. Woolfolk seems barely able to conceal his contempt at times.  In rebutting Mr. Sri-Kumar, he interrupts “but you can’t do that [adopt gold]… right?”  His face flickers to a smirk, which he quickly suppresses.  “I mean the value of gold would have to be astronomically high to be able to back the money supply.”  He adds,  “Wouldn’t it?”  He takes on a tone of exaggerated patience.

Mr. Woolfolk says we don’t have enough gold.  Whenever I hear that, I always feel an urge to ask three questions.  First, How much gold do you think we have?  Second, how much do you think we would need to have?  And finally, how did you arrive at these numbers?  There is little point in spending further electrons dwelling on Mr. Woolfolk.

Mr. Sri-Kumar made a point that I think is under-appreciated: central banks create uncertainty.  I would add that economic calculation as such is impossible under paper.  A construction worker cannot use a rubber band to measure the length of a beam; he must use a steel tape.  An accountant cannot use a rubber dollar to measure the worth of an enterprise; he must use gold.  Well, today, they do try to use dollars, but there is a systemic bias towards overstating profits and understating losses.

Unfortunately, Mr. Sri-Kumar’s main idea is wrong.  He wants governments to fix the price of gold.  He even claims he knows the magic number: $1675 per ounce.  Mr. Sri-Kumar and everyone else should be reminded that price fixing never works (and the price is always fluctuating in a free market).

Apart from this fatal problem with price fixing, government always gets the wrong price for two reasons.  First, they don’t have perfect information, and second there are special interest lobbyists.  Imagine the debate in Washington about a fixed gold price.  Debtors would want the price to be high, so they could liquidate their debts with as little gold as possible.  Creditors would want the gold price set low, so they can get more gold out of their counterparties.  The fighting between the special interest groups would be like the shoot-out at the OK Corral!

Mr. Sri-Kumar proposes to return to the last throes of the terminal gold standard, the twisted husk known as the “Bretton Woods System”.  In this system, it was a criminal offense punishable by imprisonment for a US citizen to own gold.  While Mr. Sri-Kumar did not endorse this particular feature, it is a necessary feature because otherwise unpredictable people could begin buying gold and force governments to either let the price rise or else drain their reserves of gold.

In Bretton-Woods, the dollar was redeemable only by foreign central banks.  Those banks were indeed redeeming, at an accelerating pace.  By 1971, they were bringing enough dollars to the US to take home over 100 tons per day.  The US government was within a few months or running out of gold at that rate.  President Nixon made his fateful decision to “temporarily” suspend redeemability as a response to this monetary crisis.

The failure of Bretton-Woods was inevitable.  Economists Jacques Rueff and Robert Triffin predicted it many years before it happened.

covered some of the problems of the pre-1913 gold standard, but it was superior in every way to Bretton Woods.  It certainly did not self-destruct.

It’s good that Mr. Sri-Kumar pointed out that there cannot be debasement and thus endemically rising prices under gold.  But there is much more to be said, if we are to avoid the fate of Rome.  The next time Bloomberg needs someone to talk about the gold standard, let’s hope they pick someone who  understands it fully. 

For those who are interested, I published a video yesterday discussing an important consequence of irredeemable dollar: the system is collapsing under the weight of the rising debt.

 

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Wed, 02/13/2013 - 14:41 | 3240720 RockyRacoon
RockyRacoon's picture

How 'bout we don't have any "standards", and just let everybody trade for whatever they want.  Oh, but wait, there would be no "standard" to pay TAXES with.  Now I get it.

Wed, 02/13/2013 - 11:31 | 3240292 steve from virginia
steve from virginia's picture

 

 

 

If/when the world/US adopts a gold 'standard', gold money or specie or some other systemwide redemption regime that includes gold the world/US will not be 'modern' in the sense that money is a proxy for energy waste.

 

If/when there is a gold standard there will be no automobiles or airplanes, no gigantic office towers, no suburbs and a lot fewer humans. Therefor, I approve of gold standards.

 

Modern 'money' is simply debt, the collateral for it is the means of energy waste, therefor, any increase in money/debt requires additional constant increase of energy wasting machinery. The wasting process works until the energy starts to run out then the system collapses under the weight of higher costs.

 

In the modern 'system' the only capital is resources/energy this includes gold ... all capital is a form of energy which is the instrument by which the capital is put into human hands.

 

Because of the cost of gaining gold (capital) is higher than the current price of gold (energy costs + externalities) gold must be priced high enough to meet these costs or there is no more added gold. Also, the costs must be accurately accounted for -- including externalities -- otherwise gold is simply another abstract form of debt money like paper dollars. If the externalities are added to the energy costs (needed to extract gold from gold bearing rocks) gold is 'underwater', too costly to gain: this is because gold is another petroleum dependency.

 

The bottom line is an accountable gold system will not produce enough gold, there will not be enough gold to allow for even the smallest amount of economic activity. Because gold is a natural resource, any gold 'value' must represent an anti-entropic increase in capital!

 

Anyone who believes that a gold currency regime will allow more resource waste at lower cost is fooling themselves, it will do the exact opposite!

 

Har ..  de har har har!

 

This is something to keep in mind: I like the idea because I am a Luddite and environmentalist and despise modernity and 'modernists' ... you won't like the idea at all!

 

 

Wed, 02/13/2013 - 16:44 | 3241078 BigJim
BigJim's picture

So there were no airplanes until after 1971, when we finally dropped anything resembling a gold standard?

Do you ever consider engaging your brain before writing your nonsense?

Wed, 02/13/2013 - 10:10 | 3240030 Winston of Oceania
Winston of Oceania's picture

Central Planners hate the gold standard because the increase in money is LIMITED to gold production. You see they could NOT create these precious bubbles to steal from you through inflation first and crisis second. I would suggest reading The Theory of Money and Credit-Ludwig von Mises to help in determining the value of gold but suffice it to say that gold holds a much more stable value than this author suggests and it is the worthless script that does the fluctuating. Book avaiable at www.mises.org

Wed, 02/13/2013 - 10:52 | 3240179 thisandthat
thisandthat's picture

I don't think there would be a problem (or solution) even for "QEs" - all they'd need is to float it's value to meet all available currency through international agreements.

The real problem is that many countries don't own enough, if any at all, any longer - so how would the be solved?

And what about the so-called "Asian" gold, supposedly held by th US, since the 30s, and left out of BW?

Wed, 02/13/2013 - 16:39 | 3241057 BigJim
BigJim's picture

 ...The real problem is that many countries don't own enough, if any at all, any longer - so how would the be solved?

oooh, I don't know... how many people owned goldmines back in the days of the gold standard? Did they go without having money? No, they created value, and the owners of goldmines exchanged gold for whatever it is they created, either directly or at several removes.

Wed, 02/13/2013 - 19:43 | 3241510 thisandthat
thisandthat's picture

So, how would you do it? Country A has barely any gold reserves, but enormous amount of printed money; country B has not much printed money, but large amounts of gold.

Country A's currency would plunge, due to lack of enough gold to back its currency; country B would buy country A... unless you'd somehow "persuade" country B to "redistribute" their gold to country A?

Edited for clarity

Wed, 02/13/2013 - 09:46 | 3239943 Setarcos
Setarcos's picture

Come to Australia, where there was a Gold Rush a century or so ago for easy pickings of even gold nuggets on the surface, but where, now, the gold mine in Kalgoorlie is a HUGE open cut mine, visible from the Moon apparently.

Gold is parallel with "black gold" (oil) which has backed the petro-dollar since Nixon finished the "gold standard".

Well no currency can any longer be backed with gold, because "easy/peak gold" ended a century ago.

And now "the oil standard" is over too, which is why wars escalate for control ... which is why Canada now mines for oil on as massive scale as Australia mines for gold, iron ore, bauxite, uranium and other diminishing resources.

It is PAST the point when resource extraction (of every kind) could support an economy and currency'

Australia is a basket case waiting to happen.

Insufficient of ALL kinds of resources remain to fuel exponential industrial growth, whilst debt-based economies (paying compound interest on borrowed money) absolutely demand the impossible of never-ending exploitation of our finite planet.

Our current form of industrial and financial civilization is over, bar the "can kicking" which might keep the "Titanic" sailing for a few more years.

We had the biggest housing bubble in the world (maybe except Hong Kong), solely because of Chinas imports of our raw materials.

Admit that, globally, the "world as we knew it" is basically over, bar kicking cans down roads.

Wed, 02/13/2013 - 10:21 | 3240066 JOYFUL
JOYFUL's picture

While I would agree that things look rather bleak, I do not think we are out of options to make it all turn out right...

putting Mel and Clint in charge of their respective governments would be a decisive step towards a return to sanity. Old white guys have gotten a bad rap lately, but certainly couldn't screw things up any worse than the current alternatives.

http://english.ruvr.ru/2013_02_13/Israeli-intelligence-orders-media-blac...

I'd bet a fistful of bernackbucks that the Sudden Impact of those two taking the reins would force those currently wielding Absolute Power to realize that all their True Crime will remain Unforgiven till they walk the Gauntlet of a public Beguiled no more  by their Black Hearts...or being the Complete Savages they are, agree to die by Tightrope, as  Patriot(s) yell Hang Em High! 

A Perfect World, at last.

Wed, 02/13/2013 - 10:18 | 3240058 acetinker
acetinker's picture

Wow, so far you got two reddies for sharing the unvarnished truth of our (in)human condition.  Anyway- BINGO!  Gold is valuable because it's shiny and doesn't tarnish, right?  NO!  It's valuable because it takes investment (energy) to extract and refine it.

Currency is merely a medium of exchange- as such, it doesn't even need to have intrinsic value (indeed it does not).

I'm in the (miniscule) camp that thinks that currency should be created based on headcount, period.  Still (apologies to Bill) there is the issue that humans must administer same.  Even so, it can't be worse than having our economic lifeblood controlled by privately owned central banks.

Also, plus one for recognizing the utter futility of pegging currency to ANY commodity- especially ones that require the serial raping of our Mother (earth).

Wed, 02/13/2013 - 16:35 | 3241049 BigJim
BigJim's picture

And how many commodities don't involve raping Mommy?

Wed, 02/13/2013 - 17:53 | 3241279 acetinker
acetinker's picture

Good point, as even modern agriculture is incestuous.  I'm sure you'd agree it's a little more tolerable than mining for something that, in real life, you have almost zero practical use for, right?

Before you flip out, I said practical, OK?  I know that gold is a great hedge/store of wealth, but at the end of the day, in a true SHTF scenario- what'll it be worth?

Wed, 02/13/2013 - 18:37 | 3241384 BigJim
BigJim's picture

 ...in real life, you have almost zero practical use for, right?

Before you flip out, I said practical, OK?  I know that gold is a great hedge/store of wealth, but at the end of the day, in a true SHTF scenario- what'll it be worth?

A store of wealth is a real, practical use for gold, in direct proportion to how much wealth I have to store... or is something only 'practical' if I can use it if we go Mad Max? And how many of the things that are 'practical' in this sense are of any use in anything less than complete societal breakdown?

Fri, 02/15/2013 - 14:33 | 3247108 acetinker
acetinker's picture

I'm not trying to pick a fight, really, I'm not.  All I'm trying to say is that gold's value is perceived, as it has few practical uses.  It seems to me that we're in uncharted waters fiscally, so a "complete societal breakdown" isn't so far fetched.  Methinks we're headed for a not-too-distant rendezvous with a "new" reality in which our current perception of what's valuable will be severely challenged.

 

 

Wed, 02/13/2013 - 10:43 | 3240142 Setarcos
Setarcos's picture

You have read even more into my post than I implicitly intended, so thanks for expanding.

Wed, 02/13/2013 - 09:59 | 3239999 AUD
AUD's picture

Inconceivable amounts of gold was mined out of Australia from the 1850's, as in California & Nevada in the US, in Canada & South Africa. And that's on top of all the gold mined in the 10000 years previously.

99.999% of this gold remains, stuffed into somebodies vault somewhere.

Nobody knows how much gold there is, but it's a fucking lot. The idea that gold is scarce is complete bullshit.

Wed, 02/13/2013 - 10:11 | 3240037 Setarcos
Setarcos's picture

Nonsense.

If gold was as abundant as iron, for instance, it would not be a "precious metal".

You defeat your own argument by your claim that "99.999% of this gold remains, stuffed into somebodies vault somewhere."

You are implicitly admitting that gold is indeed scarce and that - according to you - all past mined gold has been horded.

You have not presented any evidence that there's a "fucking lot" of future gold to be mined, to add to existing stores.

Wed, 02/13/2013 - 10:29 | 3240086 AUD
AUD's picture

You have no idea.

If you did you would know that quantity plays no part in why gold is precious.

Moreover, I didn't say there was "fucking lot" of future gold to be mined, I said that a fucking lot HAS been mined & that 99.999% of this gold still exists.

Gold is not scarce. There is no problem with gold redeemability in any currency, except that it would remove the abilty of the government to pass off dud cheques on ignorant dipshits like you.

Wed, 02/13/2013 - 16:33 | 3241038 BigJim
BigJim's picture

Using a term like 'a fucking lot' to describe how much gold has been mined is stupid. What does it mean? A fucking lot compared to what, platinum? Pink diamonds? Unobtanium?

Calling other people dispshits when they point out the stupidity of your posts only makes you look even more stupid. And arrogant to boot.

Wed, 02/13/2013 - 11:15 | 3240249 unrulian
unrulian's picture

So if it's stuffed in someones vault and most likely borrowed against...over and over it's not available to be used on the open market...that's why it takes weeks to get one fucking maple. go ahead back a currency with it and see how much is readily available...dip shit

Wed, 02/13/2013 - 10:43 | 3240141 Hobbleknee
Hobbleknee's picture

Sure dude, gold is everywhere.  That's why everyone is a gold miner, digging it up all over the place and getting rich.  Just the other day, my kids found 20 ounces on the beach.  It's crazy that people pay over $1,600 an ounce for stuff that is not scarce and can be found everywhere. 

Wed, 02/13/2013 - 09:09 | 3239911 rsnoble
rsnoble's picture

Of course there's not enough gold for a gold standard, duh.  Not without a 99.9% devaluation.  Which would be fine with a debt holliday and prices crash with it. 

Wed, 02/13/2013 - 08:53 | 3239878 eddiebe
eddiebe's picture

What, and give up the printing press?         Inconceivable!

Wed, 02/13/2013 - 08:30 | 3239842 apberusdisvet
apberusdisvet's picture

Any gold standard cannot be allowed by TPTB because the Anglo-American cabal either doesn't have any or what they have has been hypothecated numerous times.  BTW, what ever happened to Libya's gold?

Wed, 02/13/2013 - 03:16 | 3239680 JOYFUL
JOYFUL's picture

The next time Bloomberg needs someone to talk about the gold standard, let’s hope they pick someone who  understands it fully

 

Er. what? There's naivety...then the disingenuous, then, possibly a whole new category which you sir, have invented and emblemize>>??

Possible equivalents to your non-sequitur....

Let's hope the offical 9-11 Commish will reconvene to direct their attentions to information and informants vital to establishing the 'truth' about the towerz...

Let's hope that Arlen Spector rises up from the grave one night in a sweat and dials up the FBI to inform them that his conclusions about Dallas were all wrong.

Let's hope that Obama goes to israel and tells the nasty sionist that Merika and Merikans will not stand for aggression against Iran.

Let's hope that the suppply of witless pundits of this type will dry up, and no longer appear on the top banner of the west's lastest and bestest information outlet.

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