Guest Post: A Golden Opportunity

Tyler Durden's picture

Submitted by Patrick Barron via the Ludwig von Mises Institute,

The euro debt crisis in Europe has presented Germany with a unique opportunity to lead the world away from monetary destruction and its consequences of economic chaos, social unrest, and unfathomable human suffering. The cause of the euro debt crisis is the misconstruction of the euro that allows all members of the European Monetary Union (EMU), currently 17 sovereign nations, to print euros and force them on all other members. Dr. Philipp Bagus of King Juan Carlos University in Madrid has diagnosed this situation as a tragedy of the commons in his aptly named book The Tragedy of the Euro. Germany is on the verge of seeing its capital base plundered from the inevitable dynamics of this tragedy of the commons. It should leave the EMU, reinstate the deutsche mark (DM), and anchor it to gold.

The Structure of the European Monetary Union

The European System of Central Banks (ESCB) consists of one central bank, the European Central Bank (ECB), and the national central banks of the EMU, all of which are still extant within their own sovereign nations. Although the ECB is prohibited by treaty from monetizing the debt of its sovereign members via outright purchases of their debt, it has interpreted this limitation on its power not to include lending euros to the national central banks taking the very same sovereign debt as collateral. Of course this is simply a backdoor method to circumvent the very limitation that was insisted on when the more responsible members such as Germany joined the European Monetary Union.

Corruption of the European Central Bank into an Engine of Inflation

When the ECB was first formed around the turn of the new millennium, the bond markets assumed that it would be operated along the lines of the German central bank, the Bundesbank, which ran probably the least inflationary monetary system in the developed world. However, they also assumed that the EMU would not allow one of its members to default on its sovereign debt. Therefore, the interest rate for many members of the EMU fell to German levels. Unfortunately, many nations in the EMU did not use this lower interest rate as an opportunity to reduce their budgets; rather, many simply borrowed more. Thus was born the euro debt crisis, when it became clear to the bond market that debt repayment by many members of the EMU was questionable. Interest rates for these nations soared.

Over the past few years the European Union itself has established several bailout funds, but the situation has not been resolved. In fact, things are even worse, for it now appears that even larger members of the EMU succumbed to the debt orgy and may need a bailout to avoid default. Thus we have arrived at the point predicted by Dr. Bagus in which the euro has been plundered by multiple parties and the pot is empty. The ECB and many sovereign members of the EMU want unlimited bond buying of sovereign debt by the ECB. Only Germany opposes this plan, but it is the lone voice against this new bout of monetary inflation.

The Historical Context of German Antipathy to Monetary Inflation

In 1923 Germany experienced one of the world's worst cases of hyperinflation and the worst ever for an industrialized nation. The reichsmark was destroyed by its own central bank, plunging the German people into misery and desperation. Now, after only a dozen years of relative monetary discipline, the euro faces the same fate as country after country demands to be bailed out of its mounting debts by unlimited printing of money by the ECB. Because Germany is part of the EMU, it must accept these newly printed euros. This threatened monetary inflation of unlimited amounts has shaken German bankers to the core. It is the nightmare scenario that they feared when, against their better judgment, the German politicians agreed to give up their beloved deutsche mark and place the economic fate of the nation in the hands of a committee of foreigners not as concerned about monetary inflation. But Germany can put a stop to this destruction and save the world while it saves itself. It can leave the EMU, reinstate the deutsche mark, and tie it to gold.

A Golden Deutsche Mark Is Possible and Desirable

Despite the haughty pronouncements of EU officials, there is nothing that can stop a sovereign country from leaving the EMU and adopting a different monetary system. The most likely scenario would be a one-for-one redenomination of German banks' euro-denominated accounts for deutsche marks. Thereafter, the DM would float freely in currency markets in the same way as British pounds and American dollars. The Bundesbank would be responsible for monetary policy just as it was before Germany joined the EMU. By leaving the EMU Germany would insulate itself from the consequences of the euro as a tragedy of the commons; i.e., monetary inflation by third parties would end, Germany would not experience higher prices due to the actions of third parties, and the capital-destroying transfers of wealth would end.

Yet Germany should go one step further. It should anchor the DM to gold. Germany is the world's fourth-largest economy, behind only the United States, China, and Japan. Furthermore, Germany owns more of the world's gold than any other entity except the United States, more than either China or Japan and more than any other European country. A prerequisite to market acceptance of any gold money would be confidence in the integrity of the sponsoring institution. Not only is the Bundesbank known for its integrity and reverence for stable money; Germany itself has a worldwide reputation for the rule of law, advanced financial architecture, and a stable political system. For these reasons, Germany would prove to the world that a gold-backed money is not only possible but desirable. Expect a cascade of similar pronouncements once Germany's trading partners realize the importance of settling international financial transactions in the best money available — which initially at least would be a golden DM.

Germany Should Seize the Moment!

Of course the beneficial consequences of tying money to gold go beyond ending price inflation and capital-destroying wealth transfers. We can expect all the beneficial consequences of a return to limited government, for government could no longer fund itself through the unholy alliance with an inflationary central bank that creates fiat money in order to monetize government's profligate spending. The people would no longer be so subservient to government, pleading and begging for special interests at the expense of the rest of society, for government would be forced to go to the people for approval to increase its budget. The list of benefits goes on and on. Suffice it to say that it all begins with truly sound money, money anchored in gold. Germany can lead the way and earn the just respect of a grateful world. It is in the right place at the right moment in history. It should seize the moment!

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goldenboy's picture

Ahh,ok...that's enough to convince me that der Buba still has its name on any more than that 150 Tons it's bringing back over 3 years for a 'thorough examination'. Link the DM to paper gold claims on never-to-exist gold... The Oil states are gonna rush to that as payment for their Oil...

knukles's picture

Strong currency, anyone?

gmrpeabody's picture

Ackward, but Germany doesn't know if they actually have any gold to anchor to...

knukles's picture

If this goes on much longer it'll go from "Gold? What gold?" to "Vaults?  What vaults?  We never had any vaults.  Whadddhu talkin' about?"

Dr. Sandi's picture

I want to see how the official audit of German gold turns out.

Will it truly be a transparent, actual audit process that would mean something, or will it be some sort of standard accounting practice audit where each IOU is compared to each UOMe and declared equally high stacks of paper?

If the real gold actually gets back home to Deutschland, it would seriously change the game. And it would make it possible for Germany to actually have gold backed fiat. 

Of course, the honesty of even a gold-backed system still relies on the honesty of the thieves in charge.

strannick's picture

The people would no longer be so subservient to government, pleading and begging for special interests at the expense of the rest of society, for government would be forced to go to the people for approval to increase its budget.

Exactamundo

flacon's picture

The problem is that world wars are fought over land and gold. THE UNITED STATES OF AMERICA® (the bastard, kniving beast that she is) deserves some respect for being able to pillage the entire world of it's gold under their drunken noses. For the US Dollar is the substance which makes kings and rules drunk with the the wine of their fornications. 

fourchan's picture

if our 10000+ tons isnt in our vaults, we should kill every government worker and start over.

EnslavethechildrenforBen's picture

Usury is unpayable, neither in Gold nor in Fiat. Printing money is exactly the same as robbing money. People close to the top of the pyramid are starting to wake up to this fact. Monetary easing is the art of easing hundred dollar bills out of your pocket while you are being distracted with an endless array of bullshit. No government on earth wants to go back to a Gold Standard because that would end their ability to steal at will. They will print until hyperinflation is a household word. The only solution is to realize that there are 300 Billion of us and only 300 of them, that being a ratio of a Billione to 1, we outnumber them to the point where it should be no problem to simply put them all in jail and start over.

Bansters-in-my- feces's picture

I know it seems like "300 billion of us"but I am pretty sure it's like 7 billion ish. So your estimate seems a wee bit high.

But......I still agree put them in jail and hang them there.

jeff montanye's picture

never seen a list of reserves with 10,000 tons of gold or higher for the u.s., usually around 8,100 (though cnbc has an 8,900 figure).  my guess is the truth is lower rather than higher and that government workers below the tippy top got none of it.  the revolving door to the bullion banks, tbtf etc. rewarded a few, probably at a fraction of a cent on the dollar.

http://www.businessinsider.com/countries-biggest-gold-reserves-2012-3?op...

cynicalskeptic's picture

A tungsten backed currency isn't quite the same thing - and that may be the result if London and NY still have any German 'gold' bars on premises.  You'd expect the bankers to at least preserve the illusion of gold holdings for their favorite central bank metal lenders via gold coated tungstern even if they sold off all the real stuff years ago.

Same reason you'll never see a real audit and (with assays) of US holdings.

Eugend66's picture

You`re, of course right. But the currency Will be the EUR.

Snidley Whipsnae's picture

"Yet Germany should go one step further. It should anchor the DM to gold. Germany is the world's fourth-largest economy, behind only the United States, China, and Japan. Furthermore, Germany owns more of the world's gold than any other entity except the United States, more than either China or Japan and more than any other European country."

Possession is 9/10s of the law... It's going to take Germany 3 years to repatriate 150 tons of gold from the US... Why 3 years? BTW, the PBoC certainly believes that physical PM ownreship MATTERS. Indians, who own ~ 15,000 tons believe that it MATTERS. Only the talking heads and paper pushers on MSM believe that it doesn't MATTER. All of SE Asia and the Mid Easterners believe that physical ownership MATTERS. Who ya gonna believe?

"CNBC MOPE: Actual Existence of Gold Reserves is Irrelevant, It’s the Bookkeeping That Matters!"

"In reality, it does not matter one bit whether the Federal Reserve Bank of New York actually has the German central bank’s gold or whether the gold is pure. As long as the Fed says it is there, it is as good as there for all practical purposes to which it might be put. It can be sold, leased out, used as collateral, employed to extinguish liabilities and counted as bank capital just the same whether it exists or not."

http://www.silverdoctors.com/cnbc-mope-actual-existence-of-gold-reserves-is-irrelevant-its-the-bookkeeping-that-matters/

 

jeff montanye's picture

it doesn't matter until it does (see: no clothes, emperor with,; oz, wizard of; republic, weimar)

EatYourCornTakeyourPill's picture

I think the author misses the elephant in the room.  Germany sells the majority of it's shit to Europe. Just ask Krugman, kill the consumer, kill the world. Seriously though, if Germany drops Europe. Germany gets screwed just as much. Catch 22 anyone? China's on the line.

masterinchancery's picture

I don't agree. The golden rule is that gold rules.  If Germany were to back the DM with gold, it would rule the world. Ultimately, unbacked currencies would have to fall in line.

Bindar Dundat's picture

You are right Master I,

 

There has never been a strong country that did not have a strong currency -- ever.

xray vision's picture

Why would unbacked curriences have to fall in line?

They could sell their goods cheaper than Germany and Germany's economy, largely based on exports would dry up.  People with money would buy DM just to hold and drive it's cost up up up.  Just like Switzerland had to debase their currency.  In the global race to the bottom a strong currency is death. 

Bay of Pigs's picture

Like Greece?

You forgot your <sarc> tag.

xray vision's picture

Why would unbacked curriences have to fall in line?

They could sell their goods cheaper than Germany and Germany's economy, largely based on exports would dry up.  People with money would buy DM just to hold and drive it's cost up up up.  Just like Switzerland had to debase their currency.  In the global race to the bottom a strong currency is death. 

OneTinSoldier66's picture

This is like trying to say that Gold has no value.

Gutterballs's picture

Kill the Keynesian bullshit. Oh, and I think you meant "its". The possessive form of "it" is "its", to distinguish it from the contraction "it's = it is".

And go ask Krugman how often he polishes his Nobel medal.

fockewulf190's picture

Let me tell you all that there is almost ZERO support amongst all the mainline political parties over here to ditch the Euro. All you hear is "wir brauchen mehr Europa!" (we need more Europe). These chumps in power will drive this bitch straight into the ground on full afterburner. I shit you not! They may be stalling here and there, but in the end they are going to throw billions out the window if the screaming gets loud enough...and I'm talking about the banks, not the people. The people here are always considered sheep.

Cast Iron Skillet's picture

that's what I hear, too. it might be technically possible for Germany to leave the Euro, but it is politically impossible.

jeff montanye's picture

"These chumps in power will drive this bitch straight into the ground on full afterburner."

that's my reading of the european political elite as well.  christine lagarde may not read her organization's publications but she knows a hot leather item when she sees it.  oh and then there's this:

http://www.guardian.co.uk/world/2011/may/11/christine-lagarde-invetigati...

nofluer's picture

I fail to see ANY benefit to keeping customers who cannot pay value for value.

Go for it, Germany! Once the rest of Europe realizes that momma has slammed the lid on the cookie jar, maybe they'll finally eat their broccoli?

Silver Bug's picture

Germany really should leave the Euro for their own good.

 

http://ericsprott.blogspot.ca/

bilejones's picture

Here is the central issue:

 

"the bond markets assumed that it would be operated along the lines of the German central bank, the Bundesbank, which ran probably the least inflationary monetary system in the developed world. However, they also assumed that the EMU would not allow one of its members to default on its sovereign debt."

 

Who are the "Bond Markets"  ? 

The Banks.

The convergance trade (that all euro rates would move toward those of Germany) was second only to the yen carry trade in the past couple of decades.

Hundreds of billions of dollars were made.

This is a bank fuck-up and when banks fuck up guess what, they're bankrupt.

Hulk's picture

Keep stakin Bitchez !!!

TrillionDollarBoner's picture

Vampires maybe, bitchez no.

I draw the line there. 

I have never and will never stake any bitchez, period. 

Hulk's picture

I see what you did there !!!

Likstane's picture

No matter how many times I stake wood in them, they never seem to expire; sometimes they moan a lot, but never expire.  Maybe I'm doing it wrong. 

Yen Cross's picture

Germany re-unified the East in the early "90s'". I think Germany is ready to take the "blue pill", and move fore-ward! (I'm not yiddish)

  Germany makes Japan look "pathetic"!

bank guy in Brussels's picture

A differing perspective today from one European commenter, writing to John Ward's excellent 'The Slog' ...

« ... Whatever we do is not going to make one blind bit of difference to the real Eurozone problems and the huge Euro catastrophe heading straight towards all of us. »

http://hat4uk.wordpress.com/2012/10/26/special-slog-editorial-is-it-me/

Yen Cross's picture

 You always pop in at the most "un-invited times". That's why you are a, "Bank Wananbe in Belgium"!

Treason Season's picture

Frontrunning for zionists and pedophlles.

Burticus's picture

Anchor it to gold?!  Ahahahaha!

Everyone knows the Limeys, 'Murkins and Frawgs done stole the Krauts' gold, gave it to their central bank masters where Rubin swapped it for plated tungsten and "leased" it for eternity to their beloved bullion bank shareholders who "sold" it the Rothschilds and just enough into the market to disguise the collapse of their central bankers' fiat electrons.

For a currency to be redeemable, they will need a lot of real gold that ain't there.

newworldorder's picture

Correct. If GATA has it right the German physical gold is not there. If it is, it has been swapped,  leased, loaned and sold numerous times. Would the German people take the dare of finding out the truth? Stay tuned to GATA and ZH for the exciting details, but dont be suprised if you grow old wainting for the final results.

yabyum's picture

Gold! What Gold? Better think about the Tungsten inside those shiny bars. Better think of the empty look on their faces.

Thisson's picture

Gata doesn't have it right, though.  And Germany adopting a gold-"anchored" currency isn't going to solve anything as long as they continue letting their banks engage in fractional reserve lending.  It's also unclear that they wouldn't suffer from inflation, unless they prohibit the use of euros and other fiat currencies as well, otherwise Gresham's law will result in the DMs being hoarded as imported euros continue to act as an inflation engine.

CitizenPete's picture

Serious hypothetical question: Say that they do back all base money (reserve money) with gold assayed and allocated in the CB vault.  Then buy bonds and allow banks to expand the money supply via fractional reserve lending.  Of it ends up being a 9 to 1 ratio for this "twice loaned money" then is 9 to 1 really a problem. Why does it need to be 1 to one.  How could it function that way?  The banks go and mine gold.? 

_underscore's picture

Which doesn't really matter at all. German strength stems from its formidable industrial base & post-WW2 reputation for financial probity & currency stability. Imagine, if you will, the situation where Germany says it will re-adopt a DM standard & buy gold withose DM & will also pursue its gold reserves held overseas. It may well have difficulty in getting its gold back - but so what! It has the claims, those cliams can be converted (if all else fails) into other resource claims/debts owed. By hook or by crook it will get some (maybe not quite all though) value back for its gold. Meanwhile, it buys gold on the open market (or from Russia) with its ever-so-desirable new DM, starts trading oil for DM, bilaterally trades in DM/Yuan with China, sells machine tools to India for gold, buys palm oil from Brazil for DM etc, etc.

Utlimately, gold is unproductive, except where it can do its 'work' - and even though intial possession is important, if you don't have much productive capacity you'll sell to buy product. Gold will flow into Germany like it did into the Assyrian, Roman, Spanish, British & American empires. Gold flows now into the Chinese empire at the same rate as it flows out of the American empire - not because China has $ reserves, but because it made stuff to get $ reserves.

As many here point out, paper games, book-keeping entries on govt. bonds & fiat currency magicking-into-existence alchemy don't produce one single nut or bolt of production - when the time is right, all that ephemera will be swept aside, banker produced debt obligations will mean nought.

 

Shibumi2's picture

I think underscore has it right. The paper, backed by gold or not, is merely a representation of value and exchange to facilitate trade. Since gold has been a universal storage medium of value, it provides a convenient yeardstick and known entity as a backstop.

Ultimately, the paper is worth what one can obtain for it. Post WW!, the national socialists were cut off from international financing but did quite well bartering well made german products for equal value of needed imports. Ultimately, if one group needs something another group makes, the trade will happen...fiat or not.

The decline of american prosperity is a factor of the loss of industrial output rather than the banking industry fraud, per se. In other words, the bank fraud was undertaken to liberate value from those who produced it. The industrial muscle of past times created the value looted. 

Ghordius's picture

"paper games ... don't produce one single nut or bolt of production" exactly

and this is the reason why we are all engaged in a race-to-the-bottom with currencies:

from a national-industrial point of view: in order to keep the existing industrial resources home instead of letting the globalized economy rationale ship them to cheaper labour shores.

from a national-labour point of view: same as the above, with an even higher incentive because it's job that won't return, ever

going golden or with a super hard currency now would go exactly in the other direction. the last thing that Germany and others want. hence the EUR and it's function

_underscore's picture

That's the 'classical' explanation (of the desire for a cheap curency) of course Ghordius. Tell me this: does Germany  have lower labour costs than China now? Then, how (given your explanation) can Germany compete, even now?

I fail to understand (and this may very well be my failing, I concede) how having  efficient production sector that produces sought-after goods can damage itself by mere success. This is a trick played upon workers to lower their wages & increase profits for the rentier class - that class being mostly represented in the City & Wall St. The mistake, as I see it, is in the assumption that a hard DM would mean a less competitive Germany, as the floating exchange would 'over-value' the DM. This assumes no corollary advantage of lower energy/commodity & import prices, which would allow a pricing level (in DM) to stay competitive - this is not the same as an internal devaluation by the way. A mature labour union movement (as is the case in Germany) would negotiate pay levels that reflect the purchasing power of that pay - a strong currency negates the need for inflationary pay compensation, so only genuine increases in production are negotiable items in pay compensation. Production costs (say for BMW) would decrease as a result of cheaper raw material / energy costs, so their prices will refelct that. The worker' pay component is stable, except (as above) in the case of greater productivity, which again is factory-gate price neutral.

The situation now (i.e. the Euro) is a hindrance to those southern european economies that need to de-value  & a millstone to Germany, going forward. The rabiit-caught-in-the-headlights response of the EU sees only a political problem - so seeks a political solution, not an economic one.

 

Eally Ucked's picture

Why they need so much gold? If they have 1T its ok too, just find proper ratio of paper to gold 1g AG to 150t of paper and that's it.

Why are you so attached to 31g of gold to 1700$? Depending on weight and nominal value of bills now ratio is 1:1, 1g of Ag to 1g of paper. HaHa! 

AUD's picture

It should seize the moment!

It won't.

Urban Redneck's picture

the Germans would have to actually balance their budget to do so...