Guest Post: Gold And The Four Words That Define Western Economic Policy

Tyler Durden's picture

Submitted by Tim Price via Sovereign Man blog,

Despite nearly $17 trillion reasons, there are investors stupid enough to believe that debt issued by the world’s largest debtor country (i.e. US Treasuries) should be treated as a risk-free asset.

This is even more astounding given that the possibility of formal default is only a matter of days away.

Treasury bond defenders will no doubt point out that in a fiat currency world where the central bank has the freedom to print ex nihilo money to its heart’s content, the very idea of default is absurd.

But that is to confuse nominal returns with real ones.

Yes, the Fed can expand its balance sheet indefinitely beyond the $3 trillion they have already conjured out of nowhere. The world need not fear a shortage of dollars.

But in real terms, that’s precisely the point. The Fed can control the supply of dollars, but it cannot control their value on the foreign exchanges.

The only reason that US QE hasn’t led to a dramatic erosion in the value of the dollar is that every other major economic bloc is up to the same tricks. This makes the rational analysis of international investments virtually impossible.

It is also why we own gold – because it is a currency that cannot be printed by the Fed or anybody else.

On the topic of gold, the indefatigable Ronni Stoeferle of Incrementum in Liechtenstein has published his latest magisterial gold chartbook.

Set against the correction in the gold price 1974-1976, the current sell-off (September 2011 – TBD) is nothing new. The question is really whether financial and debt circumstances today are better than they were in the 1970s.

We would suggest that debt fundamentals are objectively worse.

Chart3 Gold, and the four words that define western economic policy

Trying to establish a fair price for gold is obviously difficult, but treating it as a commodity like any other suggests that the current sell-off is not markedly different from any previous correction during its bull run:

Chart2 Gold, and the four words that define western economic policy

To cut to the chase, it makes sense to own gold because currencies are being printed to destruction; the long-term downtrend in paper money (as expressed in terms of gold) remains absolutely intact:

Chart1 Gold, and the four words that define western economic policy

And we cannot discuss the merits of gold as money insurance over the medium term without acknowledging the scale of the problem in (US) government debt, now closing in on $17 trillion.

Whatever happens in the absurd and increasingly dangerous debate over raising the US debt ceiling, the fundamental problem remains throughout the western economic system.

The piper must, at some point, be paid. And someone must pay him.

As to whom? This is the foundation of western economic policy, distilled into just four words: the unborn cannot vote.

Governments have lived beyond their means for decades and must tighten their belts. Taxes are certain to rise, and welfare systems certain to contract… especially for future generations.

Even if western governments manage to rein in their morbidly obese consumption patterns without a disorderly market crisis, their legacy will be felt by generations yet to come.

The debt mountain cannot and will not resolve itself. And this, again, is why we own gold; because we think there is a non-trivial chance of a gigantic financial system reset.

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Landotfree's picture

Whether or not you attach interest to either gold or federal reserve notes... the outcome is going to be the same each time.

"7+ billion have lived beyond their means for decades and must tighten their belts."  -fixed and made it correct

You could reduce the government to $0 and the system will still implode, matter of fact it would implode overnight.  Pointing out a symptom of the problem will never fix the problem from happening again.

EnslavethechildrenforBen's picture

There is no inflation when on a Gold Standard... Basic math. Also, charging interest used to be punishable by death and should still be.

Landotfree's picture

Without inflation the system implodes, as people attach interest to their gold.    Basic math.


- Lend 10 gold oz. at 10% annually and compounded

- Million or billions do the same thing... money for nothing and your chicks for free... the money does the work... hahaha no such thing

- System expands to max potential

- System is unable to generate the needed required growth

- Peak

- Collapse

- Liquidation of the unfunded walking liabilities

EnslavethechildrenforBen's picture

Interest is only payable in vegetable and animal. Minerals do not reproduce. There is no logic in your argument.

Landotfree's picture

It makes all the sense in the world as you do not understand basic credit.   I lend you 10oz of gold at 10% annually and compounded, it works as long as the total in the system is able to generate the needed interest... ie new gold into the system.... once gold can't come into the system at the rate needed.... collapse and liquidation of the liabilities.

The system you are describing is one without interest, sorry but the people on this floating rock want their chicks for free.

I care not what you attach interest to, eventually the supply/demand will not be there as you would need to be God or God like... infinite power... good luck and all though.

Boris Alatovkrap's picture

Gold base currency, or just gold, is Banker worse nightmare. Robbery through slice salami is only effect by divisible and expandable share base for purpose of dilution. When dilute, bankster is increase number of bank share and dilute share of citizenry.

Fixed quantity basis, like gold, is not allow for theft through fiat quantitative "manipulation".

or... Bit Coin? Otherwise, why the hate from Central Bank?

Landotfree's picture

I see nothing but 7 billion bankers.


Bankers could careless if you are using gold, silver, federal reserve note, dirt or bitcoin.... they want their chicks for free just like all the rest ie attach interest.... they want money to work, but that is impossible.      

"theft through fiat quantitative "manipulation""

Pretty much irrelvant... system will expand, fail to expand, peak, collapse and then liquidation of the unfunded liabilities.


NOTaREALmerican's picture

Re:  I see nothing but 7 billion bankers.

+1 (in Fiat currency) on that one.

Survival of the fittest sociopaths, bitchz.  And, it doesn't always work out as the semi-autistic Libertarians think it will.

tongue.stan's picture

yeah, well, it doen't always work out as the fucktard statists think it will either, n'est pas?

Wen_Dat's picture

Yeah, well, you know, that's just, like, your opinion, man.



Seize Mars's picture

You're a liar.
Charging interest on a gold loan is different than the fiat idea of interest.
With a gold loan, people can only lend money that already exists. Since lending and borrowing will be uncoerced, people will not lend 100% or more of the money supply. The cost of money would rise too high for that to happen. The idea of "unpayable interest" is a purely fiat concept.
But you already knew that.

SAT 800's picture

You really don't understand this subject; but I can't write a whole book here. Money does work; it's called capitalism. You have an insight into one of the fundamental problems; which is that growth, in real productive activity must be greater than population growth. Growth is over, now; that's the fundamental new situation that the mass mind can't grasp. Un-fortunately population growth is not over. Which means we are going to find out how a really, really, large number of two legged monkeys are going to die early. Gold as a currency is fundamentally more honest than paper and it does work well; but nothing works when North America is built out and there is no food reserve and population continues to increase. We could save North America and let other regions collapse and die off; but that would require a clear sighted dictatorship; which isn't going to happen.

Squid-puppets a-go-go's picture

you mean growth must be presented in a format indexed to population growth, or else the value of the data is compromised.

This is part of what prevents many analysts getting a solid grip on Japan: negative GDP aint such a catastophe if it is eclipsed by even greater negative population growth: once amended to per-capita, Japan's performance over the last 20 years has only been pathetic, not abysmal

Umh's picture

The hate directed toward BitCoin is not because it is a sensible currency, but because it is competition.

RaceToTheBottom's picture

I am becoming a "Bit" more open to the Bitcoin....

cougar_w's picture

The denizens of ZH as a rule tend not to think too far beyond the topic of wealth preservation.

That is no fault at all. It is a very worthy preoccupation. But I have found that it limits the level of concern regarding species preservation.

DaveyJones's picture

yes, i used to think wealth preservation was an extension of species preservation.

then, like everything else, you just fuck with the definiton to game it

cougar_w's picture

I'm still trying to figure out how to game mid-life. Running out of time, still not having any success. I guess I'll go straight to dead at some point, or that's what they tell me. At which point notice wealth becomes somewhat unimportant to me personally.

Canuckistan Al's picture

I hear you cougar, just trying to figure out a way from here (midlife I suppose) to the grave that doesn't look like a straight diet of cat food, dandilions and rahman noodles.

RaceToTheBottom's picture

Buy a convertible Porsche

Buy a hairpiece

Screw young chicks

Don't care as you make a fool of yourself

Bluntly Put's picture

Bills of credit that mature into gold bullion were historically self liquidating. Labor and material could be paid for during the production and distribution of the goods/service. Can't do that when a fiat based bills of credit system dislocates.


Boris Alatovkrap's picture

Gold and four word...

"Bank are own you"

unless you are own gold (or copper).

EnslavethechildrenforBen's picture

Careful, Bankers are counterfeit shares of Copper to manipulate shares downward is possibility now.

Boris Alatovkrap's picture

Ah, you are correct, Stock Market Crash of 1907 is cause of United Copper in Butte Montana, instigate battle for control by John Pierpoint Morgan and Knickerbocker Trust. Teddy Roosevelt is give monopoly gift to JPM of Tennessee Coal Iron & Rail...

Plus ce change, plus ce le meme chose.

NOTaREALmerican's picture

Re: There is no inflation when on a Gold Standard

The smart-n-savvy people will always find ways to screw the dumbasses.

Hey,  give me your gold and I'll give you it back plus 10% more at the end of the years.

>Also, charging interst used to be punishable by death and should still be.

Not sure we want them thar turbine wearin' Muslums sneakin'er crosser boarders and runnin' our free-enterprise system, now do ya?

EnslavethechildrenforBen's picture

I'm not borrow your Gold at 10% or even borrow it at all. You just need stay the fuck off my farm you Banker Terrorist cock sucker.

Landotfree's picture

Irrelvant if you don't, others will or have.... eventually the system can't expand exponentially as required.... peak then collape.... then the liquidation phase.... time to write off the unfunded walking liabilities.... 60-80 years generallly or a generation then the exponential power is basically too much.  

artless's picture

@ Landotfree

Please explain why "the system" must "expand exponentially". First please define "the system". Do you mean the credit system? The one that fucked up the whole thing in the first place by expanding exponentially.

Unfunded walking liabilities?

Without the Federal Reserve Act and the subsequent 100 years of currency debasement via credit expansion there would be no method through which all the aspects of the welfare/warfare state could be funded.


James_Cole's picture

Re: There is no inflation when on a Gold Standard

Why do people think this?? There's this thing called history, you can actually reference it to see how things played out in the past - pretty handy sometimes. 

akak's picture

Yes, but over the long term (you know, that perspective that is now frowned-upon, if not actually unpatriotic), prices tended to be FAR more stable within a hard money regime than under a fiat currency regime --- in fact, there is really no comparison possible between the two, as 'rising prices' (i.e., a depreciating currency) is inherent within the fraud and the crime that constitues fiat currency.

Landotfree's picture

I can create fiat anytime I want with willing other agreeable parties.   

akak's picture

Perhaps, but you cannot FORCE anyone to accept it as a payment for goods and services, unlike government.

I always have to laugh at the ignorance and hypocrisy of statists and pro-fiat shills (not saying that you are either), who refuse to acknowledge that legal tender laws, which force all subjects of a government to accept their fiat monopoly money, ONLY exist, and have only ever existed, under fiat currency regimes.  Hard money (meaning money backed by gold and silver) needs no such laws demanding compliance and acceptance.

If government-issued fiat currency is such a wonderful invention and such a boon to modern economies, as all the statists and their coopted academic shills will insist, why then do governments need to FORCE everyone to use it?

NOTaREALmerican's picture

Re;  Hard money (money backedc by gold and silver) needs no such laws demanding compliance and acceptance.

Agree, BUT it's really hard to have a government do REALLY cool things; like:  neat war toys to bomb brown people with, giving money to farmer buddies for not growing stuff, building roads and dams for your developers buddies,  creating really cool spy decoder rings, and all the rest of the REALLY cool stuff that governments love to do without the ability to move lots of loot from the dumbasses into the hands of the really cool people.

akak's picture

Well, I can't argue with you there.

It is true that to make a hard money regime work within a statist system (under government), a shared and widespread sense of responsibility and ethical behavior is needed as a prerequisite, which is why no such monetary regimes exist in this degenerate and degenerating era.

NOTaREALmerican's picture

Re:  degenerating era

degenerating era?   When have humans EVER done anything but worship degenerate leaders?

Landotfree's picture

Nobody has forced me to do anything since I was a child.   I have to laugh at you..... sorry I am I am not a subject of the government.  I laugh at fools that believe such things.

You are promoting strawman arguments.... I can create fiat, either way irrelvant.  

As to the actual subject at hand... people will take the "hard money" and lend for interest... system will expand, system will fail to expand, system will collapse.... and then liquidation of the unfunded liabilities... last time 100+ milllion this time, my guess 1-2 billion.

akak's picture

If you don't believe that the government (doesn't matter under which government you are a subject) forces you to use their monopoly-issued fiat currency, then you understand very little or nothing about our (so-called) modern monetary system(s).

Landotfree's picture

I think you are very confused individual that has not a clue as to what I believe and you definitely have zero knownledge of basic contract.   Nobody forces me to use anything.   If you don't want to use federal reserve notes there is nobody with a gun to your head.  

As to the original discussion, I can create fiat with agreement with 3rd parties, nothing you or anyone else can do about it... .your fiat agrument is flawed as you do not see the forest from the trees.   

As to the article, it need not matter what the underlying medium of exchange is... you attach interest... same result every time... I give it 60-80 or so years.

akak's picture

OK then, idiot, go trying paying your taxes in gold, or silver, or corn, or tobacco, or in ANYTHING other than government-mandated fiat currency of your own particular local flavor, and let's see just how far you get.

Landotfree's picture

You are so far down the rabbit hole I can't help you.   I love the name calling.... great spirit.   Like a bull in a China shop.  Just because you are a sucker doesn't make me one.  :)   What you think pertains to you certainly does not pertain to me.

(a) Separability clause

If any provision of this title, or the application thereof to any person or circumstances, is held invalid, the remainder of the title, and the application of such provision to other persons or circumstances, shall not be affected thereby.
akak's picture

Nice side-stepping of the issue at hand, asswipe.

Landotfree's picture

There is no side stepping anything.... you are willfully agreeing.   That is not my problem because you are a "subject" and you believe yourself or you are unable to find your way out of the rabbit hole.   Love the name calling.  Unfortunately for you, name calling rarely helps when one is standing up for their God given Rights.  I advise you to get back in line with the rest of the lemmings because they would tear you up.

What pertains to you does not necessarily apply to me... there is no collectivism in the Law.   


auric1234's picture

Nobody forces me to use anything.   If you don't want to use federal reserve notes there is nobody with a gun to your head.

If you purchase someone's promise to deliver gold (e.g. COMEX Futures) you have no way to enforce this promise in court. Even if you write it down in contract, the government will always allow your counterparty to breach it and pay you in FRNs instead.

And yes, if you attempt to obtain the gold you're entitled to by your own means (e.g. break into your counterparty's facilities), someone eventually will point a gun at you, even if that gold was yours according to contract.


artless's picture

So you choose to pay taxes?

And you choose to have that tax revenue go to build weapons to murder innocent people thousands of miles away that are of no threat to you or anyone else?


James_Cole's picture

in fact, there is really no comparison possible between the two, as 'rising prices' (i.e., a depreciating currency) is inherent

Yeah, gold / silver standard is a good check on human stupidity but people are too quick to label it a cure-all. 

To my mind for it to work you need a number of things to come together, chiefly - engaged citizens, accountable government and decent transparency in financial industry. People often look at it the reverse, that a gold standard would make those things a reality. 

NOTaREALmerican's picture

Re:  engaged citizens, accountable government and decent transparency in financial industry

So, basically, a Libertarian fantasy world.   Wonderful.  No wonder the Libertarians and Socialist fight so much, they have conflicting fantasy worlds.

You can't use the Flaming Sword of Libertarian Justice against the Union of Unified Workers!   It's not in the rules.