What is it about former central bankers who first destroy the fiat system with their monetarist policies, only to go into retirement, and preach the virtues of the one compound they spend their entire professional careers trying to destroy: gold. To be sure, when it comes to polar reversals of opinion, nobody comes even remotely close to Alan Greenspan: the former Fed chairman who is not only instrumental in launching the "Great Moderation", which unleashed the current unprecedented global debt wave which will lead to unprecedented disaster sooner or later, has in recent years become one of gold's biggest advocates as demonstrated most recently in "Greenspan's Stunning Admission: "Gold Is Currency; No Fiat Currency, Including the Dollar, Can Match It."
Now it's the turn of his former colleague at the Bank of England, Mervyn King, who in an interview with the WGC's Gold Investor monthly, pours cold water over Bernanke's "explanation" that gold is merely a tradition, and says the following:
"I am very struck by the fact that over many many years, central banks, governments and individuals have always, despite the protestations of economists, held some gold in their portfolio. Obviously, there is no high running return, but when unexpected things happen, particularly when governments rise and fall, then gold is a means of payment that everyone is always prepared to accept. And I think that’s why even central banks have always had a role in their portfolios for gold,” he adds."
The then innocently pointed out that when it comes to defense against hyperinflation, gold remains the, well, gold standard:
“It’s still early days to conclude that around the world, governments have found the solution to maintaining price stability with a managed paper currency. We made real progress in the 1990s and early 2000s and a lot of countries went down that road and followed us. But hyper-inflation has clearly not disappeared – the second biggest hyper-inflation in history was in Zimbabwe in this century – so I can understand why holding gold would seem to be a sensible part of a national portfolio. Because there is clearly a need to take some precautions against an unknowable future.”
But the most interesting observation from Mervyn King's interview comes courtesy of an observation by The Money Trap's Robert Pringle, who writes the following about "Mervyn King's alarmist warning":
According to the World Gold Council, Mervyn King, former governor of the Bank of England, believes that in certain circumstances China’s assets in the US could be “annulled”. Mervyn King’s alarmist warning is made in an interview, entitled “Present perilous, future imperfect” that appears in the June issue of Gold Investor, a WGC publication. After pointing out that “China and other countries do not want to be in a situation where all their iternational assets are in effect dependent on the US”, he is quoted as suggesting that all China’s US assets could be at risk:
"Over the last decade or so, the claims by some emerging market countries on the US have grown. Who knows what the future holds, but China and other countries do not want to be in a situation where all their international assets are in effect dependent on the US. Of course the US would not want to renege on its debts, but if some awful conflagration occurred, then all China’s assets in the US might be annulled. So there are plenty of big concerns that make it extremely reasonable to have assets in your portfolio that are not dependent on the goodwill of other countries."
The choice of the word “annulled” suggests some kind of deliberate action. Under what scenario could this be even contemplated?
Does he have in mind some sort of armed conflict? That is suggested by his reference to an “awful conflagration”. He appears to be suggesting that if China and the US went to war, the US could cancel the Treasuries China owns (only those China owns?) and not repay (nor service the interest) unilaterally.
He does not say so, but of course this would cause all US Treasuries to collapse, and the US would not be able to issue new bonds.
If he means that the US would suspend paying interest or capital on the bonds that it owes to China (and its allies) only while the war went on, then he cannot mean ‘annulled.’
It is fair to point, as he does, to concerns that make it reasonable to have assets in a central bank’s portfolio that are not dependent on the goodwill of other countries.
It is also quite legitimate to consider extreme scenarios other than those mentioned by Mervyn King; e.g. that US fiscal deficits might grow out of control, ending in rapid inflation or even hyperinflation.
But for Mervyn King to say that there are circumstances in which the US could annul its debts is astonishing. Mervyn King’s alarmist warning goes far beyond scenarios outlined in his recent book “The End of Alchemy”
All we can add to this is that with Icahn, Druckenmiller, and Soros, and now Mervyn King too, all warning that major trouble is coming, we are confident that the algos and the 17-year-old hedge fund managers will be right in betting it all on central banks to keep pushing the S&P to new record highs and beyond even as the global economy grinds to a halt.