Can One Sentence End the Financial Crisis?

President Trump

 

Can these 9 words end the financial crisis?

US to return to the gold standard by 2022.

White House Press Release


Could a White House press release read like this:

30th April 2020

Today President Trump committed the United States to return to the gold standard by April 2022.

“For most of the 182 years between 1789 and 1971, the United States embraced the principle of a dollar linked to gold — at first, at $20.67/oz., and then, after 1933, $35/oz,” said the President. “During that time, the United States became the wealthiest and most prosperous country in the history of the world.  Today we are returning to these roots.”

A return to the gold standard means that US dollars will again be pegged to the price of gold.  Gold has demonstrated its ability to maintain a stable value for thousands of years.  From April 2022 dollars will be fully convertible into gold and vice versa at the official price.

The role of the Federal Reserve will revert to its original mandate as lender of last resort in times of liquidity crisis.  High lending rates will keep these loans short term. 

The Federal Reserve also reverts to its pre-1971 mandate of maintaining the value of the US dollar to its official peg with gold.  Expansion and contraction of base money supply will again ONLY be used to achieve the single objective of parity with gold.

The return of the Federal Reserve to its original mandates means an end to Quantitative Easing and other money-expansion initiatives.

“A return to the gold standard marks the end of bailouts,” said the President, “for banks, for businesses and for the US government.  The prosperity of previous generations was built upon the principles of hard work and self-reliance.  There will be no more taxpayer-funded easy money.”

During the two year transition period the President affirmed the government’s intention to work with banks and businesses to prepare for the return to hard money.  However he signalled this was likely to be with loans or new equity instead of the current purchase of troubled assets.

“Make no doubt, the next two years are going to be tough,” commented the President, “but the lesson of history is on our side.  No experiment with floating currency has ever brought lasting prosperity while people and nations have prospered with the discipline of hard money.”

 

The President’s 6 Point Plan


Banks

Banks in need of liquidity are recapitalised along traditional lines through the issue of new shares.  The valuation of new shares is handled by private equity firms.  The government invests alongside private equity at the price determined to be a sound investment by these firms.  This ends the cosy relationship between governments and banks.

Federal guarantee of bank deposits is abolished.  Banks need to compete for deposits on the basis of fiscal prudence and discipline.

Stocks

As with banks, government is willing to become a shareholder in corporations in need of capital, but only at a price the private market considers a sound investment.  Government again invests in new share issues alongside private equity.

Shareholdings in banks and corporates become a major source of revenue for government.

Treasuries

Demand for treasuries immediately rises as the United States strengthens its safe haven status.  Demand continues as government demonstrates its ability to live within its means.

Government

Bipartisan commitment to small government returns the country to its entrepreneurial roots.

Stock Market

The stock market falls as it clears the over-valuations caused by QE and share buy-backs.  The correction provides the opportunity for new inflows of capital at the right price.

Taxes

The government cuts taxes. It follows the example of Russia with a flat 13% tax rate.  The rate not only increases revenue but stimulates the real economy in a way not possible with QE.

 

Expected Results
 

Role as World’s Reserve currency Strengthened

Backed by the announcement demand for dollars continues to be strong around the world as the currency’s imminent link to gold re-establishes a stable currency and monetary discipline.  Other countries follow suit by either linking directly to gold, or, as during the Bretton Woods era linking to gold via the dollar.  With markets given the choice between the stable US gold-backed currency and a currency that remains floating, currencies that do not return to the gold standard experience rampant inflation through loss of confidence.

Beggar Your Neighbour

Damage to the competitiveness of US exports from a hard currency dollar are short lived.  As the world’s reserve currency a significant portion of dollars are used for non-US trade purposes. For example the dollar is used in 40% of all cross border transactions using the SWIFT clearing system.   60% of world bank reserves are held in US dollars.  88% of all Foreign Exchange trades are in US dollars.  That is to say, the supply chain of non-US countries also relies on US dollars for the pricing of materials and payment of contracts.  Given that the option to retain a floating currency becomes increasingly untenable the “beggar your neighbour” currency wars of the fiat era become a thing of the past.

Economists

An entire generation of economists trained in Keynesian and Monetary economics find themselves out of work.  Currency Boards (which is what the gold standard effectively is) are simple and indeed mechanistic in the way they operate.  With no openings for their skills economists, like the economy itself returns to the real world.

The President’s Contact Details
 

This plan can be sent to President Trump via:

https://www.whitehouse.gov/contact/
trump@trumporg.com

 

Postscript – Russia 1989

 

In September 1989 a group led by Wayne Angell, a governor of the Federal Reserve’s policy board made a trip to Moscow to recommend a return to the gold standard for the ruble.  The centralised Stalinist Soviet system was crumbling and the government was financing its enormous deficits with the printing press. 

With a gold peg in place, the demand for rubles would skyrocket…The Soviet government could then issue long-term debt to its own citizens at 5 or 6 percent annually, the rate at which the fledgling U.S. government issued debt in the early nineteenth century rather than using the printing press to simply print more money. Nathan Lewis Gold The Once and Future Money pp378-379.

Unfortunately the Russian government did not take Angell’s proposal preferring the certainty of economic ruin enshrined in the recommendations of the IMF and the Harvard Institute for International Development.  At the beginning of 1989 the black market ruble traded at 4 to the dollar.  By August 1991 the rate was 77 per dollar.  By 1992 the ruble was essentially worthless.

 

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