On the Feasibility of a Return to a Gold Standard

*** This is fiction. ***

This is an IMAGINARY discussion in the home of an important Federal Reserve official in the year 2016 …

Federal Reserve Official #1: “We created, printed, swapped, loaned and guaranteed $16 Trillion or so in response to the financial meltdown in 2008. We quadrupled our balance sheet with about $4 Trillion in dodgy asset purchases to bail out commercial banks and our friends in New York who own the politicians. All those dollars didn’t help much. And now I’m worried more bad news and financial trauma are coming, the dollar will sink further, and in several years a million angry people will march up the steps of the Eccles building and resort to violence.” He sighed.

Official #2: “Don’t be naïve. Of course the dollar will weaken, but even worse are the yen, the pound, and the euro, not to mention the yuan and the ruble. You missed the point. We bought enough time to create a diversion for what we both know is coming. We’ll get a war in the Middle-East or Europe if the White House follows orders. Then we have a guaranteed excuse and a distraction and we blame it on Russia or Saudi Arabia.”

Official #1: “But what if we proactively strengthened the dollar? I’ve been thinking that we should rebuild our currency and expect no help from the politicians. That economist Bassman got me thinking. I have a proposal, and I know it is crazy, but hear me out. I propose we print enough dollars to purchase over 10,000 tons of gold. Yes, I know, gold prices will rise and food and energy prices will jump, but we need inflation so that’s a good reason to push gold prices higher. I suggest we print $200 – $400 billion, which is chicken feed, and buy all the gold anyone will sell at say $2,000 per ounce. We accumulate 100 – 200 million ounces of gold and we get an inflationary pop in other prices.”

Official #2: “Have you gone mad?” He starred at his colleague in shock.

Official #1, on a roll, continued, “And then we wait a year or so, print another $400 billion and buy another 100 million ounces of gold at $4,000 per ounce. We announce this will be the last purchase and people will flock to sell their gold. It is amazing I know, but people will trade real gold for pieces of newly printed paper.”

A year later we announce another extraordinary purchase, print $600 billion and offer to purchase gold at $6,000 per ounce and swear this is the last such purchase. That adds another 100 million ounces to our gold horde.”

A year or two later we print another $ trillion and offer to buy 100 million more ounces of gold at $10,000 per ounce. By then we have only printed about two $ trillion but we have accumulated about 400,000,000 ounces of gold – over 12,000 tons of gold to back the US dollar. The dollars cost us nothing, we created the inflation we wanted, you and I walk away with 1,000 ounces of gold each, and we go to work for the IMF. We have backed the dollar, strengthened the US economy, and the Fed has real gold.”

Official #2: “Okay, you have gone bat-shit crazy. You should be on medication.”

Official #1: “No, you don’t get it. I’m perfectly sane. In the long term we both know the dollar is toast, but right now we have an opportunity to create trillions of dollars and buy real stuff with dollars – like gold. Why you ask? Look at Japan – a dead-man-walking economy that will implode because of their incredibly large debt. In ten years the US will probably be there, in the same shape or worse, and by then we may not be able to get any gold. The whole system might come down unless we back the dollar fairly soon with something real – like gold.”

Russia and China are buying all the gold they can get, so they’ll eventually overpower everyone economically, unless we nuke them or economically crush them. Basically, we go to a gold standard fairly soon and save the dollar, or they’ll implement a gold standard and the dollar sinks to toilet paper status. By the way, how well do you speak Mandarin?”

Besides, we need to inflate away our debt and gold at $10K will help. Ten years after our final purchase, gold will sell for $20K or $30K but who cares – the dollar will be better than every other currency, the debt and inflation problems will be nasty, but far better than if we had done nothing, and we have taken care of ourselves and our friends on Wall Street. The average Joe will be screwed, but he is screwed no matter what anyone does, so there is no point worrying about him.”

Official #2: “Okay, I agree we need to support the dollar. Ever increasing debt and paper currencies have never worked in the past and they aren’t working now, even though the system hasn’t collapsed yet. You got that right. Nobody cares about the average Joe – right again. Japan is not the model we want to follow – right again. And nobody wants Russia or China to rise to world dominance, so maybe we need to shore up our failing dollar.”

Official #2 downed half a glass of Scotch, paused, and shouted angrily at Official #1, “But we don’t do gold! We do digital dollars. With a gold standard it’s tougher to suck out our skim, and the whole damn financial system is going to crash anyway, so there’s no reason to try to stop it from crashing by using gold. Stupid! Stupid! Stupid!”

Official #1: “You still don’t get it. We print dollars by the truckload, like we did in 2008, buy gold with it, and save the US financial system and the dollar. Sure the inflation will get ugly, especially for the average Joe, but the alternatives are worse. You want martial law, millions dead, mass starvation and a barter economy in a country where the people have guns? You want the average Joe hungry, trying to feed his children, and pissed at politicians and bankers while he loads his assault rifle and thinks he has nothing to lose? Either we save the dollar by backing it with gold or we’re totally screwed in a few years anyway.”

A gold backed dollar sounds far better than millions dying in the streets. Besides, after we publicly buy over 10,000 tons of gold and make a huge public spectacle of moving it into Fort Knox, we can retrieve it a few tons at a time after dark. Nobody will know, and obviously, it has been done before.”

They discussed late into the night, killed a bottle of scotch, and decided ….

*** End of the Fiction ***

Yes, there are issues with this piece of fiction. I’ll list some and readers can add others.

  1. Federal Reserve officials don’t like gold and will only back the dollar with gold if all the other choices are worse. Paraphrasing Churchill, the Fed will do the right thing, after they have exhausted all other alternatives.
  2. Revaluing gold to $10,000 per ounce will eventually happen, one way or another, given our addiction to debt, central banking, deficits, and money printing. But how we get there is important!
  3. Consumer price inflation will be ugly no matter which way gold rises to $10,000 per ounce. It will be a difficult world and a time will come when the consequences of decades of bad policy cannot be delayed any longer.
  4. Would 10,000 tons of gold be available for purchase, even at $10,000 per ounce, during the next several years? Maybe not.
  5. I doubt the Fed will initiate a program for which it can be blamed. If the Fed raises the price of gold to $10,000 they might be blamed by the masses for the price inflation that will plague their daily lives. If the Fed and the politicians continue down our current unsustainable path of deficits, debt, and devaluation, consumer price inflation is inevitable, but it can be blamed on Russia, China, politicians, Saudi Arabia, greedy speculators, global warming, the UN, and maybe space aliens.
  6. Yes, the dollar has lost nearly 99% of its value in a century of Fed mismanagement, but what Fed official would predict the dollar will devalue further, given that the Fed is continuing the same failed policies and accelerating the dollar destruction? No, not us. We didn’t know … We couldn’t have seen it coming … It was all Russia’s fault. Really!!!
  7. And finally, if the plan to purchase 10,000 tons of real gold with dodgy dollars is even half possible, doesn’t it make you wonder how a banking monolith like the Fed can successfully “print” a few trillion digital dollars and exchange them for 10,000 tons of real and valuable gold? There is something deeply wrong with that “something for nothing” picture! And that is a monumental problem … and it has created consequences for all of us … that are coming … as clearly as night follows day …

WHAT TO DO?

  1. Remember the reason central banks exist.
  2. Remember that a debt based – unbacked – paper and digital economic system requires currency devaluation and price inflation, and usually only survives for a few decades. There will be more devaluations, inflation, and wars for “stimulus” and distractions.
  3. “Negative interest rates” (Europe and Japan) do not indicate robust economic health. They indicate fiscal and monetary desperation.
  4. Own hard assets: gold, silver, platinum, land, real estate, fine art, diamonds and more.

Gary Christenson

The Deviant Investor

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