"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved."
- Ludwig von Mises

Monday, November 15, 2010

Don't Discount the US or the Dollar Just Yet

In 2004, writing for the New York Times Magazine, Ron Suskind interviewed amongst others, an aide to then George Bush's administration. The article covered Bush's handling of world affairs, and the US's role in the world. There is an interesting quote in that article that conveys, to me, the reality of a superpower. And even though the early 2000s were emerging "war years" for the US in Iraq and Afghanistan, there is a quote in that article that also applies, in my view, to all US Presidential Administrations and their actions, which covers the economic sphere as well.

Ron Suskind was speaking to this aide about how solutions are promulgated - through the "judicious study of discernable reality." To which this Presidential aide elaborated:

''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.''


So why do I bring this up? I want to make a point clear. Although my blog is titled fiat collapse, and I write about the US Dollar paper standard's inevitable collapse, I am not discounting the US or the Dollar. Notice, I say "paper" dollar. That is, the debt based system that was begun under Nixon when the gold window of convertibility was shut. So yes, I believe that debt based fiat money is on its last legs, but that doesn't mean the US Dollar disappears. It can transform and so, my views are still open on the US's future role in the world. I will not underestimate the US - not yet. But I also believe that American banks have cost the US dearly, in both power and national security - but all is not lost - as I said, not yet. The US has something up its sleeve that can't be ignored. Gold.

Writing for the Gerson Lehrman Group, George Anastasiadis comments in his summary:

"The U.S. message at the G20 is the following: if we do not act together to rebalance the world economy, the US will act unilaterally to rescue its economy. This will entail a change in the rules of the global game as the U.S. will try to impose its will via the printing press by inflating the rest of the world or forcing their currencies to appreciate relative to the dollar."


I agree with the above comment on the US acting unilaterally, though I disagree with the success of quantitative easing ("QE"). I think the US's QE is plan "A," but there is also a plan "B," in my view.

So what is this plan "B"? Gold, in my opinion, is plan "B." The US has by far, the largest gold reserves of any other nation. And it doesn't just end there. The US, acting as custodian, also stores many other nations' gold. Under the Bretton Woods system, as many may already know, the US Dollar was converted to gold. But that didn't mean it also went across the Atlantic either. More often, all that transpired was a book entry. The gold went to another nation's balance sheet, while it sat in a vault in the US.

According to Jim Rickards, the US has over 6,000 tons of gold stored in custody for other nations. This makes the US the "Saudi Arabia" of gold. In a recent interview at King World News, Rickards has stated the following:

"In a way, the Fed can afford to trash the paper dollar, or at least experiment and risk trashing the paper dollar because if the dollar collapses we can go back to gold pretty quickly."

"We have the world over a barrel; the US wins either way... we have a plan 'B' and the rest of the world does not."


In 1933, then President Franklin Roosevelt signed executive order 6102, "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates." The US purchased gold, from its citizens, at $20.67 an ounce. It then proceeded to devlaue the dollar against gold. The US can do the same thing with its custodial gold. It can write a check to say, Germany, and then devalue the dollar against gold. I have speculated how the gold bubble would end in the past - and I covered this type of "sovereign revaluation of gold" scenario in my post: Gold Will Be A Bubble Until It Isn't.

I want to note that much of this custodial gold is Europe's. Thus, for those that follow FOFOA's blog, it makes me wonder if the Euro-Gold connection is really that solid? Isn't possession 9/10ths of the law? Overall, Rickards still believes that most US policymakers are not thinking about gold and so we'll stumble into it in a "chaotic way."

About a month after that Rickards interview Robert Zoellick, President of the World Bank, started a gold debate, which I covered in my post The Gold Standard Debate Unleashed. This article in the Financial Times sure enough created quite the buzz of academic thinking on the gold standard. Most main stream economists are trained in the Keynesian school and thus furiously disagree with gold. But what they miss, what they ignore, is the quote I posted above. Let's look at it again:

''That's not the way the world really works anymore,'' he continued. ''We're an empire now, and when we act, we create our own reality. And while you're studying that reality -- judiciously, as you will -- we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors . . . and you, all of you, will be left to just study what we do.''

To me, this quote hits the nail on the head. It not only describes journalists and analysts, but economists as well. It basically states: let the eggheads debate all they want, when push comes to shove, when national security is at stake, we act in our own interests, and everyone else reacts. Now that's Realpolitik. And for those that may have missed it, James Grant wrote an article on the gold standard in the NY Times yesterday. The article is titled: How to Make the Dollar Sound Again.


Anonymous said...

Good post, Mithos. Glad you linked to your blog so I could bookmark it. Look forward to your insights in the future.

and Greece is still my favorite vacation spot (Santorini is heaven).


Misthos said...

Good to hear from you Ivanovich. As you see, I left New Jersey and I'm living in Greece now, taking some time off and trading occasionally. Thanks for visiting the blog!

Anonymous said...

I've heard Rickards and I read Fofoa.
Actually Fofoa is only analysing A/FOA and I also have my doubts wether this concept isn't flawed so many years later after its issue.
I would be quite interested to hear your prediction. Europe and the US are both at the point of no return and I wonder what comes next. Now I go back to your blog as I am sure there is more to discover. Yes, you are on my reading list, too, and I am glad you live in Europe as there is quite a scarcity of good analysis around.

Misthos said...

You are right that the EU and US (plus Japan, I would add) are facing a major crossroads.

I read the news for hours daily, and I also have a pretty good grip on history, which is what I draw from. I keep my analysis based on current events, with the theory that international cooperation will be nonexistent as the global debt and currency crisis accelerates and gold, in some form, will become the global reserve, by default.

You know why gold? When the SHTF -it will be the only thing that most countries will agree on.

I look at markets, monetary theory, but also geopolitics - current events - when I write about this crisis. Most analysts don't do this - they ignore the real-world geopolitical factors and analyze economics or monetary theory in a vaccuum.

I also want to mention two things:

If/When the Euro fails, all currencies as they stand today (debt based fiat paper) fail.

The US does not want a gold standard. It can't export inflation as easily under a gold standard as it can today, and thus finance its military. The gold standard is plan B - the US's (and Wall Street's) worst case scenario.

Thanks for visiting my blog - your comments are always welcome.

Anonymous said...

I thank you for helping me through the reality. Yes, geostrategy and history are indeed first tools for understanding. Sadly, even the history has been taught as a lie.

As Rickards said, a gold standard (born in chaos?) under robbery of the world's gold could insure America's hegemony. But the old problems re redemption would come back creating an outflow of "American" gold again.

Why wouldn't the US adhere to a Freegold actually? Even after a confiscation of the gold deposits?
Wouldn't they fare better?

Misthos said...

I wouldn't exactly call it "robbery" think of it like the gold confiscation act of 1933 - done on a larger scale involving sovereign/custodial holdings. The government pays for gold at a price at or above market value, and then proceeds to devalue against it.

Gold will continue to trend up, but as the crisis accelerates, so too will the value of gold - think Exter's pyramid.

At that point, I wouldn't be surprised if governments create laws affecting gold the way capital controls affect money flows. This would include private holdings as well as custodial gold and official reserves.

No one can get detailed with how this can play out. I'm just saying it is a plausible scenario - depending on how bad things get.

As for the US facing a redemption issue/i.e. outflows. That's the issue with any monetary system used in world trade. Imbalances in trade always occur over time, worse yet in a debt backed money system. If the US was able to reset the clock, if you will, that would be good enough.

Monetary crises are unavoidable over the long haul. Any government would be happy with 25-50 years of stability. Bretton Woods I lasted from 1944-1971. And now, since 1971 we are approaching a 40 year mark.

We have been conditioned to think that the way things are today represent the apex of humanity and we are immune to crises - for example, when people were talking about the "goldilocks economy" or the "great moderation," or the "permanent plateau of prosperity" just before this crisis hit. They said the same things in the 1920s.

In my view, to think that any global monetary system could last forever is asking a lot. But no one in the main stream media addresses this. That's why I found World Bank President Zoellick's recent comments on gold so surprising.

I think we are being prepared.

Anonymous said...

I don’t know much about Zoellick as to grasp WHY he did it and for WHOM? Which faction is he affiliated to?
Was it a buy incentive or a sell one? The insider are in the know, so who had to be indirectly informed? China?

I am afraid that a gold standard would come with taxes even confiscation. A confiscation would slap the rich also which in socialism wouldn’t matter but we are not there yet. The way they protect the banksters it is not to be expected and by no means needed as a kind of voluntarily confiscation for a good price would be a quick reaction for those who won’t abandon the fierce bull market we are headed for. Information is very scarce here , don’t have great financial blogs J !!! Even on Friday people also sold bullion as the dealers say (20% sellers). Just 1K max read ZH, and the majority of holders expect a top, eventually 1980.
High taxes and flow control would suit them better imo.
On the other side here in Gerrmany we had had VAT on gold before the EMU and we didn’t mint gold coins prior to 2002 as we mint now (one coin/y) for which the gold is extra being bought. This seems to be more in line with A/FOA. Also we have for 80 M 100 shops online and they make these days some “research” as about how many people possess gold…So that it’s known that a high percentage are invested. F, I, P, Spain have almost no infrastructure for gold!

For me is quite vital to see why should “they” (banksters/politicians) prefer a golden standard.
Which should be the rationale for that? And if so, how did Zoelllick give a dementi short after his FT article?

Misthos said...

I think Zoellick brought up the gold debate as a trial balloon - to see the reaction and to start a discussion. He also mentioned China, and the Renminbi's future role in the SDR- so it was also part appeasement.

I want to mention that I don't think it's certain the US will take the custodial gold. It all depends on how things transpire and how bad things get. But it does give the US leverage for now.

As for gold confiscation - I too don't rule that out. Marc Faber once brought up a a good point - to keep your gold in other countries. The extremely wealthy have this option as they have multiple residences in multiple countries and can therefore hedge their bets. For example, just before Argentina's collapse ten years ago, the wealthy left with suitcases of money - the poor and middle class didn't have that option, and then they were told how much money they can take out of the bank every month.

But if there were to be government gold confiscation, it would be well above the going market price because governments prefer inflation, not deflation. So in my view, worse case scenario, gold is still a good hedge, or insurance.

I believe that the Banking Industry is facing the end of an era. They will be regulated heavily once again, just as they were during the Great Depression. But you know what it takes for them to be heavily regulated? Their collapse - just as they did in the Great Depression. Governments are still trying to hold the banks up, but in my view, it's futile.

If you look at history, governments always outlast monetary systems and banking systems.

A new monetary system is rarely (if ever, to my knowledge) voluntarily implemented. There are too many people/nations with too much at stake to agree on change. It's too expensive. New monetary systems are born out of the end of a prior system.