VIDEO 1 BY ECONOMICS EXPLAINED / WATCH AND SUBSCRIBE TO ECONOMICS EXPLAINED

Is returning to the gold standard something that could fix the economic issues we are facing today?

VIDEO 2 BY EPIC ECONOMICS / WATCH AND SUBSCRIBE TO EPIC ECONOMICS

Under the Bretton Woods System, the US Dollar was backed by gold. Then it was backed by nothing. Ever since then, the world seems to be getting both more complicated, and more chaotic. Why is that, and how did we get here? This is the story of how our politicians, bankers, and economists, lost control of the global economy in an attempt to bring stability to the world. In dong so, the American dream has become a nightmare

WOULD RETURNING TO THE GOLD STANDARD RESOLVE OUR MOST PRESSING MONETARY PROBLEMS? 

BY CHARLES HUGH SMITH ON SUBSTACK

We all know the problem with fiat currency: the temptation to print more currency is irresistible, but ultimately destructive.

BY CHARLES HUGH SMITH ON SUBSTACK

Money in all its forms attracts quasi-religious beliefs and convictions. This makes it difficult to discuss with anything resembling objectivity. But given the centrality of money (and its sibling, greed) in human affairs, let’s press on and ask: would returning to the Gold Standard (i.e. gold as money / gold-backed currency) resolve our most pressing monetary problems?

The conviction that the answer is “yes” is widespread. In this view, President Nixon “closing the gold window,” in 1971, i.e. ending the convertibility of the US dollar to gold in international foreign exchange (FX) markets, is the Original Sin that doomed us to the inflationary Hell of fiat currency, i.e. currency unbacked by anything tangible such as gold or silver.

In this view, the only way to avoid the consequences of this Original Sin–the eventual reduction of fiat currency to zero value via hyper-inflation as the currency is “printed” without restraint–is to return to the gold standard.

So far, so good, but from here on in it gets tricky. We have a long history of precious metals being the only form of money in various economies, and an almost as long history of paper money augmenting precious-metal “real money” (in China, for example) and the issuance of copper coinage to grease small transactions.

Gold-backed currency rolls off the tongue rather easily, but what exactly does this mean? In theory, it means every unit of paper / digital currency in circulation can be converted on demand to a physical quantity of gold or silver at an exchange rate either set by the nation-state’s government or by the market.

This conversion acts as a governor on the issuance of new currency: if the nation has $100 billion in gold/silver, it cannot issue $1 trillion in currency, as the whole idea of conversion is that each unit of currency can be fully converted to gold/silver. So in a truly gold-backed currency, the money supply in circulation must be limited to $100 billion.

There are various tricks that can be played here, of course. The government can assign a conversion rate that doesn’t align with the actual market value of gold/silver, for example. Or it can limit conversion to the settlement of foreign trade with other nations.

Let’s return to Nixon’s Original Sin and stipulate that there is no such thing as “free trade”, as all trade has geopolitical and domestic-economic elements. Those nations whose domestic growth depends on increasing exports, i.e. mercantilist economies, will naturally trumpet “free trade” as a cover for their exploitation of trade for domestic growth while they restrict imports.

Many observers seem to forget the US was engaged in an existential geopolitical struggle with the USSR in the 1950s, 1960s and beyond. Gaining and maintaining allies and “spheres of influence” were core dynamics in this global contest, and the US had over-riding reasons to support the war-devastated economies of its allies in Europe and Asia by enabling them to export goods to the US.

The US also had over-riding reasons to maintain the US dollar (USD) as a reserve currency, a currency that is available in sufficient quantity globally to grease commerce and credit and also act as a stable foreign exchange reserve for both private enterprises and nations.

Issuing a reserve currency offers an exorbitant privilege–what we might call monetary hegemony–but it comes with a price, a price explained by economist Robert Triffin as Triffin’s Paradox, which has two key paradoxical dynamics:

1. The issuing nation must run a sustained trade deficit in order to “export” sufficient quantities of its currency into the global marketplace to meet the expansive needs of global trade and other nations. (This helps explain why the USD is roughly half of all reserves (48%) while China’s RMB is only 2% of reserves: exporting nations running surpluses don’t “export” their currencies for use by others.)

2. This need to serve international trade / geopolitical goals is fundamentally in conflict with the goals of the domestic economy: the currency cannot serve two masters equally well.

Why did Nixon end USD conversion to gold? He had no choice, as the geopolitically necessary trade deficits were rising to the point that America’s gold holdings would have diminished to zero were the rising trade deficits settled in gold.

Existential challenges take precedence. To say that the US should have given up its reserve currency and insisted our struggling allies maintain balanced trade with the US is to ignore the geopolitical realities.

We must also recognize that markets discover the price/value of competing currencies, and so nations whose currency is priced higher than others will have difficulty exporting their goods, as these goods are priced in their own strong currency and are therefore more expensive in nations with weaker currencies. Nations with weaker currencies will have an easier time selling their goods to nations with stronger currencies, as their goods are cheaper as a result of their weaker / lower value currencies.

Those nations blessed with surplus essential commodities (energy, food, minerals, etc.) will naturally tend to run surpluses with nations less endowed with tradable goods, and as a result, the nations running trade surpluses will end up with the lion’s share of the gold and silver. This generates global “haves and have-nots,” with all the attending sources of conflict: “our lead will take your gold.”

We might also note that fiat currencies issued by the sale of sovereign bonds are not actually “backed by nothing”: they’re backed by the interest payments made on the bonds and the entirety of the nation’s economic-political-social stability and productivity which guarantee repayment of the bond at maturity.

We all know the problem with fiat currency: the temptation to print more currency is irresistible, but ultimately destructive: once currency is issued in excess of the actual expansion of goods and services, the result is devaluation / loss of purchasing power, a.k.a. inflation. Here’s a snapshot of global money supply:

In response, central banks are adding gold reserves: gold reserves are now larger than the reserves of the second-largest reserve currency, the euro:

Where does this leave us? Not with an easy answer, but with more complexities, starting with credit. As David Graeber explained in his book Debt: The First 5,000 Years, credit has been an essential element of commerce from the earliest days of commerce, for very compelling reasons. How do we graft credit onto “money” when credit is itself a form of “money”?

We’ll also have to consider the other crisis we face, soaring wealth-income inequality, which arose without restraint in ancient economies that used precious metals for money.

Looking at the history of Rome, we note that the wealth of Rome’s elite in the Republic era has been estimated as 30 times the wealth of the average free male citizen, where by the Imperial era the elites had amassed fortunes 10,000 times the wealth of the average free male citizen. There was no fiat currency, so we must accept that politics is part and parcel of “money,” social stability and economic vitality or stagnation.

ARE GOLD-BACKED CURRENCIES THE FUTURE OF MONEY?

Any exploration of money is at its heart a philosophic investigation, for money is a social construct which functions not as scientific fact in a mechanistic universe but in a specific context of time, place and culture.

The stone coin “money” on the island of Yap is an interesting example of the fluidity of money as a social construct. A stone coin laying on the sand at the bottom of a lagoon is just as valuable and serves the same role as a coin on land. Physical possession of the coin is not necessary.

In this context, yesterday I asked, Would Returning to the Gold Standard Resolve Our Most Pressing Monetary Problems? Rather than answer “yes” or “no,” I discussed the inherent complexities imposed on “money” by geopolitical necessities / existential threats, global trade and foreign exchange market discovery of price. I closed by promising to discuss the complexities of trade and the distribution of wealth / inequality.

Before we start today’s philosophic investigation of “money,” consider a metaphor for gold-backed currencies. 

In the medical realm, antibiotics are the miraculous cure for bacterial infections. In the financial realm, gold-backed currencies are viewed as the cure for excessive money creation and the resulting hyper-inflation which then leads to “the death of money.”

Faced with a single potentially fatal threat akin to a nasty microbe, gold-backed currencies (a.k.a. “sound money,” money backed by the tangible value of gold reserves) are the cure much like a dose of antibiotics.

But if we consider the problems to be a scarcity of opportunity for productive use of capital and labor, and the social disorder created by extreme wealth inequality, then the metaphor is the totality of human health, which is intrinsically complicated and thus not fixable with a simple dose of antibiotics. The problem is then more like a lifestyle illness in which diet, fitness, stress levels, the microbiome and a host of other factors are all interconnected.

The point here is that being the potential solution to one problem–hyper-inflation–doesn’t make gold-backed currencies the automatic solution to all the other lifestyle-like complexities of the socio-economic system.

Every one-size-fits-all solution comes with limitations, and since most of recorded human history occurred in eras in which gold and silver were “money,” we have a large body of knowledge about the limitations of gold-backed currencies.

Just to name a few: gold by itself doesn’t create wealth (via investment in productive assets and labor); throughout much of history, gold merely moved from one elite to another as “dead money” stored in vaults or in trade for luxuries (consumption). Nor does gold money in and of itself encourage distribution of wealth outside the elites that own most of the gold. Gold doesn’t stop inflation caused by severe scarcities of essentials such as grain, or the social unrest such scarcities generate, or limit speculative bubbles–both the Tulip Bubble and the South Seas Bubble occurred in gold-is-money eras.

As David Graeber explained in his book Debt: The First 5,000 Years, credit has been essential for commerce from the earliest days of civilization, as gold and silver were too limited in supply to conduct all the commerce that people wanted to conduct.

Is Hyper-Inflation that Destroys a Currency a “Solution”?

This contrarian sees a strong consensus around the notion that hyper-inflation is the inevitable end-game of nation-states / central banks issuing fiat currencies, i.e. currencies that are not restrained by being pegged to tangible assets such as gold reserves. The temptation to issue (via “printing” or borrowing new currency into existence by selling sovereign bonds) more currency becomes irresistible to politicians and central bankers alike. as the means to mollify every constituency, from elites to the military to commoners dependent on state-funded bread and circuses.

This unrestrained creation of new money far in excess of the expansion of goods and services (i.e. the real economy) devalues the currency, as “all the new money chases too few goods and services.” Gresham’s law kicks in–bad money drives good money out of circulation–as precious metals, fine art, gemstones, etc. are hoarded and the depreciating currency is spent as fast as possible before its purchasing power declines even further.

The Cantillon Effect also kicks in: those closest to the spigot of new money get first dibs on converting the depreciating currency into tangible goods, leaving the non-elites to sweep up the “trickle-down” shreds left as the currency loses purchasing power daily.

The consensus holds that there is no way to stop this decay of purchasing power to near-zero, i.e. hyper-inflation, once it starts. As in a Greek tragedy, the fatal flaw of the protagonist–in this case, fiat currency–leads inevitably to its destruction.

In the real world, things having to do with money tend to occur because they benefit powerful interests. This leads us to ask of hyper-inflation: cui bono, to whose benefit? Exactly which powerful interests benefit when a currency’s purchasing power plummets to near-zero?

The idea here is that there will be pushback if it doesn’t benefit the wealthy and powerful. So either hyper-inflation somehow benefits the wealthy and powerful, or it escapes their control and wipes them out along with the powerless commoners. That raises the question: didn’t the wealthy and powerful see what was coming and couldn’t they have reversed the policies generating hyper-inflation? If not, why not?

There are a couple of different threads to follow here. One is that capital is what matters to the wealthy and powerful because they own the vast majority of it while credit is what matters to the poor, as credit is their only way to acquire a bit of capital to invest in their own enterprise / household.

The poor owe debt, the wealthy own debt: debt (such as a home mortgage) is an asset to the wealthy, who buy the loan for its income stream, while debt is a liability to the commoners that must be serviced out of their earned income.

If wages rise in parallel with high rates of inflation, those who owe debt find their burdens lightened as their mortgage payment remains fixed while their income rises with inflation. Imagine how cheering it is when one finds a once-onerous $200,000 mortgage can now be paid off with a month’s salary due to hyper-inflation.

On the flip side, the wealthy and powerful who own the debt are less delighted, as the purchasing power of the currency used to pay off the mortgage has diminished, effectively robbing them of most of the value of their original purchase of the mortgage. Where the $200,000 they paid for the mortgage could have bought two nice luxury vehicles, the $200,00 they now receive in full payment can barely buy a used clunker.

This raises an interesting question: why on Earth would the wealthy and powerful let hyper-inflation destroy the value of all their debt-based assets and income streams? Isn’t that completely counter to their interests? If so, why would they let that happen?

At this juncture it’s important to draw a distinction between ancient examples of hyper-inflation and the present-day economy. In the declining era of the Roman Empire, the government drastically reduced the silver content in the coinage to generate the illusion that everyone was still being paid in full with only a fraction of the silver contained in old coinage. This artifice was quickly uncovered, and old coinage disappeared from circulation due to hoarding and inflation caused prices and wages to soar.

The difference is back then, the poor owned virtually nothing. Today, the poor “own” debt service: they owe interest and principal on the vast quantities of debt owned by the wealthy, who will lose out when the value of their debt-based assets crash to near-zero in hyper-inflation. Hyper-inflation is incredibly beneficial to debtors with earned income and incredibly destructive to those who own the debt being wiped out.

This leads to a second thread: the wealthy shift their wealth overseas as inflation picks up, wait for the hyper-inflationary storm to wipe out the value of literally everything in their home economy, at which point they return, foreign cash in hand, to scoop up all the best assets at fire-sale prices.

This certainly works on small developing-world economies, but it doesn’t work in large economies such as the U.S. with $156 trillion in assets to convert into other nation’s currencies and assets. In large economies, the wealth of powerful elites is generated by a functioning economy that produces goods and services and maintains a stable currency. Buying a castle and some gold overseas is not a replacement for productive capital that generates income and capital gains.

Wiping out the value of the nation’s currency also destroys its value as a reserve currency and in global trade, two additional disasters the wealthy and powerful would seek to avoid at all costs. If we tote up the winners and losers of hyper-inflation, the commoners who owe debt win as long as wages rise with inflation, while the wealthy and powerful lose out. Given the vast asymmetry of wealth and power, do you really think this is going to happen?

We must also draw a distinction between borrowing currency into existence via paying interest on a sovereign bond and “printing” currency, as some studies have found borrowing currency into existence precludes hyper-inflation, as the interest payments on the rising debt act as a negative feedback loop on future borrowing: as interest consumes more of the state tax revenues, political and financial pressures to curtail runaway borrowing/spending emerge.

What seems more likely because it serves the interests of the wealthy and powerful is interest rates on sovereign bonds soar, enabling the wealthy who sold off all their risk assets such as stocks and commercial real estate to earn a healthy, low-risk return in Treasuries. The central bank is ordered to stop “printing money” and the government cuts spending across the board, leading to howls of outage but since the interests of the wealthy and powerful are at stake, too bad, suck it up, kids, everyone takes a cut.

Risk assets deflate, the purchasing power of the commoners’ debt service stabilizes, and the ensuing deflation only hurts those who didn’t bail out of speculative risk assets at the top and stash the cash in short-term Treasuries. Then, when rates max out, the smart money shifts capital into long-term sovereign bonds and waits for the deflation to send risk asset prices to the basement. Then the long-term bonds can be liquidated for cash, and the deflated assets scooped up at fire-sale prices.

If we ask cui bono, which scenario is more likely: hyper-inflation or a deflationary crushing of risk assets and soaring interest rates? Yes, a bunch of zombie / marginal borrowers will default, and those holding the debt will be wiped out, but all that is foreseeable and can be remedied by selling when everyone is bullish on real estate and risk assets.

As for the commoners, deflating prices increase the purchasing power of their wages. Those with little or no debt will benefit from deflation, as their wages will go farther and they’ll finally be able to afford risk assets once prices return to pre-bubble levels. As for interest rates, we all paid 12% mortgages in the early 1980s and life went on because the loans were modest in size compared to today’s bloated Everything Bubble.

Other than China, it doesn’t appear that global money supply is going parabolic:

As this chart indicates, inflation is tolerated as long as it’s stretched over a century and wages rise along with prices.

When predicting the future, we’re best served by following what benefits the wealthy and powerful, as that is the likeliest outcome. Is hyper-inflation a “solution”? Not to the wealthy and powerful.

Gold vs. Bitcoin: The Ultimate Competition To Be the World’s Best Money

BY NICK GIAMBRUNO FOR INTERNATIONAL MAN

Did you know the Bitcoin price reached parity with the gold price in April 2017 and never looked back?

Today, buying a single Bitcoin takes over 30 ounces of gold.

Put differently, it takes about 0.032 BTC—3,200,000 satoshis—to buy an ounce of gold.

In the last year, Bitcoin’s market cap grew by over $883 billion—from around $457 billion to about $1.34 trillion today.

Annual gold production is estimated at around 118 million ounces, worth about $254 billion.

The increase in Bitcoin’s market cap last year alone was more than triple the value of global gold production.

If just 10% of that $883 billion increase in Bitcoin’s market cap instead went into gold, it could have rocked the market and sent prices soaring.

With that in mind, and looking at the above charts, it’s not surprising that many have wondered, is Bitcoin demonetizing gold? How should investors position their portfolios?

These are critically important, fundamental questions I will answer.

MicroStrategy founder Michael Saylor thinks gold is an outdated monetary technology compared to Bitcoin. He once said:

“You can cling to gold, but it’s like clinging to your Kodak stock because you like photos instead of buying Apple. Or like Rand McNally maps compared to Google Maps.”

For the first time, gold indeed has a worthy monetary competitor that presents a serious challenge to its status over the long term.

However, I don’t believe the outcome is 100% certain or preordained.

Nobody knows whether gold or Bitcoin will ultimately emerge victorious in the ultimate competition to be the world’s best money.

Below, I’ll describe how I see it playing out.

First, it’s crucial to clarify a fundamental point.

We are talking about a competition to be the world’s best money. So, let’s define what money is.

Money is a good, just like any other in an economy. And it isn’t a complex notion to grasp. It doesn’t require you to understand convoluted math formulas and complicated theories—as the gatekeepers in academia, media, and government mislead many folks into believing.

Understanding money is intuitive and straightforward.

Money is simply something useful for storing and exchanging value. It’s a tool for sending value through time and space. That’s it.

Therefore, I’ll analyze gold and Bitcoin to see which is best suited to send value through time and space.

Today, three monetary goods—fiat currency, gold, and Bitcoin—compete as the best vehicles for storing and exchanging value.

The chart below shows their approximate sizes.

I believe the above chart will be flipped entirely in the future. The only question is whether Bitcoin or gold will reign supreme.

While fiat currency is today’s dominant form of money, it is well on its way to collapse.

I estimate that by around 2030—or perhaps sooner—the collapse of fiat currencies could be complete.

The chart above estimates that about $96 trillion is stored in global fiat currencies. I believe most of that value will migrate to better store-of-value assets, primarily gold and Bitcoin.

That’s why Bitcoin and gold could do exceptionally well in the short and medium term as the fiat currency system crumbles.

However, over the long term—after the fiat currency system has fully collapsed, which I estimate to happen around 2030—I expect an epic competition between Bitcoin and gold as one or the other will necessarily emerge as the world’s dominant form of money. That competition could take many years.

Suppose gold wins. The above chart might look something like this.

If gold emerges as the world’s dominant money, I estimate a gold price of around $16,168 per ounce in purchasing power in today’s dollar.

It also implies a Bitcoin price of $0.

That’s because Bitcoin is purely a monetary good with no industrial or other non-monetary uses. Bitcoin is either useful as money or worthless.

Industrial Use Doesn’t Make a Good Money

A common misconception says money also needs to have some industrial use for it to be good money.

However, that’s like saying a shoe must also be useful as a hammer to be a good shoe.

Many people incorrectly reason that Bitcoin can’t be a good money because it has no industrial or non-monetary utility.

However, industrial use is not needed to make something useful as money. Using something as money—i.e., to store and exchange value—is sufficient for it to be money.

The fact that gold has some industrial use doesn’t give it superior monetary properties. People value gold as money primarily because it’s the one physical commodity most resistant to debasement—not because it’s used in dentistry, electronics, or other industries.

On the contrary, I’d argue that gold’s relatively small industrial uses do not enhance its monetary characteristics. If they did, why aren’t metals with more industrial use—like copper or nickel—more desirable as money?

When it comes to money, I’m only interested in its ability to store and exchange value. I’m not interested in something whose value is hostage to the whims of ever-changing industrial conditions.

This is why industrial use is not a monetary benefit but, in fact, a potential detriment.

Gold would be an even better money without the variation in its supply and demand from its industrial uses, which are unrelated to its use as money.

Further, the competition to be the world’s dominant money is essentially winner-take-all. Anything else would amount to an inefficient barter system, which is why international monetary networks tend to converge on one thing as dominant money at the base layer.

Previously, the dominant base layer money was gold. Today, it’s the US dollar and Treasuries. In the future, I think it will either be Bitcoin or gold.

The current status quo for Bitcoin seems untenable.

Over the long term, I believe Bitcoin will become the dominant form of money or end up at $0 as a superior money—most likely gold—beats it out.

On the other hand, suppose Bitcoin emerges as the world’s dominant money—a megatrend I like to call The Bitcoin Supremacy.

The above chart might look something like the one below.

Even if Bitcoin emerges as the world’s supreme form of money, gold will still have industrial and non-monetary uses, which I estimate comprise around 14% of its total demand. So it won’t be worthless.

If gold were to lose all of its monetary demand to Bitcoin, it would become a pure industrial metal like copper or aluminum. I estimate that monetary demand—to store and exchange value—makes up around 86% of the overall demand for gold. Therefore, if Bitcoin demonetizes gold, I estimate the gold price could drop by 86%.

If The Bitcoin Supremacy occurs—and gold is demonetized and rendered a purely industrial metal—it would imply a gold price of $278 an ounce and a Bitcoin price of $5,171,429 per BTC in purchasing power in today’s dollar.

After the collapse of fiat—which I estimate to be around 2030—nobody knows how long the competition between gold and Bitcoin will last. It could be over quickly or drag on for many years. My guess is that it won’t be over quickly.

I am confident that this competition will happen and there will only be one winner.

Over the long term, billions of people, through trillions of transactions—in other words, the free market—will ultimately decide whether gold or Bitcoin will win.

I am all for free-market competition in money.

I say let the best money win.

In the meantime, I think the stars are aligned for a massive Bitcoin bull market.

Consider this.

The market cap for Bitcoin is around $1.34 trillion.

The market cap for all the mined gold in the world, which took thousands of years to accumulate, is about $14.5 trillion.

That means Bitcoin has a market cap roughly equal to 9% of gold’s.

Assuming gold stays flat and Bitcoin goes up about 10x, its market cap would roughly equal gold’s. At that point, a single Bitcoin would be worth over $680,000.I think that’s a real possibility in the years ahead, though it could happen much sooner.

If that sounds outrageous, consider this…

Ten years ago, the Bitcoin price was around $600. Today, it’s roughly 113x that.

Bitcoin has made numerous breathtaking moves to the upside in the past.

I think it can do it again, especially as corporations, institutional investors, and even nation states start buying Bitcoin for the first time. Of course, it’s important to remember that past performance does not indicate future results for any investment.

Publicly traded Bitcoin stocks stand to be a primary beneficiary of this trend.

Bitcoin stocks have the potential to MASSIVELY outperform Bitcoin—and deliver those enormous gains quickly.