March 28, 2012
That’s the only way to describe the reaction that future historians will have when they look back and study the utter perversion that is our global financial system.
We live in a time when a tiny handful of people have their fingers on a button that can conjure trillions of dollars, euro, yen, and renminbi out of thin air. In the United States, it comes down to one man. Just one.
With a single decision, he controls the lever that dominates the entire economy. When you control the money, you control everything– financial markets, consumer prices, risk perceptions, investment habits, savings rates, hiring decisions, pay raises, sovereign debt, housing starts, etc. One man.
This irrational, arrogant system presupposes by design that a central banker is smarter than everyone else; that markets are incapable of determining appropriate risk and value; that he is more effective at allocating our time, capital, and labor than we are.
Future historians will probably also be dumbfounded when they see how long people allowed worthless, unbacked fiat paper to pass as money. It’s extraordinary that most people today happily accept a digital abstraction of paper currency controlled by a single individual as ‘valuable’.
It was more than 5,000 years ago that primitive commodity money was used in Mesopotamia, and it’s been over 3,000 years since metal coins began circulating. For more than 99.2% of human civilization, money actually meant something… right up until 1971 when Richard Nixon ended any remaining link between the dollar and gold.
Ever since, the US government has refused to acknowledge precious metals as money… yet if the Treasury’s financial statements are to be believed, Uncle Sam is still holding 261,498,900 troy ounces of gold. Let’s dismiss the tungsten possibilities for now and presume that it’s real gold. At today’s prices, the value would be about $437 billion.
Meanwhile, M2 money supply at last count was about $9.8 trillion as of March 12, 2012. This means that roughly 4.46% of US dollars in circulation are ‘backed’ by gold, the rest backed by false promises and goodwill.
In the UK, the government’s Exchange Equalisation Account shows 9,971,000 troy ounces of gold on the books. At today’s market value (1,054 British pounds) and the Bank of England’s most recent statement on reserve balances and notes (259.5 billion pounds), Britain’s gold supply constitutes roughly 4.05% of pounds in circulation.
Simply put, the price of gold would have to rise 20-25 times in order for the US and British governments’ gold assets to match the supply of money in circulation.
In fairness, very few countries hold meaningful gold positions when compared to their money supplies. Even Singapore, generally regarded as having one of the healthiest balance sheets on the planet, holds a mere 2% of its money supply in gold.
(Singapore does, however, consistently run budget surpluses and control two sovereign wealth funds which manage the equivalent of 130% of GDP…)
Lebanon is an exception. According to Banque du Liban statistics, the value of Lebanon’s gold holdings is equivalent to nearly 50% of the country’s money supply. To boot, Lebanese banks tend to have very high liquidity ratios and are willing to open accounts for most nationalities.
The problem with Lebanon is that the country is deep in debt– well over 100% of GDP.
With an additional $30 billion in foreign reserves on the books (i.e. other people’s paper), though, Lebanon does have the capacity to pay off over half of its debt. And there are a number of state-owned companies that could be privatized to generate even more revenue.
Given the how sophisticated government corruption is in Lebanon, though, such solutions may never come to pass. Go figure… the one place on earth where the currency is actually backed by something becomes the next shoe to drop.
Fortunately there is another place worth considering. For now, gold only comprises about 5% of Mongolia’s $4 billion money supply. Not much. But the important thing to pay attention to is the trend.
A few months ago, the government of Mongolia nearly doubled its gold holdings to 3.5 tons. This is a huge move.
Given the massive resources in the country (coal, copper, gold, oil, uranium, etc.), Mongolia is set to become one the world’s richest countries. And I think we can expect them to continue trading out paper reserves for the gold that’s already under their soil.
It’s possible that, if the trend holds, Mongolia’s gold holdings will back 10% to 25% of the tugrik money supply in just a few years’ time. Over the same period, gold holdings in the US, UK, and Europe will probably decline to less than 2% of their perpetually inflating money supplies.
Moreover, bank accounts denominated in the Mongolian currency (tugrik) yield an impressive 13% to 15% for savers. As far as paper goes, this one actually may be worth betting on.