TheGold Standard57Sept15 - The Gold Standard Institute International

The Gold Standard
The Gold Standard Institute
1
Issue #57 ● 15 September 2015
The Summit was a sell-out event with legendary
speakers making some great points. The media
turned up in strength; hopefully it will become an
annual event. Readers of The Gold Standard are
urged to set aside some space in their diary for 2016.
The Gold Standard
The Gold Standard Institute was represented by
Keith Weiner and Philip Barton, who both spoke to
a good reception.
The journal of The Gold Standard Institute
The purpose of The Gold Standard Institute is to
promote an unadulterated Gold Standard
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Thomas Bachheimer
Keith Weiner
Ville Oehman
Philip Barton
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Contents
Editorial ........................................................................... 1
News ................................................................................. 1
Correlation is not causation .......................................... 2
Economics Malpractice ................................................. 4
The Trinity of Truth ...................................................... 6
Foreign currency denominated loans – what me
worry? ............................................................................... 8
Editorial
I’m writing this over a hard-earned gin and tonic up
in the mountains of Wyoming after the conclusion
of the Jackson Hole Summit. The event was put on
by the American Principles Project and slickly
organised by Steve Lonegan.
It was timed to coincide with the Federal Reserve
Bank’s central planning fest down the road.
At the Summit it was announced that in a national
poll of 1000 people by McLaughlin & McLaughlin,
39% agreed that they would support the Gold
Standard in the US. Only 15% said no and 46%
were undecided.
There are some skews in there. Firstly that is not a
large number of people and secondly it was a
landline phone poll, which tends to mean an older
demographic.
While that should be born in mind, the result was
nevertheless heartening and, to me anyway, very
surprising. I do not believe that the same positive
response to the question would have been achieved
just a couple of years ago.
Philip Barton
President, Gold Standard Institute
Dawn of Gold
News
Keith Weiner at SNBCHF:



Jackson Hole: Cherry Flavored Cyanide, or
Strawberry?
Move Over Entrepreneurs, Make Way for
Speculation!
Who the Heck Consumes Capital?!
≈≈≈
Guillermo Barba interviews Keith Weiner
≈≈≈
Daily Mail: Huge reserves of gold and other precious
metals are hiding in reservoirs of water within active
volcanoes
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Issue #57 ● 15 September 2015
Breitbart: Jackson Hole - Fed Dithers But Left &
Right Agree on Improving Economy
≈≈≈
unzensuriert.at: Thomas Bachheimer interview –
German
≈≈≈
Economic Times: Odd spot - Dubai gold retailer
defaults on $136 million, banks consider options
≈≈≈
Fortune: Deathbed confession reveals the location of
the Nazi Gold train
Correlation is not causation
This statement is a mantra constantly repeated by
today’s materialist ‘scientists’... pretenders to the
tradition of Natural Philosophy. Science is properly
called natural philosophy... a philosophy of
observing nature, finding patterns, seeking
explanations... and doing real world experiments to
verify the philosophies (hypotheses and theories)
thus created.
Now the raw statement is true... causation cannot be
proven by simple correlation. For example, wet
sidewalks and rainfall are clearly correlated; but this
correlation does not prove that wet sidewalks cause
rain. Other explanations need to be considered as
well... and one must be on the lookout for a reversal
in cause and effect; like maybe rain causes wet
sidewalks?
This may seem silly, and of course it is; common
sense makes causation and correlation very clear.
Unfortunately, common sense seems mostly lacking
today. The direction of causality is constantly
reversed; the cart is all too often placed ahead of the
horse. Instead of natural philosophy, we have
“higher”
mathematics...
fancy
(physically
meaningless) equations, and virtual reality (imaginal
computer games) replacing common sense, replacing
true science. Math and computers are but tools; they
are not substitutes for natural philosophy.
So it goes for monetary science. Instead of a real
science of economics, a natural philosophy of real
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money and honest credit, we have fancy equations,
confusion of cause and effect... and a total loss of
the vital connection between correlation and
causation. Recall that Adam Smith, author of Wealth
of Nations, was a Natural Philosopher... not an
‘economist’. No wonder economics is often called
‘the dismal science’... as practiced by the mainstream,
economics is far from being science... and is quite
dismal.
Nevertheless, the very first step in finding cause is
looking for correlation. One of the strongest
historical correlations is collapse of civilization and
currency debasement. Going back to Roman times,
this correlation is unmistakable. The Roman republic
used the Denarius silver coin as its common
money... and one Denarius was composed of about
4.5 grams of Silver.
By the time the Roman Empire collapsed, the
Denarius contained a mere 0.25 grams of Silver... ¼
gram of monetary metal. The purchasing power of
the debased coin fell in step with the adulteration.
The base metal added to dilute the silver, to try to
maintain the farce that the Denarius was still the
same coin as before debasement, added zero value to
the coin. Only the remaining tiny Silver component
had any value.
Meanwhile, in counterpoint, in the Eastern Roman
Empire (Byzantium) money (the Gold Solidus,
originally used in Western Rome as well) was
unadulterated; the Byzantine Empire lasted for
another thousand years. The correlation holds true...
but how about causation?
Many other examples can be trotted out to highlight
correlation of collapse of empire and monetary
debasement. Consider the fall of the British Empire,
and Britain ‘going off Gold’ in the nineteen thirties.
Or, better yet, consider the abandonment of Gold by
President Nixon in the nineteen seventies... and the
ongoing collapse of the American Empire...
So, what about causation? Does the debasement of
the currency cause collapse of empire, or is
debasement the result of collapse? And, if we stop
and think a bit... does this really matter? Would
knowing the answer allow us to reverse debasement,
to arrest collapse? Using simple logic, collapse causes
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Issue #57 ● 15 September 2015
debasement, debasement causes collapse... or a third
factor causes both debasement and collapse. There is
no other possibility.
It does not take rocket science or brain surgery to
get a handle on this. Greed, lack of Human empathy
and conscience, a pathological desire for unlimited
power and wealth are the common factors behind
both collapse of Empire and monetary debasement.
Indeed, the very act of seeking Empire is runaway
greed, power hunger, and hubris.
Native Americans subject to genocide by Europeans
infected with this disease called it Wetiko; the Greed
Disease. Wilhelm Reich, one of Freud’s star students
(his name now all but forgotten, pushed down the
memory hole) called it Emotional Plague. Andrew
Lobaczewsky, psychiatrist author of Political
Ponerology called it Psychopathy, but all recognized
the syndrome as pathological, and fatal to
civilization.
There is profit in issuing Gold and Silver money...
called seignorage. This profit is legitimate, as long as
the specie (monetary metal) used to form the coins is
unadulterated. A trustworthy coin is significantly
more valuable than bulk Gold or Silver... as coins are
a convenient means of exchange, far more so than
large bars, ingots, or nuggets. Value contained in
coins is simple to tally; just count the number and
denomination (weight) of the coins. In contrast, bulk
Gold or Silver must be chipped to the desired
weight, and assayed to determine purity; not simple
acts suitable for quick, convenient market exchange.
The premium of coins over bars is in effect today;
the premium is several percent, the exact percentage
depending on the size of the coin. Mints make a nice
living simply stamping bars of Gold and Silver into
coins. Unfortunately, the modest profit thus
generated is not enough to satisfy untrammeled
greed and unlimited power hunger. By adding base
metal to the coin, profit grows... until the market
comes to understand the debasement, and the value
of the adulterated coin drops... destroying the illicit
profit. So, let’s add a bit more base metal!
Clearly simple adulteration does not work very well.
Gold and Silver do not allow this kind of
debasement game to succeed. The game must
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change, or greed will be defeated. Comes paper
‘money’; currency (bank notes) deemed money by
government decree (Fiat). Now seignorage can
skyrocket, to near 100%; print paper ‘money’ at
virtually no cost, and spend it at full value.
To add insult to injury, don’t just create the paper...
borrow it into existence, lend it out, then demand
interest to be paid in real value... the borrower’s
sweat and blood. This is the true definition of usury;
create counterfeit money, spend it at full value, and
earn interest as well. Hey; with interest payments
kicking in, does seignorage profit top 100%?
Monetary debasement is the most insidious form of
taxation. It is what ‘capital gains’ tax is made of. Buy
an asset like a house for $100,000 then fifteen years
later sell it for $200,000, and the $100,000 ‘profit’ is
deemed to be ‘capital gains’ and is taxable. The truth
is the house is fifteen years older, well used and
deteriorated. The truth is the asset has not
appreciated; indeed it has grown older and likely less
valuable. Check the replacement cost. The ‘gain’ of
$100,000 is simply the result of monetary
debasement: $100,000 has been debased to $200,000,
50% loss of value, loss of purchasing power.
The plain truth is that Humanity has lost its moral
compass. Everyone expects to live off someone
else’s efforts... don’t tax you, don’t tax me, tax that
guy behind the tree... Greed is good! Vote for the
G’man with the promise to put two (free) chickens
in your pot, not just one. The self evident axiom that
there is no such thing as a free lunch is kept out of
sight and mind.
Being self-sufficient, being responsible for one’s life,
health, and wealth are seemingly passé. Let big
Government fill all our ‘entitlements’. But slowly the
truth is re-emerging; monetary crisis, war, terrorism,
constant surveillance, militarization of police, murder
by cops, regulatory strangulation... all are becoming
harder to not see. Most important, the rate of decay
and destruction is speeding up. Gradualism is going
by the wayside. Slow decay spread over generations
is hard to spot; rapid collapse is visible to everyone
who has their head out of the sand.
How do we end the debasement, the collapse of
what remains of civilization? The world needs to
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regain its moral compass. We need to understand
once again, that civilization cannot survive when
greed rules; honest society, honest money. The only
thing for sure is that empires collapse. This is
inevitable, given the bottomless greed and insatiable
power hunger at the top. Nothing less than
restoration of morality, the victory of truth over lies,
can succeed. No vote for a new master will do; only
the total banishment of financial slavery will save us.
stock prices (or commodity prices, bond prices, etc.)
always incorporate all relevant information. This
means that it’s impossible to know something that
others don’t know.
Austrian economist Hans Sennholz puts it about as
well as possible;
What everyone knows is sometimes false. For
example, at one time people thought the world was
flat. No matter how unpopular it may be, it’s always
possible to discover the truth. When this happens in
regards to the value of an asset, the discoverer can
make money. This fact should be uncontroversial.
"Sound money and free banking are not impossible, they are
merely illegal. That is why money must be deregulated. The
Gold standard will return as soon as people realize that
honesty is the best policy.
As hope of ill gain is the beginning of the fiat standard, so is
honesty the mother of the Gold standard. The Gold standard
is as old as civilization. Throughout the ages, the Gold
standard has emerged again and again because man needed a
dependable medium of exchange."
I would only add this; ‘because man needed a
dependable medium of exchange and store of value”
The good thing is after the collapse of empire, a
Golden opportunity arises; an opportunity to restore
the moral compass, an opportunity to restore honest
money, honest credit. An opportunity to defeat
Wetiko, an opportunity to kick and keep
psychopaths out of power. If we miss this
opportunity, history will inevitably repeat, the old
empire will be replaced by a new one and Humanity
will resume its quick march towards hades.
To survive to see this new age, we individually must
prepare for bad times... exchange your Fiat paper for
stuff of real value before it’s too late.
Rudy J. Fritsch
Economics Malpractice
Take the notion of the efficient market. What does that
mean? Today, hordes of people are coming out of
economics and finance majors believing an
absurdity. Yes, I said absurdity. They think that, if
the market is efficient, it’s impossible to beat the
average investor. This is based on the premise that
If that were true, then entrepreneurs could not exist,
and central planning committees should decide how
to best spend the collectivized resources. But it’s not
so.
So how did it become controversial?
Part of the answer may be that the philosophy
departments have long ago defaulted. It is accepted
in the mainstream that knowledge is out there, literally
in the universe. In this view, prices are right out there
with knowledge.
Information, and more importantly understanding,
only incurs in here - in your head. It takes an
individual mind to process information, and form an
understanding. This means that there is no direct
transmission process from information to prices. It
is a process of each individual mind coming into
contact with the information, deciding for itself
whether it even agrees and if so, what importance to
ascribe to it. And then, and only then, whether to
buy or sell.
Case in point, I can say that the information is out
there that all fiat paper currencies eventually collapse.
I have put some of that information out there myself.
Does that mean that all market participants sell their
fiat paper currencies and bid up the price of gold to
infinity (or permanent backwardation) instantly?
They haven’t done so yet.
Some people know how fiat currencies fail, but most
people don’t. Price is set at the margin, so we can say
that the marginal gold trader doesn’t know about fiat
currencies. Or, it could be that he doesn’t care. The
marginal seller could be a gold mining company with
a lot of dollar-denominated debt. It will not stop
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Issue #57 ● 15 September 2015
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selling gold, no matter what the CEO believes. If he
does not sell the majority of the mine’s output, the
company will be in default and the creditors will take
over. Different actors in the markets have different
motivations, let alone different knowledge.
mean that 3¼ shillings is right in any intrinsic sense.
These arbitrageurs are not supposed to be
omniscient. In fact, all they are doing is closing the
price gaps they find, and earning a small profit to do
so.
So what on earth could efficiency mean? What could
the original intent of this word have been?
This is the original idea of efficiency. It had to
develop, as these market innovations were occurring.
Note that these have nothing to do with the belief
that the current price represents the absolute or
universally right price for wheat. Perhaps wheat
demand will soon drop off due to a new diet.
Perhaps the price will rise due to an insect working
its way west out of Russia. These vague concerns
have nothing to do with the arbitrageurs.
There was a time, not too long ago, when a
commodity could have a different price in different
markets within a city. Communication was slow, and
transportation even slower. Economists of the day
were aware of this, and concerned about it. If wheat
could be had for 4 shillings in the north of London,
and 3 shillings in the east end, then many people
were making an obvious mistake. Buyers in the north
were overpaying, and sellers in the east were
accepting too little.
Distributors entered the market. They developed
ways of knowing the price in different places, and
sought to profit by buying where goods were
cheaper and selling where they were more expensive.
The result of this activity was a price closer to 3½
shillings in both north and east London.
Suppose that wheat was trading higher in Scotland,
but cheaper in France. This is the same problem, on
a larger scale. It’s nothing that can’t be fixed by
adding telegraphs, railroads, and boats.
Similarly, one might observe a wide spread in wheat.
The bid might be 2¼, but at the same time the ask is
3¾. The market maker comes into the wheat market,
ready to buy at the bid and sell at the ask. In so
doing, he and his competitors narrow the spread. It
could become a bid of 3 and an ask of 3¼.
Another kind of spread occurs across calendar time.
Suppose the wheat harvest comes in, on August 1.
The price of wheat collapses for a while. But bakers
will still want this commodity next month, and every
month through July next year. By late Spring, the
price of wheat skyrockets. So warehousemen enter
the market, able to buy spot wheat and sell forward
contracts for future delivery.
Economists of the day might say that the wheat price
reflected all available information. This does not
Efficiency in this original sense is a concept
pertaining to the losses one will take to trade in and
out, to buy at one’s preferred location, to buy when
one chooses, etc. Efficiency exists when a variety of
arbitrageurs are active in the market, able to close
gaps of distance, spread, or even calendar time.
The arbitragers can be said, in an abstract sense, to
be using information to impact prices. However, one
should look past the abstract idea to the
mechanics of where the rubber meets the road. The
simple processes of arbitrage cannot provide the sort
of guarantees in which today’s efficient market
theorist believes.
The modern idea of efficient markets switches to an
entirely different kind of actor. The speculator is no
arbitrageur. The distinction is important, because
arbitrage is a powerful lever than can narrow any
spread. Speculation cannot do what arbitrage does.
Speculation, subject to uncertainty, overshooting,
undershooting, and risk, is a generally weaker and
always inconsistent force than the lever of arbitrage.
Suppose Joe the speculator thinks that the price of
wheat will collapse, because of the paleo diet. He and
his buddies may sell wheat short, taking down the
price. At the same time, Jen the speculator thinks
that the price will rise due to some insect in Russia
which is eating wheat. So when Joe is about done
selling wheat down, she and her friends begin buying
it up. Perhaps Joe and his buddies get squeezed, and
are forced to buy wheat at a higher price, and their
buying pushes up the price even further.
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Issue #57 ● 15 September 2015
The result is that the price moves around chaotically.
At no point in this maelstrom can we say that the
price incorporates all information. Sure, Joe and his
buddies have pushed the price down based on their
diet theory. Then Jen and her friends push it up,
leading Joe and his friends to (unintentionally!) push
it up further. Next, it may be too high and now Bob
and company can short wheat once more, to get the
price down to what Bob calculates is the point where
supply meets demand. Jen and her friends could get
stopped out, and so the price undershoots to the
downside.
The wheat market is not like a pond coming to
equilibrium after you toss in a pebble. It can often be
more like a pinball machine, with lots of automatic
bumpers and actuators slamming the ball this way
and that.
An efficient market is one which maximizes the
marketability of the goods or securities traded in it.
The higher the marketability, the lower the costs of
doing business such as getting into and out of a
good. An efficient market is one with the minimum
possible spreads: bid-ask, geographic, calendar,
brokerage commissions, etc.
An efficient market is not omniscient. The concept is
closer to frictionless. A car with frictionless bearings
does not guarantee you will drive to the right
destination. It simply drives with the lowest possible
fuel bill.
Keith Weiner
President, Gold Standard Institute USA
The Trinity of Truth
It should be noted that there is an important
asymmetry between selling short and buying long.
Short sellers have the risk of unlimited price rises,
but can only make a finite amount when the price
drops. They will therefore tend to be timid, and only
enter for short periods of time.
Did you ever watch a Perry Mason court drama? If
you are of a younger generation than I am, perhaps
not... However, you have no doubt seen court
dramas of some sort; in particular, you have seen a
witness being sworn in with the clerk reciting the
famous mantra;
There is no way to say that speculators make prices
perfect - or make markets efficient - in according with
the information they trade on. Unlike arbitrage,
speculation cannot guarantee any particular market
outcome. It involves numerous risks (sometimes
lopsided),
uncertainty,
doubt,
incomplete
understanding, and many other challenges.
“Do you swear to tell the truth, the whole truth, and nothing
but the truth?”... While the witness holds his hand on
the Bible?
When reading any economics work (including mine!)
you should strive to understand the meaning, nature,
and consequences of the ideas. If something is said
to be true, ask how that is so. Who would have to do
what in order for it to be so? Look at real markets,
and ask yourself is the theory working out in
practice, or do you observe the exact opposite of
what the theory predicts?
Sometimes a writer may not be as clear as he could
be, especially if he thinks a relationship is obvious or
takes a word or concept for granted. Other times,
the problem may be that his choice of words is
imprecise. No matter what, never fail to drill down,
ask deeper questions, and look beyond the mere
word to the truth of how markets work.
Of course, the threat of punishment via the law of
contempt of court (invoked for telling lies) is also in
force, beyond any possible Divine retribution. In any
case, why this trinity... why not simply “Do you swear
to tell the truth”? It’s pretty clear that “and nothing but
the truth” is tacked on to disallow the witness telling
some truth and some lies... but what about “the whole
truth”?
This is the kicker; does the witness have to say ‘2 + 2
= 4’... or ‘the Sun rises in the east’... both true
statements? After all, ‘the whole truth’ means all
truth, no? Well, no. The mantra should actually read
‘all pertinent truth’, not ‘the whole truth’... but this
would call for judgement on the part of the witness
as to what is pertinent.
When we are mislead, the main method used is
exactly this; tell some truth, mostly tell only truth...
but by no means tell ‘the whole truth’... do not
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Issue #57 ● 15 September 2015
mention facts that are pertinent and essential for a
clear understanding.
A great way to spread mistruth is to treat the lie as if
it were true... repeat it like it was true beyond any
doubt. Repetition is the mother of learning; repeat a
lie often enough as if you yourself believe it to be
true, and the uninformed will generally buy it, no
questions asked. The best defense against being
mislead is knowledge. Knowledge demands use of
the ‘Trinity of Truth’ test.
One often hears; ‘simply print more Fiat currency,
and inflate away the debt’. But does this statement
pass the Trinity test? The truth, the whole (pertinent)
truth, and nothing but the truth? Far from it; let’s
look at the statement in fine detail. ‘Print more Fiat
currency’ seems innocuous... but blind belief is lethal.
Is it true that more Fiat can be printed? Sure,
without apparent limit. Is there a lie being told along
with the truth? No visible lie... But does the
statement tell the whole truth, all the truth needed to
understand the whole matter of money creation,
does it tell all pertinent truth? No way!
Indeed, the statement is repeated as if it were true
beyond any doubt... never to be questioned. The
uninformed may accept this statement –‘print more
currency’- but knowledge is power, and we must dig
in to discover the facts.
To get at the truth we must understand the process
by which Fiat currency is created under our current
financial system. I will use the USA as an example...
after all, they are the biggest ‘printers’ of currency
(U.S. Dollars) but the system applies worldwide.
Euro, Yen, whatever, all Fiat paper is created in the
same devious way.
The US treasury collects taxes and borrows whatever
the Government wants to spend beyond tax income.
This borrowing is called the deficit. Deficits
accumulated over years are called sovereign debt.
Sovereign debt grows as deficits add up year after
year.
The question is if the treasury borrows, from whom
does it borrow? Now anyone could (theoretically)
buy the newly written bond... could lend the
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government some currency... but the whole truth is
that there is not enough currency in circulation to
buy the new bond. This is where things get
interesting. At the end of the day, the treasury must
borrow from the Fed... the Federal Reserve Bank, so
called.
To put it as simply and clearly as possible, the
government runs a deficit... less tax income than
spending... and it’s treasury is obliged to write a bond
(borrow) to cover deficit spending. The Fed must
create (print) new currency to buy the new bond and
thus close the loop. Why is there not enough
currency in circulation to buy new debt? Why must
the Fed create new currency? When the government
wants to sell trillions in new bonds at near zero
percent interest rates, while technically there may be
currency available, in reality new cash must be
created.
Note, we are not talking about lending or borrowing
currency already in existence; that is what happens if
anyone other than the Fed buys treasury debt. This
does not correspond with new currency... only Fed
purchases of ‘assets’, normally but not always in the
form of treasury bonds. The Fed could and lately has
been monetizing other debt paper as well, like
Freddie Mac mortgages etc.
The Fed buys debt with newly created Dollars;
Dollars from thin air, backed by promises. The Fed
could and does do ‘open market operations’; buy
treasury debt originally sold to others... with the
intent of increasing the Fiat money supply.
For every newly created Dollar, there is
corresponding newly purchased debt. Dollars printed
by Fed = debt purchased by Fed. Once this is clear,
it becomes obvious why the statement ‘print
currency’ does not pass the Trinity Test. It is NOT
the whole truth. The whole truth is ‘borrow currency
into existence’. The Fed and all CB’s print only to
cover ‘asset’ purchases.
Friends of Gold often repeat ‘you cannot print
Gold’... but does this statement pass the trinity test?
No. While it is superficially true that you cannot
print Gold, the whole truth would be ‘you cannot
borrow Gold into existence’. This statement tells the
whole pertinent truth. It passes the Trinity Test. But
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Issue #57 ● 15 September 2015
how often have you heard ‘you cannot borrow Gold
into existence’?
I wager this is the first time, whereas the
(superficially true) statement ‘you cannot print Gold’
you have probably heard a hundred times. Note that
‘Gold cannot be borrowed into existence’ has
dangerous connotations, connotations very pertinent
to exposing the whole truth. It implies that unlike
Gold, paper currency IS borrowed into existence.
On the other hand, ‘you cannot print Gold’ implies
that currency can be just printed... not true.
Many ramifications flow from this realization. Gold
money can be borrowed; the Classical Gold Standard
featured Gold bonds, Gold bills... but Gold
borrowing involves legitimate credit, not illicit
debt/currency creation ad infinitum. Most
important, before Gold money can be borrowed or
lent, it must already exist; mined, refined, minted and
in circulation.
Another key ramification is that the reverse of
‘Dollars borrowed = Dollars created’ is also true;
‘Treasury debt repaid = Dollar bills disappear’.
Whoa, say that again!? Like this; just as the Fed
creates Dollars out of ‘thin air’ to buy treasury
bonds, so a treasury bond repaid means the Fed
must return the corresponding Dollars to ‘thin air’.
The Fed has a balance sheet, just like any other
company on Earth... and a balance sheet must by
definition balance. If the Fed buys a treasury bond,
the bond value goes on the asset side... and the
Dollars created to buy the bond go on the liability
side. One Trillion Bond = One Trillion Dollar bills.
The balance sheet balances.
If the treasury actually repays its trillion Dollar bond
(don’t hold your breath) then the asset is gone, and
the Fed must remove a trillion Dollars from the
liability side by sending a trillion Dollars back into
‘thin air’ else its balance sheet is out of balance by a
trillion.
This is true deflation; a major reduction of currency
in circulation, a major reduction of the so called
‘money supply’. A trillion Dollars sent back into ‘thin
air’. By contrast, since Gold is nobody’s liability and
does not appear from thin air, Gold money cannot
deflate or disappear (unless you consider grinding up
Gold, mixing it with tons of sand and mud, and
stuffing the muck back into the ground.) The
statement ‘Gold is deflationary’ is a much repeated
lie.
So there you have it; you cannot simply print paper
money under our system, you can only borrow it
into existence. You cannot repay sovereign debt
without a parallel reduction of paper currency in
circulation. The whole truth is that more new Fiat
Dollars must be borrowed into existence every year
just to pay interest on existing debt, never mind
paying for more new debt.
Just as there is no currency to buy new debt, there is
no existing currency to pay interest on old debt; all
currency in circulation today was borrowed into
existence, thus currency matches the existing debt.
More new currency -and corresponding new debt- is
needed to pay accrued interest on currency
previously created.
Ever more currency must be borrowed into
existence, even without deficit spending, or the
whole house of cards collapses. A balanced budget,
however unlikely, would still demand new currency
and new debt to pay interest on the existing
mountain of debt; an endless vicious circle.
We started with the statement ‘simply print more
Fiat currency, and you inflate away the debt’... and
the first part ‘simply print more Fiat currency’ fails
the Trinity of Truth test. Under our current system
it’s impossible to ‘simply print more Fiat currency’.
How about the rest? Can we ‘inflate away the debt’?
Well, if each new Dollar created is of necessity
accompanied by a newly created Dollars’ worth of
debt, this does not seem likely, does it? Any effort to
‘print away’ existing debt will result in ever larger
debt. This is the road to bankruptcy.
Rudy J. Fritsch
Foreign currency denominated loans
– what me worry?
Would you lend money to someone in another
country who told you they were doing it because
interest rates in your currency were cheaper than
The Gold Standard
The Gold Standard Institute
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Issue #57 ● 15 September 2015
their currency and not to worry about them paying
you back if the size of the loan amount in their
currency increased due any weakening in their
exchange rate as they would set aside the money they
saved in interest to cover that risk? I hope you
answered NO!
tenor “could be for a minimum of 5 to 7 years, so that it
would protect investors from medium term volatility in gold
prices” and giving investors the option to roll over the
bond if the gold price falls. But don’t those same
risks equally apply to person on the other side of the
loan?
Such foreign currency denominated loans are
attractive to borrowers facing high interest rates who
are willing to overlook the exchange rate risk (or be
sold them by a bank underplaying that risk). Polish
Swiss franc mortgages, which blew up when
Switzerland dropped its currency peg, are the latest
in a long line of such exploitation of unsophisticated
or desperate borrowers. My Australian readers of
mature age are no doubt familiar with the 1980s
foreign currency loan scandal that “involved significant
financial losses and personal suffering for many borrowers”.
Why is the Government so confident that the Rupee
price of gold will fall? Possibly they think that by
“reducing the demand for physical gold by shifting a part of the
estimated 300 tons of physical bars and coins purchased every
year for Investment into gold bonds” the global gold
market will be weakened?
So who is the latest desperate borrower to ask
investors to lend them their foreign currency at
cheap interest rates? Well if you only read
mainstream media who just report press releases
without any analysis, you’d have missed that it was
the Government of India (GoI) asking average
Indians to lend them their gold. Although in this
case I think it is the lender than is going to lose, not
the borrower.
Lest you think I am exaggerating, here it is clearly
stated in this official press release on the Indian
Sovereign Gold Bonds Scheme:
“The amount received from the bonds will be used by GoI in
lieu of government borrowing and the notional interest saved on
this amount would be credited in an account “Gold Reserve
Fund” which will … take care of the risk of increase in gold
price that will be borne by the government.”
What could go wrong with that? Certainly the
Government doesn’t think there is much risk as the
borrowing “will not be hedged and all risks associated with
gold price and currency will be borne by GoI”. But don’t
worry, “the Gold Reserve Fund will be continuously
monitored for sustainability”, with sustainability being
lovely bureaucratic speak for “are we losing money”.
The Government only seems concerned about the
risks to the lenders, noting that “investors will need to be
aware of the volatility in gold prices” and that the bond
I should note that this Sovereign Gold “Bond” is
another example of government doublespeak as one
does not initially lend gold but instead pays Rupees
and is given a loan denominated in grams of gold,
receiving Rupees back at the end (based on gold
prices at maturity). There is a Gold Monetization
scheme where you can deposit actual gold but there
is little difference to the Gold “Bond” as the
medium and long-term deposits are redeemable “only
in cash, in equivalent rupees of the weight of the deposited gold
at the prices prevailing at the time of redemption”.
I will at least give the Government credit for being
explicit about what they are doing as they say “the
deposited gold will be utilised in the following ways …




Auctioning
Replenishment of RBIs Gold Reserves
Coins
Lending to jewellers”
The first and the third point are basically the
Government selling the gold and taking a (vaguely
Gold Reserve Fund hedged) short position against
the depositor. The last one is the only legitimate and
minimal risk use of gold (but as I explained here, it
has limited use in throttling Indian gold imports).
The second is the Government effectively buying the
depositor’s gold on the cheap, as long as interest
savings outweigh Rupee price changes.
The key question of course is what will happen to
Rupee gold prices. Yes, Rupee prices have been
stable the past few years, but note the general
downward trend in the INR/USD rate.
The Gold Standard
Issue #57 ● 15 September 2015
What would happen if the Gold Reserve Fund
became “unsustainable”? Would the Government
just give up all its interest saving gains and incur the
cost of hedging its position, or decide that it might
need to roll over the bond to protect itself “from
medium term volatility in gold prices”. What me
worry indeed.
Bron Suchecki
Bron Suchecki writes in a personal capacity and the views
expressed do not represent those of the Perth Mint. First
published at Perth Mint Research.
The Gold Standard Institute
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