-- Posted Wednesday, 18 July 2007 | Digg This Article
Money is the foundation of civil society. Money allows us to transact business with strangers. Without it we would live in a barter society, in villages, limited to the circle of who we know and who we trust. At 7 billion, we have grown well beyond the point where most of us can survive without the efficiencies of money.
Nothing is more important to our collective well being than the health of our worldwide monetary system.
In order to understand how healthy our worldwide monetary system is today, let me start by defining money.
Money is a universally recognized unit of value. The value of a unit of money is determined solely by the willingness of people to exchange their own labor and possessions for it.
For 60 years the US Federal Reserve Note (USFRN) has been the worldwide monetary unit. Today countries around the world are officially diversifying out of the USFRN. Individuals in countries such as Russia, are turning in their USFRNs, in favor of the local currency. Oil producers are demanding payments in other currencies. Today the US government is on the hook to bail out potentially trillions of USFRN worth of bad debt from the rotten securitized debt industry.
Trust in the USFRN system has been abused, and we are seeing the consequences. Many are looking to the Euro to solve this problem, but the Euro will fail due to friction within the EU over monetary policy. The Euro is the monetary equivalent of a bag full of cats. When the Euro ruptures, the world will see just how unhealthy the worldwide monetary system is.
I expect the Euro to rupture within the next 18 months. The only way out of this mess will be for the US to restore confidence in its currency. Some say that we will see the birth of the Amero, an amalgam of Canada, US and Mexico. This seems unlikely given the example of the Euro. More likely, the USFRN will be given a new veneer of legitimacy, some sort of guarantee to limit abuse. This guarantee will have something to do with gold, because only gold can restore confidence in light of what is happening.
Will the solution be direct convertibility, a new gold standard? I think not, because that would necessitate an immediate increase in the price of gold on the order of 100 times. I think that we are more likely to see is a quasi gold standard, where the US FED targets a gold price instead of an inflation target. The problem is that the inflation target has been corrupted. The FED is explicitly managing inflation expectations, not even real price increases, and certainly not the money supply. Inflation expectations can remain disconnected from money supply for a long, long time as we have seen. In fact, Bernanke admits that this is what he is counting on.
Because of the buildup of past abuse, soon we will experience a gold mania. Lack of confidence in the USFRN and the Euro will cause people move to protect themselves with gold. People will once again view gold as the safe haven that it has traditionally been, and the US FED will have to deal with that. Instead of targeting inflation expectations and covertly bashing gold, the FED will have to target the price of gold by convincing people that the supply of USFRNs will not grow too fast. The FED will have to convince people that the USFRN is as good as gold at some price and interest rate, probably 2500 to 5000 per ounce and > 10%. Gold will be the new bond vigilante, the governor of money supply, and a much more effective one than inflation expectations. That is where we are headed, and if not there, then into the abyss.
Vincent Bressler
-- Posted Wednesday, 18 July 2007 | Digg This Article
