To argue with Ambrose Evans-Pritchard is risky. He is well-informed, he has travelled much, writes well and has a sharp intellect. Yet, I must affirm that he is mistaken in some of the opinions expressed in his recent article at “The Telegraph” www.telegraph.co.uk “A new Gold Standard is being born” January 17, 2013.
In the article he refers to the “(old) Gold Standard dynamic at work with all its destructive power, and the risk of sudden ruptures always present.”
I take it that he refers to the pre-WW I Gold Standard, and the financial chaos that broke out in 1930, to which he refers as “the destructive power” of the Gold Standard. That chaos should not be attributed to the Gold Standard as it existed, but to the previous expansion of credit in violation of the rules of the Gold Standard. The pain of the 1930’s was the correction which the Gold Standard imposed upon the financial diddling with credit expansion which the Powers had adopted; what was “destructive” was their policy of credit expansion beyond savings. If you stick your finger in the fire, don’t blame fire for its “destructive power”; just refrain from doing that.
Ambrose writes: “The global system is supple. It bends to pressures.”
Actually, there is no “global system”. There is at present only a global process.
A system has, by definition, parameters. A system is like a billiard-table with no pockets. The parameters are the boundaries of the table beyond which the billiard balls cannot move. The parameters of a system ensure its stability and endurance through time.
A process, on the other hand, has a beginning, a mid-point and an end, like cooking a steak, or like a fire-cracker. You light a fire-cracker; then you have the explosion as the powder ignites instantaneously. The process ends when the exploding gases collapse. A process does not endure.
From Bretton Woods (1944) to 1971 the world had a system, albeit a defective and fragile system. There was a parameter which could not be violated: the US solemnly promised to redeem dollars held by foreign central banks for gold at the rate of $35 dollars per ounce. That was a system that held world credit expansion down to a modest rate up until 1971, when Nixon decided to renege on the promise. See graph of “International Central Banks, excluding gold”.
Since 1971, there is no “monetary system” for the very simple reason that there is no longer any parameter to credit expansion.
What we have had since 1971 is an explosive process of credit creation in the world. Total world debt is calculated to be 350% of world GNP.
The explosion – like the explosion of a fire-cracker – is now entering its collapse phase. There is no way to avoid the collapse: world debt of 350% of world GNP is unsustainable. There is absolutely no way out of this. The world has not put just a finger in the fire. It has put its whole body in the fire. The pain of the coming collapse will be ghastly.
It will be educational to see how those responsible for the present disaster explain away the cause: unlimited world credit expansion.
Ambrose praises the global “system”: “The global system is supple. It bends to pressures.” Yes indeed, it does “bend to pressures” – another way of saying that there exist no parameters, and that what we have is an explosive process of credit creation, not a system. We shall learn in the near future, that the process of collapse of credit has “destructive power” in spades.
Ambrose guesses about the nature of “any new Gold Standard”. He says gold “will take its place as a third reserve currency”, but “not so dominant that it hitches our collective destinies to the inflationary ups […..] and downs of global mine supply. That would indeed be a return to a barbarous relic.” In other words: “Yes but No; the world will muddle through, somehow”.
The global mine supply that Ambrose mentions is a negligible factor with regard to the value of gold. If mine supply should double, or if mine supply should disappear completely, the effect upon the price of gold would be imperceptible. Ambrose is not aware that the world supply of gold is not just what comes from mines annually, but somewhere in the region of 170,000 tonnes, because all the gold ever mined – except what has sunk to the bottom of the sea in shipwrecks or what remains hidden in buried treasures – has an owner and is potential supply.
The ratio of stocks to gold-production is the lowest of any commodity. Mine production of about 2,400 tonnes per annum is about 1.5% of total supply. It would take some 67 years at the current rate of gold production, to double the world’s supply. Compare with copper: the above-ground supply of copper is about three month’s of copper consumption. The price of copper is very susceptible to changes in supply and demand. Gold is the paragon of stability.
Ambrose closes by saying: “Let us have three world currencies, a tripod with a golden leg. It might even be stable.”
Ambrose waffles. He is in favor of a Gold Standard, as long as it does not interfere with credit expansion, by means of which modern states pretend that they are Welfare States until they go broke and people riot in the streets.
You can’t have it both ways, Ambrose! The world will either establish a gold standard and immediate settlement of trade in gold, or it won’t. And if the world does not get a gold standard, then we can kiss industrial civilization good-bye.
I realize that putting things in such drastic terms goes against the British aesthetic which regards clarity as boorish and as evidence of a lack of suitable education. But with regard to gold, it is not possible to “muddle through” as the Brits put it.
Gold is so highly prized in the real world (uninhabited by Keynesian economists, financial oligarchs and lapdog politicians) that it will never, ever function as a world currency, as long as other fiat currencies exist, for the simple reason that no one in his right mind will want to use gold for payment, if he has any other means at hand with which to pay a debt or settle a transaction. Gresham the Brit dixit.
Gold will not be used as money until some nuclear power that is seller of essential goods demands payment exclusively in gold, and other lesser powers fall in line. In the meantime, gold is doing and will go on doing what it did when the Roman Empire entered its decline, and what it did during the French “Assignat” follies (1790 – 1797): it is going into hiding.
If the French experience with gold during the French Revolution is any guide, we have yet to see the last spasms of desperation of the big powers: persecutions, confiscations, executions, imprisonment of anyone holding gold. When the dust settles, as it must, I think we shall see an un-democratic world run by military men, among whom the most enlightened may perhaps opt for gold and silver as money, and have done with such nonsense as “suppleness and bending to pressure”.