Opinion: Our currency is being debased because it does not have sufficient backing in gold, says Philip O'Connor. Your view?

Opinion: Our currency is being debased because it does not have sufficient backing in gold, says Philip O'Connor. Your view?

By Philip O'Connor*

When the US, Europe, and Japan print money the NZ dollar is debased.

This article shows how the Reserve Bank of New Zealand (RBNZ) can fight back by converting foreign exchange reserves into direct gold holdings.

New Zealand is among a short list of countries that do not hold gold to back its own currency. But New Zealand does have indirect holdings of other countries’ gold from holding these other countries’ currencies. As a result, every time these other countries bail out their banks, the amount of gold backing the New Zealand dollar decreases (debasement occurs).

It is estimated that the August 2011 indirect gold backing of the NZ dollar is about 7.7% or 1.6 milligrams of gold. It is also shown that through sales of foreign currency reserves for gold, NZ can get about 10 times the gold represented by their indirect gold holdings.

If half of the RBNZ’s foreign currency holdings are converted into gold, the NZ dollar gold-backing would increase to 42%. Having a sizable direct gold holding, the big 3 could continue to debase their currencies, and the New Zealand dollar will not be debased.

This article defers the reasons why gold never stopped being money to another article; however, four brief points will be made.

First, to those who say you cannot eat gold and therefore gold is not money: has anybody ever seen anyone with gold go hungry?

Second, gold has been used as money throughout almost all of the history of civilization.

Third, gold’s current prominent position on central banks’ balance sheets show that gold still backs world currencies.

Fourth, the tax asset backing world currencies is extremely weak at the moment. Since growth is low and government deficits and debt are high and rising in major countries, growth and taxes are not enough to strengthen the currencies.

In bad economic times the gold-backing of currencies becomes much more pertinent than in good economic times when the tax backing of currencies is significant.

Therefore, lets start by examining the gold backing of the RBNZ’s primary foreign currency reserve: the US dollar.

Gold backing of the US Dollar

Figure 1 shows the dollar value of the US’s gold holdings as a percent of the total balance sheet of the US Federal Reserve since 1915.

As a percentage of the strict definition of the US’s monetary base this figure is around 18%. However, the 18% figure excludes off-balance sheet obligations. The ordinary US banks produce derivative money that, nonetheless, is guaranteed by weak deposit insurance funds and is convertible into the base money. And the ordinary US banks derivative money is backed by bank loans and investments whose values have dropped sharply.

Michael S. Rozeff in an article at lewrockwell.com shows that with government guaranteed bank deposits, bad loans by banks add to the base money supply that gold is needed to back.

Amazingly, the US is still among the highest gold backed currencies because it has such a large gold stock and because its inflation rate has been moderate compared to most countries (King Dollar).

The Euro and Yen have even less gold backing. (See for example, Aftab Singh at marketoracle.co.uk, “If you debase the US dollar you debase them all”). The Euro gold backing is made worse by the European banks holding sovereign debts of the PIIGS which have a significant chance of turning into bad loans.

Will this low gold backing persist?

History shows that with a fixed rate of exchange between a currency and gold (“the gold-standard”), a gold run occurs when the gold-backing of the currency falls to around 20%. People rush to exchange the paper currency for actual gold before everyone else does.

Nixon’s decision to take the US off a fixed gold exchange rate in 1971 occurred once the US dollar got below 20% gold-backing.

Figure 1: US dollar gold backing (source: www.greshams-law.com)

Nixon floated the US dollar against gold, and since then there have been no runs into gold. However, currencies can still be converted into gold by selling the currency to buy gold in the gold market.

The effect of the floating gold exchange rate is that the currency’s gold-backing depends not just on the ounces of gold backing the currency but also on the price of gold.

Printing currency (currency debasement) can continue without a full-fledged run, because the floating gold exchange rate can restore the gold backing in dollar terms.

This is achieved by the price of gold rising. For example, if the US Federal Reserve doubles the amount of currency in circulation and the price of gold doubles (sound familiar, re 2008/09?), the US dollar gold-backing remains constant. However, the physical amount of gold backing each unit of the currency has declined and debasement has occurred.

New Zealand dollar debasement

The reason that US, Euro and Japan currency printing matters to New Zealand is that the foreign exchange which backs the New Zealand dollar, and was acquired through past labour, is being backed with fewer ounces of gold when these other countries print currency.

The (relatively) stable price range of the NZ dollar in terms of other fiat currencies hides the fact that New Zealand’s indirect gold backing is being steadily reduced.

There are other assets backing the New Zealand dollar but these will have to be raised through taxation and/or sacrificing other expenditure.

The NZ government sector is currently producing massive deficits and raising new debt against these other assets.

The shocking current rate of increase in total New Zealand government debt at 36% in the year to August 2011 shows that we cannot raise alternative reserves at the moment.

Even worse, NZ is relying more on foreigners to fund its deficits and official government overseas debt rose 97% in the year to June (the most recent published data point). The recent downgrade of NZ government debt by the ratings agency reflects the fact that the value of NZ’s other net assets (assets minus debt) is declining fast.

Adding to these problems, the value of the RBNZ’s foreign currency assets is being debased by other countries’ money printing. New Zealand is being forced to take action now, before these other countries print away the ounces of gold backing the NZ currency.

NZ Dollar’s gold-backing

Figure 2 shows the approximate gold backing of the New Zealand dollar in terms of NZ dollars (left hand axis) and in terms of milligrams of gold (right hand axis). The graph assumes all foreign currency is held in US dollars. This is a best-case scenario because the US dollar has a relatively large gold-backing and because it ignores that most of the RBNZ’s foreign currency assets are not direct holdings of foreign currency but stand in-line with many other assets for conversion into the foreign currency base.

The RBNZ undertook a wise course of action to increase foreign currency assets to back the NZ dollar starting in 2005. This is the cause of the increase in the New Zealand dollar’s indirect gold-backing beginning in 2005.

Notice how the US dollar debasement in the 2008 financial crises dramatically reduced the New Zealand dollar’s gold backing in dollar terms and in terms of milligrams of gold.

Since 2009, the increases in US money supply has caused an increase in the price of gold and the milligrams of gold backing the NZ dollar have been whittled away. In fact, despite the RBNZ increasing net foreign currency assets by $14 billion since January 2005, the NZ dollar’s physical (indirect) gold-backing has actually declined from 1.8 to 1.6 milligrams of gold per NZ dollar.


 
Figure 2: RBNZ net foreign assets* US gold holdings/US Fed liabilities/RBNZ NZ liabilities (source: World Gold Council, RBNZ, Fred St Louis Federal Reserve)

Conversion of 50% of RBNZ’s foreign currency reserves into direct gold holdings

For the case of this conceptual experiment I use a round number gold-backing of 10% which reflects an estimate of the off-balance sheet obligations of the US Federal Reserve (and also the lower gold-backing of the RBNZ’s other foreign currency assets).

This means that for every US dollar that the RBNZ sells for gold, the RBNZ exchanges $0.10 of indirect gold for $1 of direct gold. This is not an illusion. Because the world is willing to let the US gold backing be only 10%, New Zealand can arbitrage the difference and get gold at 10% of its cost in terms of gold that it gives up when it gives up foreign exchange.

Taking the RBNZ’s net foreign currency reserves and dividing by their total liabilities, at August 2011, the RBNZ has an indirect gold backing of just 7.7% in dollar terms or 1.6 milligrams of actual gold per dollar.

Half of the RBNZ’s foreign currency assets (representing a 3.86% indirect gold-backing) can be exchanged for gold itself, and the gold backing of the New Zealand dollar would rise to 42%.

The remaining half of the foreign exchange assets contributes 3.86% indirect gold-backing and the directly held gold 38.6%.

The actual amount of gold is about 160 tonnes and would be about 40 grams per person.

Interestingly, this amount is very similar to NZ’s 1925 direct gold holdings. According to the World Gold Council, in 1925, New Zealand held 56.73 tonnes or 1.8 million troy ounces, about 40 grams per person. This represents more than the USA’s current per capita gold holdings. The optimal amount of gold may not be exactly 50% of foreign reserves, but this experiment is useful starting analysis. (Perhaps some reserves could be silver.)

The chance of a worldwide run into gold

Obviously, it made more sense to do the exchange for gold when the US dollar gold backing first went below 20% just before the turn of the millennium. The gold price was around $300 and NZ would have gotten about 5 times more gold than today. But waiting further may be even more costly.

With the interconnectedness of the global financial arrangement that operates on credits all built on a sliver of gold, there exists the possibility that the whole financial system will see a crisis/panic that causes a run into gold.

Other countries have noticed that the major world currencies have low gold-backing, and China, Russia, South Korea, Thailand, India, and others are embarking on the path of acquiring more direct gold holdings. Recently, Venezuela actually took delivery of its gold, taking it out of the Western banking system.

However, New Zealand has one huge advantage: NZ is small and can achieve this transformation relatively easily. China which has been accumulating gold for over 10 years is still a long way from converting their foreign reserves to gold, but its efforts which include buying all local gold supply (it helps being the largest world producer), creating gold and silver exchanges, and introducing gold ATMs are intensifying – but they are too large to make a sudden leap into gold for the gold price would go nuclear. And if they did, New Zealand would be the last in line at the gold window and left holding an empty fiat bag.

Risks of holding gold

The risk of holding direct gold reserves is that the price of gold falls.

The supply of gold is relatively known with mining increments adding to the amount already above ground. Demand reflects expectations about a wide variety of factors but demand mainly reflects expectations about future currency debasement.

Some argue that the total amount of credit in the worldwide economy affects the price of gold, and in a crisis, current demand could become supply as wholesale liquidations of all assets including gold occur.

This wholesale liquidation of all assets including gold appeared to be the case in 2008, although the effect on the gold price was temporary.

In addition, countries that are accumulating gold are using price dips to wisely build their direct gold holdings.

But if the world’s central banks change their behaviour and stop debasing their currencies as in 1980, the price of gold will fall. And in that case, having 50% of reserves in foreign currencies mitigates the impact of a fall in the price of gold.

 Benefits of holding gold 

So the risk of direct gold-holdings is that central banks change their behaviour leading to a fall in the gold price. But what if the world’s central banks continue their current behaviour and follow their stated policy objectives?

In that case, having direct gold-holdings stops the debasement of the NZ dollar when other countries debase their own currencies.

Europe is proposing bailout packages of Greece (and an unknown number of other Euro countries). The Fed continuing to increase its money supply and rumours of QE3 abound. Japan likewise has excuses for printing money.

The danger of the RBNZ waiting to convert into direct gold holdings is that as the big 3 keep printing the gold price is forced higher to keep the gold backing above run levels and the weight of gold that New Zealand gets by a partial conversion of foreign exchange assets into direct gold declines.

Diversification motivation for the RBNZ to add direct gold holdings

Even without the worldwide run into gold intensifying, gold can offer the RBNZ some benefits. In fact, an article by the RBNZ’s Kelly Eckhold in the 2010 September RBNZ Bulletin analysed different foreign exchange assets including gold and concluded that “gold also proved to be a resilient risk diversifier”.

It is important to keep some foreign exchange assets for transactions purposes and to support the NZ dollar in a crisis.

But with the current allocation of 100% in foreign currencies, the RBNZ is undiversified.

The RBNZ is essentially betting that the fiat powers do not debase their currencies further, or at least more than that reflected by the current gold price. Given the current state of worldwide economic news and the action of world central banks since 2008 (and most central bank behaviour throughout history), that seems a rather brave bet.

Perhaps it has not occurred to the RBNZ that their foreign currency reserves are being debased in terms of gold.

Diversification into direct gold holdings is less risky than the current RBNZ allocation of zero direct gold holdings. Holding gold directly as well as foreign currency assets will give less volatile outcomes over the entire possible range of outcomes in the future.

Other arguments against direct gold holdings

A perverse argument against direct gold holdings is that it will create a strong NZ dollar.

But, for any economic entity, once cash flows start to decline and the debt rating starts to get downgraded, creditors start to look more closely at the company’s assets to assess market values and liquidation values.

In bad economic times, it is extremely difficult to see any benefits of having a weak NZ dollar, and more importantly, a weak NZ dollar caused by other countries printing money.

It seems to be crazy to continue in the current system and experience real losses in the value of the NZ dollar (in milligrams of gold), when these loses have no benefit whatsoever to NZ citizens.

Is it reasonable to incur a loss of wealth in NZ to help save Deutsche Bank, Goldman Sachs and their likes for making wrong highly leveraged bets at the financial 'casino'?

Individuals can also trade currency for gold

Individuals can do the same transaction as the RBNZ by exchanging NZ dollars with little gold backing for gold itself, but many people are scared by articles in the financial press that instead talk of gold being in a bubble.

Gold did decline dramatically to below $300 after a brief peak of prices above $600 an ounce in 1980. However, it is extremely important to compare today’s low US dollar gold-backing to the approximately 100% gold-backing in 1980.

You could say that gold was in a bubble in 1980 as expectations were that the gold debasement of the US dollar that started at $35/ounce would continue. Instead, the US Federal Reserve temporarily stopped the debasement by dramatically increasing interest rates (remember the 20%+ mortgage rates?)

Today to get back to a safe gold backing necessary to prevent the chance of a run into gold, the US Federal Reserve could halve its money supply. This would entail a major change of behaviour as minor annual contractions in US money supply are rare and have only occurred in the 1920s and in 1937.

The other alternative is that the US dollar price of gold doubles.
----------------

Philip O'Connor is a senior lecturer in Finance at the Department of Accounting and Finance of the University of Auckland. You can contact him here » philip.oconnor@auckland.ac.nz

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It’s time for the RBNZ to add direct gold reserves
 

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Im sorry but i find this argument a hard one to swallow. I think our debt to GDP will have a big effect on the value of our currency. Our $ was proped up by the carry trade for years, the US and European money printing will mainly effect their currencies not ours . we may get a carry trade due to super cheap money out of these countries supporting another asset bubble but thats getting risky as the last bubble is still deflating.

>>>>>>

US Federal Reserve chairman Ben Bernanke called the approach of the US 

Federal Reserve to the financial crisis as credit-easing rather than quantitative easing. In the approach of 2009, the US Federal Reserve bought commercial paper and residential mortgage backed securities. The quantity of money remains unchanged if the sales of government bills offset the purchases (credit easing). If purchased assets are funded through the creation of money, the practice is referred to as quantitative easing as defined by Werner.

36 37

>>>

Bill Gross (pimco)  is betting the next thing to be purchased by the Fed in QE3 or QE4 depending on how one keeps count, will be Mortgage Backed Securities. 

http://www.zerohedge.com/news/bill-gross-goes-massively-short-cash-he-bets-newport-farm-uber-duration

I agree totally that the increasing government debt to GDP will reduce the value of the NZD as the risks of default or pseudo-default (paying the debt back with new money not backed by assets) increase. The fact that government debt is exploding means that time is running out to convert some of the foreign reserves that the RBNZ holds into gold.

>>>>>

You could also apply the same logic to your second point -- the massive increase in US government debt will reduce the value of the US dollar.

But in theory the second point is correct. The value of US dollars would be the same if the Fed had bought good assets, i.e. gold. The Fed would have you believe that their money printing is backed by good assets, but mortgage backed securities (MBS) don't have quite the same ring to them as gold. House prices are continuing their slow motion crash in the US. They were forced to buy these assets to pay for the bad debts of the US ordinary banks. The money was printed (to buy the MBS) to fund a worthless asset (US bank bad debts). With US government debt growing at Trillions per year, even buying US Treasury bonds is not a sound asset as it has significant risks of default or pseudo-default.

Plus, if the US money was as sound as it was before QE began, why has the price of the monetary assets, gold and silver, gone up about 60% and 200% respectively?

I would make a few initial comments on your assumptions:

1.  Gold as money.  If you can't pay your taxes with it, it isn't money.

2.  If you can't redeem your dollar for physical gold it isn't actually "backed" at all.

3.  No western central bank has shown any interest in strengthening their currency by 42% at this time.

You don't address is the economic impact of appreciating our currency by 42%.

You fail to mention economic depressions happened when countries were on a gold standard.

There is some reasonable argument that the gold standard contributed to the depth of the great depression.

2. Not true on fiat currency to gold IMHO....both are, ultimatley the same thing, they are IOUs for energy.   The money in circulation, the debt etc is all future calls on energy...which is limited and indeed going to go into decline...therefore neither is backed by sufficient energy...therefore a lot of it will disappear it cant be cashed.....hence a huge depression and deflation.

"There is some reasonable argument that the gold standard contributed to the depth of the great depression"

Yes....

regards

Re- your assumptions

1 US$ is money and I cant pay my taxes with it. There are now providers that hold gold which can be exchange electronically instantly, e.g. Euro Pacific's Mastercard.

2 true, and the US hasn't got any gold, it has been looted anyway.  The last full audit was in 1950 something. even if they were holding some it has got multipule claims on it. 

http://www.youtube.com/watch?v=IXXMSduH6YE

3 By exchanging dollar reserves for gold the Reserve Bank's balance sheet stays the same value.

The economic impact will be we will become richer.

The great depression occured because the US departed from a 100% gold backed standard, the Fed increased the supply of paper dollar claims on the gold held at the time causing a false boom.  FDR stole the gold and revalued the exchange rate of it, from that point an individual couldn't redeam $ for gold ref- your point #2.

If NZ money changes to a gold standard then what will improve about the economy? Do you think that people will have more faith in money and so it will appreaciate in value or something?

In the current economic conditions people are already effectively hoarding money, it really could not gain much more value. That is why debt is being repaid and banks are not lending easy credit. It's also why people are not spending it willy nilly. What is your argument for how this will bring the economy out of a recession?

Also how will the system be changed to a gold standard? What is the Reserve bank going to exchange for monetarisation of gold? You appear not to want an exchange able gold-dollar standard so what will be exchanged for the gold to setup the system? Isn't this going to make the people who have the gold really influential, I mean if I need to go to one of them in order to pay my taxes or be prosecuted by the IRD who knows what these people might demand in return? These people would be pretty important, no?

Don't we currently have a problem with a small group of individuals (I am mostly referring to the US of course) standing in the way of political change. How does a gold standard change this?

Sorry, the article is still in the works, but I am genuinely interested in what you have to say about these questions.

 

Hi Nic, this is the simplest to understand history of American monetary systems

http://www.gata.org/files/CRSHistoryOfUSGoldStandard.pdf

And this is a vid that illustrates better than I can explain an alternative perspective on how to view gold (money) in relation to green pieces of paper (currency).

http://www.youtube.com/watch?v=qeQtpRGSI_8

US$ Federal Reserve Notes (FRN's) Yen and Euros have currently the near full confidence of the worlds population, but as you know given they are borrowed into existence with exponentially accruing interest attached it will end badly, as all ponzi schemes do. They are all hopelessly indebted.

Given the sustained abuse these currencies have endured over the last wee while I am thinking it won’t be long. What is holding it together is the momentum of them being world currencies, and that’s it. When people collectively see the emperor has no cloths and there is a mass exodus from fiat currencies where will that wealth end up? In gold and real stuff.

Gold is the most recognized money of all time. It has the best fit of all the requirements to fulfill as being money. Two bits of gold will always be worth twice that of one (a piece of paper with a 2 printed on it has no more intrinsic value than a piece of paper with a 1 on it). If you want to "make" some more gold it will always cost you a heap of effort.

This is Paul Grignon's latest release from his Money as Debt series, you saw it here first!

http://www.youtube.com/watch?v=x_xoJQZtmHY&feature=feedu

Sorry, Banksterbasher, but if you can't answer the two questions above how on earth can money reforms work. I will re-state them,

1) How will this help the NZ economy?

2) Won't this make the holders of the gold in charge of the monetary system. Maybe they don't want their shiny gold bars laminated into money and would rather keep them. How do you propose this conundrum be resolved?

The research was interesting but in my opinion highlights three things,

1) Lots of different gold standards all collapsed.

2) One ended with the great depression (which began in 1929, long before 1933 changes).

3) It was possible to deflate or re-value Greenbacks which had the advantage of being some what limited and paper based. As long as the supply was limited, they achieved parity with gold.

There is not the political will to voluntarily change the fiat monetary system to an honest commodity backed or public credit system in nz. Even if there was, there are too many vested interests in keeping the status quo.

The current system will collapse necessitating a new system, hopefully with honest money.

1) In a fully backed commodity currency, with a 100% reserve banking system offers stability;

a) savers will not have a portion of their wealth stolen and transferred to those that are close to the new money entering the system (offshore banks and governments and those close to these).

b) governments will have a restraint imposed on them, they can only spend money they have received from tax revenue, no sovereign debt.

c) the economy will not be going through periods of booms and busts (the business cycle) as this is caused by the central bank imposing interest rates that are either higher or lower than what the free market would otherwise set them at.

d) theoretically the monetary system will be sustainable, it could go on for ever, if there were enough recourses and goods, to support it and everyone was fiscally prudent.  With a interest bearing debt money as we have eventually the debt gets too great and it all falls over.

e) gold supply is currently increasing at roughly 1% a year, this happens to be about the rate of population growth. all things being equal this means a 0% inflation rate.

f) given money cant be lent into existence for next to nothing, we wouldn't have the parasitic banking/financial industry that we have today, you could only borrow at a rate some one was prepared to lend it to you at (much dearer than rates are currently).

2) Anyone with a pile of gold bars would be very rich, but as soon as they have spent it it would be gone, as apposed to what we have today were anyone who is close to the magic money machine gets the benefit at the expense of savers. No one group would have influence in the money supply.  Money supply (gold) would be pretty much static.

No gold/silver standard has ever collapsed, plenty were altered to allow debasement of the currency or it was a quasi-standard to begin with.

The setup for the great depression occurred in the early 20's when the currency supply was allowed to expanded beyond the level of gold that backed it setting up a big bubble that popped in 29.

Yes, extra greenbacks were printed then withdrawn from circulation bringing it back to parity, can you see Ben withdrawing enough currency to bring gold back down to $20?  (destroying 96% of all US$)

"Anyone with a pile of gold bars would be very rich, but as soon as they have spent it it would be gone, as apposed to what we have today were anyone who is close to the magic money machine gets the benefit at the expense of savers. No one group would have influence in the money supply.  Money supply (gold) would be pretty much static.", Any student of history could tell you something which the original owners of a lot of the necessary gold will do. First they will refuse to have it monetized, by not spending it, then when the economy flounders they will pick up distressed assets for cheap. 

"No gold/silver standard has ever collapsed, plenty were altered to allow debasement of the currency or it was a quasi-standard to begin with.", I guess this is true if you take collapsed to mean all the gold suddenly vanished. In reality they did collapse because they could not cope with the demands of a democratic economy, e.g. the economy became manipulated by a small group of wealthy individuals and the only way people had to escape this was to reform the currency. This is basically my point above.

The financial system should work for the economy, not the economy for the financial system. No, Ben does not make decisions, he just follows instructions. Alan was the same. I hope you are not advocating that the US economy should be crashed by the Fed. Many people died because of shock therapy in Russia, would you want their blood on your hands?

Your intention is good I know, but your analysis of a gold standard is incorrect in many ways. You need to do some research to qualify your statements. For example when you state "no gold/silver standard has ever collapsed,". It is the economies based upon a gold standard which have collapsed.

Of course one group would have influence on the money supply, the banking cartel would. They're not going to loan out money for free so through interest they end up with all the gold. They then control the money supply, thus they control everything.

 

From my understanding, I feel that the least imperfect monetary system is one that conciders gold (and or silver) as money.

No monetary system is going to prevent an economy from colapseing through mismanagement.  No economy has collapsed because of the a true metalic money system.  Plenty of debt money economys have collapsed because of this system.  The use of gold as money is in itself inert, its a zero sum game.

In a 100% reserve gold money system, a bank could not loan out money it didn't have, banks would have to compete with one another to attract lenders, put a margin on the money borrowed and lend it out at a profit.  In the same way a shop or plumber or anyone else has to opperate.  Banks would not be in any more of a monopoly position than a plumber.  Sure a plumber or anyone else may be able to hoard money, but they must still spend it to realise its value.

@ Nic the NZer

I explain a little about the gold-standard and why it didn't work in a longer comment below. The problem is always one of politicians spending something for nothing. Your point 3 that the supply of paper currency was limited, has been proved again and again (and yet again today) to be false.

Gold is a lump of metal: it doesn't cause economic depressions. That is like a man blaming his injuries on the rock he fell on, as a result of jumping off a cliff.

In fact, gold is despised by politicians because it is not free to create like paper money. It is protection against the excesses of government -- in this article I argue that gold should be used to stop the US, Euro, and Japan from diluting away the RBNZ's wealth in their foreign currency reserves.

This is the same type of thing that Alan Greespan said in 1966:

http://www.constitution.org/mon/greenspan_gold.htm

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

"Your point 3 that the supply of paper currency was limited, has been proved again and again (and yet again today) to be false.", Read the article again, the number of Greenbacks was gradually reduced until they reached an acceptable exchange rate with gold. The point is just that the tokens held their value due to their volume, rather than being 'backed'. Obviously the inflation rate depends on the political will of the bankers in charge but a limited supply of legal tender holds it's value even when not backed by anything more tangible, this is very clear.

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.", A gold standard hardly makes money a safe store of value, the standard might collapse, it has happened before.

You don't appear to realise but the NZ monetary direction is primarily controled by commercial lending policy, the RBNZ has a strictly limited role in NZ monetary policy because it is lender of last resort. Same with Alan Greenspan in the US, same with Bernanke. The Fed can't say no to inflation without causing a banking crisis, neither can the RBNZ. This is still going to be true if the RBNZ has significant gold reserves. This makes a mockery of the idea that it's actually a government or RBNZ decision to have 6% average year on year house price inflation leading up to 2008. This is and has always been the reason a gold standard will collapse under it's own limitations.

Nic, you are using the straw man against me.

"The Fed can't say no to inflation without causing a banking crisis, neither can the RBNZ. This is still going to be true if the RBNZ has significant gold reserves."

While I may agree with your statement, this article is not about stopping a banking crisis in the US or NZ, but about RBNZ foreign reserves which are being debased in value by foreign central banking money printing. How does that debasement contribute anything to NZ?

How do you propose that the RBNZ protect its assets?

With regards to your Greenback example, I discuss in this article what would happen if the Fed decided to reduce its money supply in the section "risks of gold". It is also mentioned how the Federal Reserve slowed the debasement of the US dollar in 1980.

But the bet that the Fed will reign it the money supply is a risky bet for two reasons. First, if the Fed continues its current policy, future banking crises cause the Fed to fund the banking sector losses with new money. Second, the "intangible" asset backing paper currency you are talking about is the government's tax asset (plus other saleable assets) less government issued debt. In good economic times these other assets are sufficient (and gold goes to the background), but with government debt around the world exploding, you cannot rely on these tax assets, and gold becomes important.

Yes, Greenspan was talking about a gold standard which governments renege on, but direct gold holdings which I propose are not subject to the default. They will protect against money printing by foreign central banks.

On your last paragraph you say I am proposing a gold standard (a currency peg against gold) but this is another straw man you have created. You also talk about NZ monetary policy, but I do not talk about NZ monetary policy in this article. The problem I refer to is caused by foreign government money printing for which NZ only loses.

I would be interested to know what strategy you propose to stop the debasemnt of RBNZ foreign currency reserves by foreign central banks.

 

Just pretend. Works for most central banks.

Pollies too....managed to do it for 50 odd years mind....

regards

Er, the author of this article never mentions a gold standard, anywhere.  Search the article yourself.

Cheers.

Again, the author never mentions a 'gold standard'.

Since he doesn't, we are left to decide whether or not he is in fact implying / advocating one.

As it turns out, he may not be.  That is to say, there is more than one way for gold to 'back a currency'.

One way is indeed via a fixed exchange rate with gold.  This is what I would define as a 'gold standard'.

Alternatively, gold could exchange with currency at a freely floating market rate.  This would lend the currency its credibility (ie. backing) in every sense that satisfies everything this article is predicated on, IMHO - and this would not be a gold standard in the way I think you originally meant.

Iain,

Happy to agree to disagree.  Interesting his reply to your email, not sure what to make of that either.  Ironically I did consider making the point in my previous comment that, well, one could just go and ask him... and so you did!

As for covering up economic reality - may have to disagree there also.  It might pay to think on the consequences / implications of if, as the author says, this did actually happen:

"... And if they did, New Zealand would be the last in line at the gold window and left holding an empty fiat bag."

That will be when reality sets in, and I'm pretty sure you don't want to be going around empty handed at that point, if 2000+ years of history are any lesson.  On that basis alone I think there is a lot of merit in this article.

Cheers.

 

The amount of Reserve required to offset debt based economies would not  serve even as a downpayment on that debt...and so the question that arises, would it be deemed to have any relative value  in proportion.

And yes we would be holding an empty fiat bag ..because that is in keeping with the policy of .."Wait ..See..Do ..Nothing..Wait..some more.

Relative value? Depends, on the price of gold.

That's the merit in this article - policy needs to change and it shows a way.

Ahhhhhhhhh....I see....now.....Gold crumpling under the weight of it's own value.....and a return to digging up corpses to boot..... A spead of commodity maybe.. I could go for...but an IOU has a measure that reflects more the need of the holder than the borrower ...so at some point a divergence of opinion arises.

Ahh, are you sure, but does the value of gold actually change, or is it the numbers on the paper it is denominated in that changes?

 

Banksterbasher..(still my fav Nom)...How did you manage to get that chicken in the egg...well done..!

Easy.  Check out Exter's Pyramid.

http://en.wikipedia.org/wiki/John_Exter#Exter.27s_Pyramid

Now you know which comes first (or rather, which one will last (smile)).

 

Iain, obviously this message was not intended to be posted on the discussion board and placed in this location. My message was a courtesy and thank you during a busy day. I would appreciate it if you would refrain from placing my emails in it the discusion board out of context to further some private aim.

The reason our currencie is being debased is the fractional reserve system.  Once exponential debt growth overtook exponential GDP growth, the debasement began in earnest.  As GDP growth slows and occasionally contracts, without a corresponding contraction of the money supply of course the currency will lose value.  This has very little to do with foriegn reserves of gold or other fiat currencies.  The fact is that the supply of money is growing faster then goods available to spend the money on. 

Money does not have to be backed specificaly by gold to retain it's value, but you do have to controll the supply to the amount of goods in circulation.  Gold has not changed in value over the last 2000 years or more.  The simple fact is, that it is a finite resource measured against other finite resources.  The whole fractional reserve banking system matches finite resources to an exponentially growing faith based currency. 

I think when you said "the supply of money is growing faster then goods available" you meant, the debt owed is growing faster than the income available to service it.

Of course the way out is to issue the money debt-free, and have the government make up the numbers with extra expenditure for a while. This would even create economic recovery if the fractional reserve system is left in place. This would even be beneficial if the government borrowed to fund expenditure.

"The fact is that the supply of money is growing faster then goods available to spend the money on. "

very much not true....

There is noticable over-capacity in factories, money is being printed, but its not being used in the economy compared to the decline in consumer spending. Un-employment is 2 or 3 times (depending on the measuring point) where it should be.....wages are at best flat...there is simply negligable inflation or expectations of it in three years.....and with core inflation at best flat at about 2% its not looking like in 3 years time either....

In fact I'd bet and indeed I am betting on deflation and depression.....not because I want it I'll add but because its coming.

regards

Lain Parker, I think Steven was making pretty much this point. Bank reserves have not materialised into the economy as credit.

I'ld rather stockpile oil. It's a scarce and necessary resource. Everything needs it.

Well said, best short comment of the day IMHO.

regards

If you did a search-and-replace of "gold" for, say, "antimatter" in this article, would it change the argument at all? (Antimatter is hard to produce and expensive to store, and has few if any practical industrial applications).

Yes it would, Gold has the best charataristics of money of them all.  Being expensive to store is not in it anti-matter's favor.  Can you think of anything else?

Paper money might work out ok if it was kept rare, but given more of it is required to be lent into existence every year to satisfy the repayment of the interest portion it dosen't stay rare for long.

http://chestofbooks.com/finance/economics/Elementary-Economics/Physical-Characteristics-Of-A-Good-Money.html

If a commodity backed monetary system is adopted, a means of exchange is required to hold those that are vested with the responsibility of caretaking it accountable.

A 100% reserve standard worked out ok until it got corrupted by moneychangers.

In my ideal fairy fantasy world, gold/silver would be laminated within the note with a 100% reserve banking system, so the people would not need to trust a small bunch of overlords to care for it for us.

Currencies are virtual commodities. The central reason for having gold reserves is that gold needs real human effort to mine it. Currencies are created by a few keystrokes to make a ledger entry. 

Electronic currency is much more convenient than gold, but real reserves have a place in providing equity in the system to stabilise it

Real reserves could also be useful in solving our "Dutch disease" problem - that the currency goes up far above a level that sustains manufacturing. I have repeatedly suggested that the RBNZ buy a tonne of gold a day when the NZD is above 80 US cents. This is meant as an example of how a steady drip of NZD creation might be useful in providing a profitable way to set up a negative feedback effect when the NZD is damagingly high. The aim is to limit the destructive effect, not to control the currency. I feel the RBNZ is sufficiently competent to manage the inflationary effect of such a policy.

Basically, we cannot prevent or control the rate of world currency debasement but we can adjust our own policy to limit the damage.

"XXX needs real human effort to extract it."

This is a description for every industrial commodity, not only for gold.

My point exactly. Gold is a convenient commodity. It diversifies us away from the present system whereby the NZD is effectively backed by milk.

But milk meets the same definition, it takes effort to extract.

Other points:

"... but real reserves have a place in providing equity in the system to stablise it"

Interest phrase.  If you study the end of hyperinflation in Weimar Germany you will see they stablised the currency without any new gold at all.  In fact, no more "reserves" (meaning no new wealth of real assets of any kind - not even milk) were created.

Therefore if a system in hyperinflation can be stablised without gold reserves how can it be said it is needed to stablise the system?

"Real reserves could also be useful in solving our "Dutch disease" problem - that the currency goes up far above a level that sustains manufacturing."

But the article suggest a gold backed currency would appreciate 42%.  How could any competitive manufacture take place in NZ at that exchange rate?

Milk is not durable, portable or easily formed into a standard unit of measure.

The Mark went to practically zero, a partial backing would of at least put a floor as to how far it fell.

I am not sure the article suggests our currency would appreciate 42%, it is merely saying if half of the value of our foreign currency reserves were exchanged for the equivalent value in bullion then our exposure to gold would go from 7% to 42%

It's been a while but I recall most of the detail explanation was from Niall Ferguson's The Ascent of Money.

Sorry.

My wording was a bit inaccurate, but the logic is plausible:

http://www.agrimoney.com/news/nz-eases-tanker-limits-to-cope-with-milk-s...

"However, Mr Kaczor was more upbeat over long-term prospects, saying that "there seems to be almost complete consensus that longer global demand, over the next 10-15 years, will increase and will challenge major exporting countries to match".

Barclays Capital analyst John Clemmow recommended investors who believed in stronger dairy prices to buy the New Zealand dollar as a proxy.

"New Zealand is the Saudi Arabia of milk supplying almost 40% of globally traded market," he said.

"The net result is that despite the myriad of domestic factors that impact the local economy, the New Zealand dollar trades almost exclusively on what milk is doing."

He suggested a pair trade of buying the New Zealand dollar while selling the Australian dollar, which appears threatened by talk of waning emerging market demand for metals."

Great to see someone making a rational case for NZ gold reserves.

Iain,

The article you linked to would better be described as: 'any gold measure that has been tried in the past will not be the answer to the honesty or otherwise of a money system'.

Once again you seem to be fixated on a classical gold standard, with its rightly attributed 'restrictions and inflexibility that a one hundred percent gold money system would impose'

But as I have already pointed out, it is not necessary for gold to back a currency in this way.  The alternative is for a floating rate of exchange, which would allow honesty to be returned to the money system.  You can't trust governments to hold the currency constant - nor would that be desirable - else how would the economy expand?  But neither do you want producers  forever beholden to the issuers of credit, in case the credit issuance gets out of control - the situation we see today.  So get the best of both worlds - simply use what 1000's of years of history have shown us to be the ultimate vote of confidence in true value held over time: allow the exchange between gold and currency at the market rate - and problem solved.  Of course, for this to work, it would help if everyone, including the RBNZ, got themselves some gold in reserve of whatever value they feel they've accumulated over their own times.  Hence, again, why I think this article is worthwhile.

Please read Phillip's very well written comment here, he says it far better than I can:

http://www.interest.co.nz/opinion/56161/opinion-our-currency-being-debas...

Cheers.

Hi Iain,

Yes I did read it.  And a few like it before.  I am reasonably familiar with these arguments in their various forms. They rarely get past the idea that gold must limit currency creation:

"A plausible argument can be made that if banks were required to
maintain an invariable level of gold reserves, it would limit how much
money they could create. It would, but it would also limit how an
economy functions as in the disastrous British case cited above."

Hint: It doesn't have to.  This article should be re-titled 'how to be fooled about the true nature of gold'.

Auckland Uni has not come up with a new gold.  The measure exists - it's the physical gold to currency exchange rate in a free market.

Think on Philip's comment elsewhere in this thread where he says:

"If people are not forced to use a particular item as money and they can exit the system, it seems to solve most of the problems associated with unsound money."

This is the key.

Iain,

Glad we can agree on something!

This particular issue (as represented by the rates example) is resolved when we realise that:

"Currency is for spending, Gold is for saving."

We need currency.  If we had only gold, it would be the same if not worse than the current system (ie. no growth as opposed to too much imaginary growth).

But that is not to say one cannot exit.  It's easy.  Just buy some physical gold with whatever you have left over after you've paid your rates (as we're told the RBNZ should do).

Combined with a proper market exchange rate between currency and gold, you (and your central bank) would both be on to a winner!

Cheers.

Yes.  But let's be clear.  There's no free lunch.  In your rates example, for example, you complain that you can't exit the system because you still need to pay your rates in currency.  Well... more generally than that, you need to produce at least as much as you spend in order to ultimately survive. This goes for individuals as well as entire economic zones.  And it applies whether you own no gold or all the gold in the world.  If you stop producing, you must start to use up your savings (gold) - the current US 'exorbitant privilege' not withstanding.

Now, savings (gold) are indeed a proxy for physical goods and services - as well as our capacity to convert whatever abundance of natural resources at our disposal into those goods and services.  That is, it is a (I would argue 'the') proxy for true wealth.  If that underlying wealth for some reason disappears, then of course your wealth, as measured by your gold, will also evaporate in equal measure.  But that is not what we're talking about here (it's actually a bit of a strawman in this context).  We're talking about reserving the wealth you have accumulated using a proper store - one that has been recognised across time.  Hint: it's not currency that is being forever debased.

As a bonus, when you do this, you'll find that the currency debasement, mal-investment, what-have-you that is associated with the current system will come out into the open, and so will start to naturally limit itself.  This in turn will cause less resource wastage and more efficient use of those resources we ultimately derive our wealth from.  Everybody wins (except those currently enjoying their free lunch, of course :).

The RBNZ should definitely get some.

Cheers.

 

No I am not selling or advocating the purchase thereof but here is the list of the Top ten  Gold reserve Countries and what percentage it represents to their Foreign reserves.

There is a story in here somewhere...over  to Iain or Roger  to perhaps see some dots, Italy is of note in so far as holdings go.

http://www.wealthdaily.com/articles/who-owns-worlds-gold/2491

or this to the 100..http://en.wikipedia.org/wiki/Gold_reserve

"..In bad economic times ( like now?), it is extremely difficult to see any benefits of having a weak NZ dollar.."

Perhaps that should be run past our sorry export industry to see if they concur.

Even under the gold standard, taxes were never paid in gold, but in the paper currency (which was convertible into gold). The gold standard was simply a currency peg to a specific weight of gold.

The inability of governments to constrain currency supply was the problem with the gold standard. Once the gold backing of the currency fell below 20% or therabouts runs would occur as people rushed to exchange currency for the actual gold before everybody else. There are many examples, but France and Britain experienced runs in the 1930s. These problems were fairly well known, and in 1924 Keynes stated in Monetary Reform(1924), p. 172: “In truth, the gold standard is already a barbarous relic”.

Because of the large US gold holdings, the Bretton Woods agreement made the US dollar the gold standard and other countries pegged their exchange rates to the US dollar and, therefore, effectively to gold. By 1971 private individuals had already lost the freedom to convert at the fixed exchange rate of $35/ounce, but governments had not. It was mainly France that caused the US to renege by buying so much gold, and France picked their gold up in a warship.

Since 1971 the paper currencies of the world have a floating exchange rate against gold. I am not advocating a currency peg to gold, but I am recommending reducing NZ's dependence on other countries' gold holdings. The numbers show that the world is in a situation like in 1971. There is a difference -- the price of gold can rise to release some of the pressure -- but that does not help NZ with zero gold reserves.

There was a question concerning "what the students of this nation are being told is reality?" Thanks for making my tiny role as a cog in the educational system so important, but there is an important point here. The role of gold as money is being suppressed everywhere you look: in the media, in movies, as well as in all types of education. (Everywhere it seems, except certain computer games.)

Money is an item reserved as an intermediate store of wealth that can then be exchanged in the future for goods and services. All assets by definition have value, but money must have some other characteristics. First, it is an asset free of liabilities (if it has liabilities associated with it, it is credit (not money) although credit can function as a medium of exchange). Second, the item must be durable. It should not decay over time so that it can provide money’s essential role as a store of value. Similarly, it must be in limited supply. Anticipated increases in supply will reduce money’s utility as a store of value. Last, it must be exchangeable. Being homogeneous, divisible, and transportable facilitates exchange.

I think people are perfectly capable of deciding what that item (or items) should be reserved as money. However, where are the better alternatives to gold? Gold also has recognition as money the world over as it has served as money throughout history. The alternative money is definitely not paper backed by tax assets, as this is a credit.

A couple of antedotes might help those who think milk or antimatter can function as money. The disposed leader of Tunisia didn't load up his plane with paper money, milk, nor antimatter, he loaded it up with the country's gold. Qatar gave a loan to Greece because Greece supplied gold as a collateral. Gold is the central banking system's money, and it is reported by the IMF and the BIS as a reserve of the world central banking system.

In any case, say antimatter is money. You can recommend to the RBNZ to hold antimatter and that will solve the PROBLEM brought up here. The problem is not whether gold or antimatter is money, it is that NZ is still being ripped off by other countries printing their money supply when the RBNZ holds only those other countries' money as reserves.

And thanks for taking the time to comment. I will try to answer other issues here later.

 

"Money is an item reserved as an intermediate store of wealth that can then be exchanged in the future for goods and services. All assets by definition have value, but money must have some other characteristics. First, it is an asset free of liabilities (if it has liabilities associated with it, it is credit (not money) although credit can function as a medium of exchange). "

So you are in support of a full-reserve banking system then?

A full-reserve banking system implies no credits. This is a different issue that I don't want to get into now, but here is why gold being money, and not a credit matters to the issue at hand.

Money is something that is not a liability of someone else. If an item is a liability of someone else (e.g., NZ dollars are a liability of the RBNZ acting as banker for the government), then it is credit. Credits disappear when the debtor goes broke. Gold is an example of money as there is no other counterparty (creditor). If you own gold you don't have to worry about anyone else going broke. Gold does not evaporate the way that credits can.

Everything that these days is branded as being money is really credit, and all credits have default risk. What is happening now is that the default risk of credits like the US dollar have increased dramatically. Even if the US does not go broke, its money printing is diluting the value of its credits. This is part of the reason I argue that the RBNZ needs gold reserves to protect itself against other countries money printing.

Hi Philip,

First of all thanks for the reply. Yes, absolutely full-reserve banking means no credits. For anybody else who is not aware, a credit is not the same as a loan, so full-reserve banks can still lend money to borrowers, but they need to borrow it from investors before lending.

Of course there is one thing in NZ which is not gold backed and is an asset, rather than a liability of someone else. This is the legal tender. Unfortunately 90% plus (I don't have exact figures) of the money deposited in NZs banking system is credit, not legal tender, or it's electronic equivalent. So what is that going to do to the economy when the public default on their debts and the finance system can't or does not want to issue new ones? This is happening and will continue to happen regardless of how sound the RBNZ books are.

So yes, regardless of in NZ dollars are gold backed or not, you will need to worry about others going broke. At least as far as members of the public go.

"... when the finance system can't or does not want to issue new ones"

Don't worry about that.  They will.

Cheers.

jessemcl, I hope you are being facetious, the soonest time that financial institutions will return to anything like pre-crisis backing for the economy is when the recession really ends. At this time it will be in their interests to go back to parasiting away the wealth, until then they are not contributing to the recovery.

You realise that the Japanese recession lasted 10 years, and even then it was not clear it had finished. The interests of the Japanese and it's banking sector are better alligned than the interests of New Zealand and our international financial system as well. The great depression probably lasted from 1929 to 1945, yes the end of WW2. When the war ended and war time expenditure/stimulus stopped some signs of the depression returned.

You do realise the financial system is almost the entire reason for the financial crisis.

On the contrary, I'm being quite serious.  Yes, definitely agree the IMFS is the reason for the current crisis.

Now go and research the difference between asset deflation and price deflation.  You will not see the latter, policy will not allow it.

Ergo, Phlip's article is a good one.

Cheers.

Well if the financial system doesn't change then NZ might leave the recession after 10 years of very similar economic conditions to today. This is assuming that NZ basically remains solvent for that time frame and does not default like Ireland or Greece. Something similar to the Japanese recession is probably a best case scenario, and I think optimistic.

Things could get worse, the Australian housing bubble appears to be in the early stages of collapse. You appear to understand that a housing collapse in Australia is very much going to be bad for New Zealand.

Gold backed currency will not do anything for the economy, as the writer of the article is busy explaining to me and Parky.

There's nothing you can do for the economy.  The problem it has is that there's too much debt.  That much we appear to be able to agree on.  This problem will be resolved one way or another, eventually - perhaps involving in one or more of the things you mention along the way.  What I contend, and the reason I like this article, is that we should position ourselves in physical gold in order to most effectively navigate the eventual resolution of the debt problem.

Cheers.

Of course there is, where I said that the recession is caused by the financial system, that means if the financial system was supporting the NZ economy (rather than an economy of wealthy people overseas) it would be on the road to recovery. It really is that simple.

Introducing gold into the RBNZ would be acting in the interests of the wealthy in NZ as a side show, rather than addressing the problem.

I presume you mean 'supporting' by doing something like printing (interest free) dollar bills instead of interest bearing bonds?  If so I guess we're going to have to agree to disagree at this point.  Borrowing is borrowing, from a 'wealthy person', from the future, or from the (unsuspecting) people - there's always a risk of failing to realise a return on capital - and when that happens, unless there's a suitable reserve, things *will* start to go south.  There's no free lunch.  So good luck with that.  Meanwhile I'll get some gold while there's still some to get, and I hope the RBNZ does likewise (don't want to be holding that empty fiat bag the author mentions).

Cheers.

Yes, that would help a lot. It's not something for nothing by any means, what this does is de-value the dollar and make the outstanding debts repayable by causing inflation. Of course somebody loses, yep, it's the financial system and foreign investors. But that is why it helps the economy, even if you don't reform the financial system.

The question is who is the government there to help, is it there to work in the best interests of foreign capital, or is it there to work in the best interests of participants the NZ economy. I know where I stand on this question.

The problem is this will cause inflation which is unpleasent, and so the government needs to use the money for stimulus, if it doesn't many people will have no work, no income and will starve. Of course I also advocate financial system reforms so this doesn't happen again, and so the reformed reserve bank can halt inflation later on once the recovery has occured.

No economy has ever recovered from a bust without government stimulus. This includes the great depression, but WW2 was probably not the kind of stimulus that was really hoped for. One important thing however, notice there was no shortage of money to fight a war when it came to that.

Cash printing isnt the answer, it debases our currency and pushes up our borrowing costs....We  (USA etc) fought the war by issuing bonds to our ppl which we expected them to buy.....trouble is there is no eventual upside to this depression so long term bonds (20 to 30 years) are probably worthless.....

"what this does is de-value the dollar and make the outstanding debts repayable by causing inflation."

Thos only works if you are the only country to print....when everyone prints this doesnt work.....ditto devaluing so your labour becomes cheap.....when everyone else is trying to export un-employment that strategy wont work either.....

Globalisation is finished....at some point in the future we will realise this and simply default on our foreign debt and take back ownership of our assets.....all the paper money out there held by the "wealthy" will be worthless...

Debt wont be repaid because there wont be the energy to do so....energy and cheap energy under-writes the value of everything even gold......think that through.....

regards

Gold isnt the answer. Gold is future call on energy...energy output ie fossil fuels is in decline....we are looking at a mega depression....for the drop phase gold isnt the best bet IMHO....once on the bottom some gold makes sense to protect from the Govn calling in the cash by issuing new notes.....but at the bottm assets will also be cheap, ie firesale prices...at taht point buying cheap taking a reasonable margin makes more sense than being in all gold IMHO.

regards

Steven, so close, and yet so far away.  Think on this:  Goods and Services (or Energy, if you must) values Gold (as you yourself point out).  Gold, in turn, values Currency.  But Gold has an important property that Energy does not possess.  Gold is not used up.  And therefore Gold is a (or rather, 'the') store of value.  This is why Gold is indeed the answer.  So what if Gold is a future call on Energy?  Don't you still want to store what value exists and that is in your possession, in something that's actually up to the job?  Currency is a bad choice by the way (it will be printed into worthlessness).  So is Energy itself (it will consumed).  Trust me, our reserve bank should take Philip's advice, and soon.  As should everyone.

Cheers.

 

Where you go wrong IMHO is its a store of "value"......it really represents a waste of energy.....ie energy consumed in extracting it that can never be recovered.

Everything, and I mean everything comes back to energyand with our society, cheap energy.

"Energy is consumed", exactly, hence gold is in effect worthless when there is no energy to purchase.

For instance Japan was very concerned that Thailand (and Vietnam?) stopped rice exports and even India stopped exports of all but the highest grade of rice....gold wouldnt have made a difference in this situation, at best it would have been a one time use.....sure Japan could give its gold for rice to India, but then in effect its consumed and no longer available to the Japanese.

So gold is at best a currency....worth little more than paper currency. Things of real value will be assets that produce or convert energy / calories.....but not until we have seen huge deflation in their present over-value and the destruction of such paper wealth....and the other will skills........without energy our society will become less complex...having lots of gold wont matter one bit.

http://www.youtube.com/watch?v=ddmQhIiVM48

No, I wont trust you because I think you are completely wrong....I dont hold gold and have no intention to.....not until we have reached the bottom of the coming depression anyway (and thats 3 to 6 yrears off), and then only as a hedge/protection from our Govn taking whats left of value from me.

regards

 

 

 

 

You are unfortunately conflating two distinct concepts, and arriving at an equally unfortunate conclusion.

First of all, I will ignore the trivial jibe at 'wasted energy in extracting gold', which is so vanishingly marginal in relation to the actual energy (goods and services for everyone else) that is being valued by said gold, that it is not worth talking about.

Now, first, no-one is arguing that energy does not back gold.  Of course, if we run out of energy, there's nothing for gold to value, and so gold will be worthless.  But what's the point of worrying about that? It's a different debate entirely.

Second, as you point out, the destruction of paper wealth is imminent.  Yes, it is!  But the energy will not be destroyed.  It will still exist, and it will stil be demanded, it will still be consumed and it will still translate into whatever standard of living we are able to manage (in proportion to the combination of its abundance and our efficiency in doing the translation).  Ie. the Economy will persist.

But do not cross these two things over into one.  Gold will carry you through the crash.  That's what I am saying you (and our central bank) should trust in.

Cheers.

Err... quoting myself from above:

"Goods and Services (or Energy, if you must) values Gold"

Or to put it the other way around, but equivalently:

"Gold is valued by Goods and Services (Energy)"

Are you purposefully switching around what I wrote, or was that just a mistake?

To be clear:

"Energy -> Gold -> Currency", in that order.

I was under the impression that on this individual point we actually agreed.

This is why gold has value.  As does currency. Ie. each is derived from Energy.  But of course Gold and Currency have some very important differences.  Which is why we should be reserving Gold for when our current Fiat Currency system crashes.  You will want to be positioned next in line for the value.

Cheers.

 

Missy, the reason gold/silver is an effective medium to back a currency is because it has the best charitaristics of any substance as money.

The whole idea of having something backing a currency is as a means to hold its integrety to account.  The free exchance of currency for what it is backed by is fundimental to it working.

It is totally inpractical to go into your local agent of the tresury with $500 to exchange, and ask them to give you two and a half barrels of oil and to charge up some batteries.

Part of golds suitability for use as money is that its not consumed up for other uses.  It is also divisable into a stantard unit of measure, portable, rare, durable, and reconisable.

If there is no means of free exchange then yes there is not much point of holding a backing of a currency.

Missy, the reason gold/silver is an effective medium to back a currency is because it has the best charitaristics of any substance as money.

The whole idea of having something backing a currency is as a means to hold its integrety to account.  The free exchance of currency for what it is backed by is fundimental to it working.

It is totally inpractical to go into your local agent of the tresury with $500 to exchange, and ask them to give you two and a half barrels of oil and to charge up some batteries.

Part of golds suitability for use as money is that its not consumed up for other uses.  It is also divisable into a stantard unit of measure, portable, rare, durable, and reconisable.

If there is no means of free exchange then yes there is not much point of holding a backing of a currency.

The debate about what makes an ideal store of value is a well known one, so I will not repeat the arguments here.  I would only point out that 1000's of years of history are not on your side on this particular point.

Cheers.

 

legal tender is a credit, it is a liability of the RBNZ.

Your point about bank failures ruining the NZD is correct IF the government bails out our Australian banks (and the one NZ bank and NZ finance companies).  The RBNZ bailing out a bank is printing money in exchange for nothing (or for a fraction of the value of money printed). This will dilute the value of the NZD. However, the NZD will not be diluted in value if the RBNZ does not print money unbacked by assets like gold. No bailout, no dilution in the NZD.

A greater concern is that the NZ government decides to bail out the banks by issuing debt. Increases in NZ government debt increase the likelihood that the NZ government is bailed out in the future by printing money unbacked by assets.

Even without a government financed bank bailout, the dramatic increases in government debt increase the likelihood of a bailout of the government somewhere in the future. That is why I say the RBNZ should act soon.

But forget about those domestic problems for a minute. The NZD is being diluted in value by the US and the Eurozone bailing out their banks.

Don't you find that outrageous?

 "But forget about those domestic problems for a minute. The NZD is being diluted in value by the US and the Eurozone bailing out their banks.", hey, guess what the financial system in NZ is structured in the best interests of foreign investors. People who benefit from a strong NZ dollar should be near the back of the queue when it comes to complaints about this situation, behind pensioners, wage earners, young people, farmers, other exporters and local small business operators.

If the NZ financial system is going to be reformed it must be in the interests of all of the above first. That rules out a reforms which are not going to encourage the NZ economy to leave recession.

Against

If NZ rb were to buy gold, wouldn't that give value to gold?

That is heresy.

We have been taught that we must buy the investments from the previous generation at the highly inflated prices that they have determined.  To not do so would bring down all their retirement  plans.  They have either indirectly or directly invested in cds (money speculated with by banks), stocks (money syphoned off by "very successful" CEOs CIO, CERs for expenses all held unaccountable by diluted shareholders). Property (farmers slash residential).  

The realignment of investment to find new value in something that has been relagated to the dustbin of history would allow the youth to move away from the thrashed and abused old system of frational reserve banking and cronyism and try to add a new skeleton for a more equitable and healthy system that would put them in at least  a small position of power.

As I said heresy.  We must encourage people to only value that which has the full backing of corporations and stock exchanges.  We must also keep purchasing government bonds too.  Because every dollar the government spends has such a powerful ability to improve our every day lives.

Those that speak out against the status quo surely must be considered trouble makers.  

For

I think that currencies are the most powerful factor when considering investments of any shape or form.

ie There is no point in buying NZ shares for their good performance if the dollar loses the eqivalent value against our trading partners.  

Gold has no government liabilty against it.  It has the same properties here in NZ, if you take it to India - it has the same properties.  

If it suddenly became valueless by one trading partner, it would retain it's value with another.  

It is a global currency.  And the rate of mining only adds 1+ % to the total supply each year.  That would reflect the sustainable growth of the population/consumption of the planet. Depletion would be awknowledged as technology depleted the mines.  Like everything else.

Savings most definitely should be held in the most stable currency we can lay our hands on. 

NZ dollar has been relatively stable compared to the American dollar.  I would still be most hesitant to call the NZ$ stable.

Good points. About the relatively stable NZD exchange rate against the other fiat currencies, I also say that it hides the debasement of the NZD in terms of gold.

or gold is in a bubble, which is far more likely.

regards

As you say, gold may be in a bubble.  

Name me a currency that hasn't been in a bubble.

I guess a loose definition of a bubble is when the value of something greatly exceeds all the corresponding value of things it can be exchanged for.

Ignoring government decree, gold can be exchanged for any asset or service in the world. 

What would you set the value of this to be?

At what amount of gold would you exchange your goods or services?

Now we would awknowledge you probably wouldn't want any gold of any amount.  But there is a price that would make you at least consider a trade

Again loosely.

We are told to invest in sectors, assets, services, whatever you like, when they are cheap, ie undervalued.

A lot of the stocks bonds and financial assets at this time are over valued.  Stocks returning 1 % dividend.  Bonds (especially overseas) returning under 1 % pa, cds returning less than inflation.  

In NZ we are absorbing inflation created by the major trading partners and suffering from our own inflation in nz.  

NZ will be suffering inflation to recoup the rebuilding of Christchurch, leaky houses and a raft of other local problems. That is how we can afford to rebuild, inflation versus overt tax increases.

We look at the problems that we face globally.  There are bank runs,  there are riots, the vulnerable in our communities are verging on neglected (especially overseas), people are overworked, underpaid.  People are too poor to invest in those stocks and bonds, housing farms.  

--

Most would argue that gold is at a historically low price compared to financial investments alone.  

Sometimes we need to look for value in places other than where our parents/grandparents have.

What are our values?  Who do we align our values to? Are we prepared to say, it's time to make a complete change?  Are we prepared to question the old style of work, investment, society?

Do you say these function just fine now?

BTW I was being facetious saying that every dollar the government spends improves our lives.  I am sure it does for someone, just not the taxpayer.  

 

We are a very insignificant country in the golbal economy, and so heavily influenced by the major trading partners and their currencies.  I guess trading will always be undertaken in a currency of sorts.

You are correct, they can determine which currency we must trade in.  

And then we are vulnerable to them debasing them.  

We currently have to make all our purchases of oil in american dollars,  American dollars are rapidly losing purchasing power around the world, due tho their domestic economic issues.  At what point does someone say 'enough".  

Gold makes a good currency exactly because it would not disrupt peoples lives (ie food, energy) if a country where to start stockpiling it as reserves.  It is not a threat to the lives of the  breadline middleeaster/chinese or other that depend on their subsistance farming and food supply.

There is more gold in the world than silver, platinum rhodium.

Diamonds don't have the same properties.

Food and energy (and land) are out, because hoarding would hurt many people.

Binary digits are proving to be too easily shifted around for the wealthy and powerful.

Fine art. not possilble

What is there?

What is the most obvious?

I would imagine people that own gold would want a fairly functioning economyin the future like the rest of us.  Who wouldn't want that for our kids?  An Economy where the kids can find employment, that they dont have to go to war because the trade American dollars for oil breaks down.  and the bonus of checks and balances on growth and the mechanism of checking governmental growth.  

 

"We have been taught that we must buy the investments from the previous generation at the highly inflated prices that they have determined"

I love your analysis. Crikey, I think I detect the signs of some original thinking there.  I'm interesting in where it has led you.

I don't know whether you are being facetious now.  I can't read your facial expression.

Yes I admit that I am sceptical about most investment ideas.  That has saved a lot of pain in the past, I must add. We have invested in a range of things and have gotten out when it seemed to be illogical to maintain such investments.  

We have walked away more often than not. 

We are doing fine.  Though have lost a lot of friends and family who wholly believe the mainstream way of investing. There are others that fully support our investment style. 

I am unsure which way this thing will crumble coming up.  the 'government mind readers' will do the best going forwards.  All I can read is 'increasing the money supply'.  the growth industry is 'intervention'.  I hope the 'sounds of war' is just some mixed signal that is diversionary to fixing it at home.

If you feel that there are a number of family that will be relying on outcomes, it makes you very conservative.

We don't invest on sound bites, that is for sure.

 

 

No, not facetious I assure you. I often put forward a case too strongly, which looks like I'm fixed in my opinion. Argue strongly, but hold the ideas lightly, seems to be my style.

New ways of looking at things are what gets me excited, which is why I asked the question.

Pretty much everything you hear about a gold standard is along the lines of, change to a gold standard and then money will be sounder and everything will be ok. Umm, why?

People who want this don't apparantly understand anything about how it will work, they don't actually propose a particular solution. Just rhetoric about how fantastic gold is, kind of dumb.

I thought NZ dealt with the soundness of the currency issue quite effectively by changing all the notes from paper to plastic, that made the money more sound, stopped it being 'washed away', but it didn't do anything to the economy. Obviously it is a pretty similar argument.

There is a lot in your comment but let me take a stab at it.

If the current state of affairs continues indefinitely then holding gold stops the dilution in value of foreign currency reserves. If the current system were to crash, gold will be a great thing to have -- the alternatives could be Chinese or Arab and both of these groups show a bias towards gold.

How to get sound money? The US Constitution attempted to enshrine sound money that could not be debased. The US dollar was originally defined as a weight of silver. However, over time monopolies attempted to control the money supply. Jackson threw out a US National Bank in the 19th century. But the US Constitution was unable to stop the Federal Reserve getting monopoly control in 1913.

It is the control by a monopoly that causes all the problems. If you change the definition of inflation then there is still the problem of stopping a group getting monopoly control.

This next bit was cut out of the article, but it might be worthwhile to reproduce it below. If people are not forced to use a particular item as money and they can exit the system, it seems to solve most of the problems associated with unsound money:

---

If left to innovative individuals, money could be any physical, electronic, or even conceptual item that fits the above characteristics (see earlier comment). Choices over the type of money may vary over time as, say, technology changes. A continuum of monies would naturally develop, and competition among monies would marginalize the actions of a cabal that may seek to monopolize the supply of a particular type of money.

It is interesting that Government mandate is not a necessary condition for money. In fact, money is an area of economic activity in least need of government involvement. However, the payoff from being the cabal - a monopoly supplier by force - is irresistible to governments (or groups claiming to be the government). They can increase the supply of money for their own spending, and the cost is the dilution of the value of its citizens’ existing stocks of money: a sneaky hidden tax that is relatively unnoticed by the masses.

----

And you understand the importance of sound money. I always thought that the following is a great quote. From John Maynard Keynes from whom so much of current economic policy bears his name. From his book Economic Consequences of the Peace, chapter 6:

 “Lenin was right.  There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.  The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

This is the most important consideration - read it today

http://whiskeyandgunpowder.com/the-second-crisis-of-socialism/

 

Commodity money is apolitical money. Nobody can create it at will and use it to fund himself or to manipulate the economy. Crucially, human cooperation via trade does not stop at political borders, and commodity money has always transcended such borders. If gold was money this side of the border, it was usually equally money on the other side, regardless of whose image was printed on it:

 "This crisis is the inevitable outcome of the dangerous belief that low interest rates, and investment and lasting prosperity, can be had via the shortcut of money printing — and its twin sisters, artificially low lending rates and never-ending bank credit creation — rather than the time-honoured hard way (and capitalist way) of saving and true capital formation"

The point made in that link C.....yet here today we have Kiwibank offering a lower rate for mortgage credit ...and Bollard has his near zirp game...

Make no mistake, Bollard has his printing press ready to churn out the KiwiQE toilet paper.

Very good article!

Though I think the jury the author mentions in closing is very much about to come in...!

Cheers.

 

I think that history may have been unkind to our forbearers.  Think of all the problems they have faced for us to be where we are now.

There have been plagues, fires, invasions, rulers coming and going, religion coming and going,ersecutions, innovations, you name it.

There was always change.  They were fighting for their survival for the biggest part.

They didn't have 'cheap' books, mass education. They were busy making something of themselves.

Somehow, through all that upheaval, they probably decided to fall back on something that could be relied upon.  For day to day, simple barter amongst family.  As a whole they lived in similar areas.  And tangible/commodity based currencies.  They had checks and balances to curb grand ideas - as the costs of any endeavor was funded locally.  

The modern society.  We don't know our neighbours. We get funding from the other side of the world.  There are no checks and balances.

Where has all the growth been? NZ? China? America?  Where? 

What does the growth mean?  Why was there no checks and balances? Why shouldn't locals  have a say in such matters?  Why not control the flow of resuorces locally? 

Growth to enhance to lives of society as a whole!  How do we manage that?

 

Parky knows best .....no?...." new measures of accountancy"....hahaaahaaa. What measures Parky? 

The system you speak of, I call it: 'say hi to the new boss, same as the old boss'.

Why do you mistrust the current system so much, and yet want to replace it with a system that relies on essentially the same centralisable checks and balances to function?  This new system would suffer the same end, as always, characterised by abuse by the few at the expense of the many.  How long do you think those accountancy measures would last?  Feel free to use all the financial systems of the past - all of which have failed - as a guide.  It's a nice theory, comrade.

This is why I advocate a system that would distribute the required checks and balances to every individual market participant.  No accountancy measure can keep money honest.  But the market can.  It would do this via a free market exchange rate with unverisally recognised, non-printable, non-consumable, non-derivable, un-taxable unencumbered physical Gold. Don't like the few in power as they print print print?  Think capital is being misallocated?  Easy, buy some gold.  Think you can do a better job of investing all that capital yourself?  No problem, sell some gold.  The market will take care of the rest.

The funny thing is, we could try the system you advocate.  I'd have no problem with that.  Or any similar system, in fact.  As long as I (and anyone else, including our central bank) can exit (and re-enter) as and when we see fit.  Just to keep everyone honest.

Cheers.

 

The "manipulated pyramid scheme" as you say is actually known commonly as the (current) International Monetary and Financial System.  NOT the market, thank you.

I apologise for the comrade comment - I certainly did not mean to imply anything regarding your personal philosphy with that comment.  I'm very happy to know that you stand for equal opportunity to create and retain wealth.

I think I have already commented somewhere here that I believe one of the fortunate side-effects of the system I advocate will be a more honest (read: free market driven) allocation of capital.  This in turn will have the benefit of more efficient use of our natural resources.  So it accounts for these boundaries, albeit indirectly.  Direct legislative attempts have their place, but I believe they require the system I advocate in order to have any chance of being effective in the first place.  Compare with the situation (current IMFS) of today!

Cheers.

 

Hi Iain,

I guess we truly must agree to disagree then.  To answer your question, I would say categorically YES, a floating exchange rate with physical gold WILL alleviate mathematically unrepayable debt.  How?  Because gold has infinite capacity to absorb fiat (simple: the market just raises the price of gold).

No other system will do this.  Printing interest free currency will not alleviate the underlying problem with our financial system, despite what the positive money crowd would have you believe.  Their system will simply be 'same same but different' as/to the current system - relying as it does on money to be kept honest via one policy or another.  That is, the policies may differ, but the outcome remains the same.  The outcome being that one small group gets to decide how much money is in the system, and as a result, eventually the system collapses.  Here I quote you from the thread you linked to:

"But if the RBNZ was authorised to bring the issuance of the primary money base back in house and spend it into circulation free of interest to fund and build our assets and keep the money supply in balance with actual level of trade inside the boundaries of sustainable natural resources, as was done by first Labour govt to start the State Housing Project, now thats a completely different story!"

This is the difference between your view and mine, I believe.  You think government can do this job.  I don't believe it for a second.  Have you seen the average welfare state in action?  Good luck keeping that in check via policy, however well-intentioned, over a long enough period.  I've considered governments' track record (over the last couple of millenia!) and I'm not so trusting.  Here's my argument in a nutshell:

The reason for the guaranteed eventual collapse is this:  First, currency is able to be created in unrestricted amounts (interest bearing or interest free, doesn't matter).  This, by the way, is A Good Thing.   Second, and this is a very bad thing, we are forced to save in these self-same liabilities.   Yes, I said liabilities.   Printing legal tender in any form is creating a liability on society.  Therefore, your savings are currently backed by a guarantee to print - and as Philip asked: "Don't you find that outrageous?"

My argument is that only a distributed, peer-to-peer, non-centralised system is up to the all-important job of regulating the value of currency.  Else it WILL be corrupted, eventually.  You put remarkable faith into something which relies on essentially the same fatal flaw as the current system.  I do not.

Cheers.